Docstoc

Analyzing Changes in Financial Position

Document Sample
Analyzing Changes in Financial Position Powered By Docstoc
					Chapter 3:




             1
                              When an asset,
  Events occur daily
                            liability, or equity
     that cause the
                           item is recorded for
financial position of a
                          accounting purposes,
   business change.
                           a business paper or
 Each of these events
                           source document is
 is called a business
                          required to verify the
      transaction.
                              dollar amount.


                                                   2
What would be some examples of source
            documents?



                                             Cash
           Telephone   Cheque     Store                 Credit
Hydro bill                                  register
              bill     copies   receipts               card slips
                                           summary




                                                                    3
 They provide proof for
the transaction - proof
  of payment, proof of       They are kept on file for
     purchase, and         future reference in order to
       reference.            answer questions from
                          owners, managers, auditors,
                           government agencies, etc.




                                                          4
    The objectivity principle states that
 accounting will be recorded on the basis of
            objective evidence.


                 Different people
                  looking at the      Transactions are
What does that   same evidence        recorded on fact,
   mean?         will arrive at the     not personal
                 same values for          opinion.
                 the transaction.


                                                          5
Examine this source document and answer the
   following:
                           A. Who issued the
                              bill?
                           B. Who received the
                              bill?
                           C. When was the bill
                              issued?
                           D. For what service
                              was the bill issued?
                           E. Does the bill
                              represent good
                              objective evidence?
                              Why?                 6
Examine this source document and answer the
                      following:
                      A.   Who issued the bill?
                      B.   Who received the bill?
                      C.   When was the bill issued?
                      D.   When were the goods
                           delivered? How?
                      E.   When is this bill due for
                           payment?
                      F.   Why was the bill issued?
                      G.   Was this a cash sale
                           transaction?
                      H.   Why does this represent
                           good objective evidence?
                                                       7
The accountant for a business received
a memorandum from the owner. The
memorandum stated that a new office
desk recently installed in the owner’s
office was acquired at a cost of $2,500
and that it was paid for in cash by the
owner personally.
A. Is the memorandum objective evidence? Why
   / Why not?
B. What is the best objective evidence in this
   case?
                                                 8
Equation Analysis Sheet

                          9
As business transactions occur, there
are changes in the values of assets,
liabilities, and capital.




          Although the Balance Sheet
          shows the values of these assets,
          liabilities, and capital on a
          particular date, it is not adequate
          to reflect changes created by
          individual transactions.

                                                10
Equation Analysis Sheet
     Example – Opening Balance Sheet




                                       11
1. Set up sheet with Beginning Balances as per B/S




     Set up
   “beginning
Accounting Equation        $53,300   =    $20,120    +   $33,180
   balances”        Set up column
                   Headings …
                     One per
                  account name


                                                              12
1. Set up sheet with Beginning Balances as per B/S




Accounting Equation   $53,300     =       $20,120    +   $33,180



                        A = L + OE

                                                              13
2. Metropolitan Movers pays $1,200 cash to Mercury Finance.




                                                         14
2. Metropolitan Movers pays $1,200 cash to Mercury Finance.




Accounting Equation   $52,100    =        $18,920   +   $33,180




                                                             15
3. K. Lincoln, who owes Metropolitan Movers $2,500, pays
$1,100 in partial payment of debt.




                                                           16
3. K. Lincoln, who owes Metropolitan Movers $2,500, pays
$1,100 in partial payment of debt.




Accounting Equation   $52,100    =        $18,920   +   $33,180




                                                             17
4. Equipment costing $1,950 is purchased for cash.




                                                     18
4. Equipment costing $1,950 is purchased for cash.




Accounting Equation   $52,100     =       $18,920    +   $33,180




                                                              19
5. A new pick-up truck is purchased at a cost of $18,000. Pay
$10,000 cash and borrow the balance from Mercury Finance.




                                                           20
5. A new pick-up truck is purchased at a cost of $18,000. Pay
$10,000 cash and borrow the balance from Mercury Finance.




Accounting Equation    $60,100     =       $26,920   +   $33,180



                                                              21
6. Metro Movers complete a storage service for B. Cava at a
price of $1,500. A bill is sent to B. Cava.




                                                              22
6. Metro Movers complete a storage service for B. Cava at a
price of $1,500. A bill is sent to B. Cava.




Accounting Equation   $61,600     =        $26,920   +   $34,680

                                                              23
7. J. Hofner, the owner, withdraws $500 for personal use.




                                                            24
7. J. Hofner, the owner, withdraws $500 for personal use.




Accounting Equation    $61,100     =        $26,920   +   $34,180
                                                               25
8. One of the trucks requires engine work costing $75. The
repair is paid in cash when the truck is picked up.




                                                             26
8. One of the trucks requires engine work costing $75. The
repair is paid in cash when the truck is picked up.




Accounting Equation   $61,025     =        $26,920   +   $34,105
                                                              27
Update the Balance Sheet based on the balances at the end
of the Equation Analysis Sheet




                                                            28
  (1) Identify all items (assets and
 liabilities) that must be changed
 and make all necessary changes.

                                      Decide
   Carefully
                 Classify each    whether each
 analyze the
                 item affected    item affected
 information
                 as an asset or       is to be
given for each
                    liability.     increased or
 transaction.
                                    decreased.
                                                  29
                              (3) Make certain that
                                 at least two of the
(2) See if the owner’s
                                individual items /
equity has changed.
                                   accounts have
                                      changed.


                                  It is possible for several
        Remember the                items to change, but
     accounting equation.         there can never be only
                                         one change.




     If assets decrease and
          liabilities are
         unchanged, the
        equation must be
    balanced by a decrease
        in owner’s equity.

                                                               30
31

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:3
posted:1/14/2012
language:
pages:31