Lecture 02 PPT PDF

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Jing Li...

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ACCT 1101 INTRODUCTION TO FINANCIAL ACCOUNTING

Chapter 1 (Part 2)

Transaction Analysis and Accounting Equations p.p. 13-18

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Outline 

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Analyzing transactions using accounting equation Understand the concept of double entry bookkeeping Understand the basic principles of accrual basis accounting

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Transaction Analysis  

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Business activities can be transactions and events. Record those that affect the accounting equation and can be reliably measured. Examples of transactions:  Selling of products and services (external transactions).  The business used its supplies, which are reported as expenses (internal transactions). Examples of events: 

Changes in the market value of certain assets and liabilities and natural events such as floods and fires that destroy assets and create losses. 1-3

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Principles of Transaction Analysis  Every transaction/event affects at least two accounts (duality of effects).  The accounting equation must remain in balance after each transaction.

A = L + SE (Assets)

(Liabilities)

(Stockholders’ Equity)

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Double Entry System 

Any increase (decrease) to the left side of the equation is either  accompanied by an increase (decrease) to the right side of the equation, or 

offset by a decrease (increase) to the left side of the equation.

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Balancing the Accounting Equation Step 1: Accounts and effects  Identify the accounts affected and classify them by type of account (A, L, SE).  Determine the direction of the effect (increase or decrease) on each account. Step 2: Balancing  Verify that the accounting equation (A = L + SE) remains in balance.

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Example (analyzing transactions) Chas Taylor starts a start-up consulting service business on Dec. 1. During the first month of operation, the firm incurred the following transactions. 1. On December 1, Chas Taylor invests $30,000 cash to start a consulting business, Fast Forward 2. FastForward purchases supplies paying $2,500 cash. 3. FastForward purchases equipment for $26,000 cash. 4. FastForward purchases Supplies of $7,100 on account. 5. FastForward provides consulting services receiving $4,200 cash. 6. FastForward pays $1,000 rent. 7. FastForward $700 in salary to the company’s only employee. 8. FastForward provides consulting services of $1,600 and rents out its test facilities for $300, both on account. 9. FastForward receives $1,900 from client of test facilities in transaction 8. 10. FastForward pays $900 as partial payment for transaction 4 on supplies. 11. The owner withdraws $200 cash. 1-7

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Transaction 1: Investment by Owners On December 1, Chas Taylor invests $30,000 cash to start a consulting business, Fast Forward Identify the accounts involved and determine the direction of the effects: (1) Cash (asset) (2) Owner Capital (equity)

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Transaction 2: Purchase Supplies for Cash FastForward purchases supplies paying $2,500 cash.

The accounts involved are: (1) Cash (asset) (2) Supplies (asset)

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Transaction 3: Purchase Equipment for Cash FastForward purchases equipment for $26,000 cash.

The accounts involved are: (1) Cash (asset) (2) Equipment (asset)

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Transaction 4: Purchase Supplies on Credit FastForward purchases Supplies of $7,100 on account.

The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability)

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Transaction 5: Provide Services for Cash FastForward provides consulting services receiving $4,200 cash. The accounts involved are: (1) Cash (asset) (2) Revenues (equity)

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Transaction 6 and 7: Payment of Expenses in Cash FastForward pays $1,000 rent and $700 in salary to the company’s only employee. The accounts involved are: (1) Cash (asset) (2) Expenses (equity)

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Transaction 8: Provide services and facilities for credit FastForward provides consulting services of $1,600 and rents out its test facilities for $300, both on account. The accounts involved are: (1) Accounts Receivable (asset) (2) Revenues (equity)

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Transaction 9: receipt of cash from accounts receivable FastForward receives $1,900 from client of test facilities in transaction 8.

The accounts involved are: (1) Cash (asset) (2) Accounts Receivable (asset)

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Transaction 10: Payment of accounts payable FastForward pays $900 as partial payment for transaction 4 on supplies. The accounts involved are: (1) Cash (asset) (2) Accounts Payable (liability)

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Transaction 11: Withdrawal of Cash by Owner The owner withdraws $200 cash. The accounts involved are: (1) Cash (asset) (2) Withdrawals (equity)

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Summary of Transactions The summary of all transactions is shown below:

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Statement of Financial Position

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Income Statement

The income statement describes a company’s revenues and expenses along with the resulting net profit or loss over a period of time due to earnings activities. 1-20

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STATEMENT OF CHANGES IN EQUITY

The statement of changes in equity reports information about how equity changes over the reporting period.

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Statement of Cash Flows

The Statement of Cash Flows describes a company’s cash flows for operating, investing, and financing activities.

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Financial Statement Analysis (p.p. 22-23) Return on assets (ROA) is stated in ratio form as profit divided by assets invested.

Return on assets =

Fastforward ROA =

Net profit Average total assets

4400 =12.5% (40,400+30,000)/2

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Average ROA by sector

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Debt Ratio Debt Ratio =

Total Liabilities Total Assets

Evaluates the level of debt risk. A higher ratio indicates that there is a greater probability that a company will not be able to pay its debt in the future. Fastforward Debt Ratio=

6200 40,400

=15.3%

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Average Debt ratio by sector

Debt/Equity Ratio is different from Debt/Asset, but related.

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END OF CHAPTER 1

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