BUS 251 Chapter Notes - Chapter 2: Cash Flow Statement, Deferral, Retained Earnings

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Published on 17 Aug 2012
School
Simon Fraser University
Department
Business Administration
Course
BUS 251
Professor
Chapter 2: Analyzing Transactions and their Effects on FS
The Basic Accounting Equation
How does sets of transactions affect company’s accounts
Basic Accounting Equation
o Assets = Liabilities + Shareholder’s Equity
Transactions are recorded in the accounting system (two sides must balance)
In the beginning the amounts are balanced showed on the outside column
Comparative statement: have more than 2 periods in the same FS
To find out what transaction happened in the company that changed the FS ending balance we can
take a look at the cash flow statement and earnings
Accounting period: the period of time that the FS cover
Revenues increase retained earnings, dividends decrease retained earnings
Transaction Analysis and the Basic Accounting Equation
Transaction Analysis: analyze economic substance to decide what accounts are affected and by
how much
Transaction 1: Issuance of Shares for Cash from investors
o Analysis the shareholder’s trade the company $17500 (asset) for share ownership rights
(share capital)
Cash increased by $17500, share capital increased by $17500
o Effects financing activity (cash flow), not earnings, not revenue because revenue only
comes from operating activities
Transaction 2: Used $4500 cash to buy equipment
o Analysis decrease of cash (asset), increase equipment (long term asset)
o Effect investing activity (cash flow), no earning,
Accrual-basis accounting: cost of equipment is only recorded as expense when the
item is consumed; if not then it is an asset because it will be used in the future to
generate revenues
Cash-basis accounting: classify costs as expense when cash is spent and is recorded
on the statement of earnings
Transaction 3: Paid $360 cash for insurance policy
o Analysis prepaid expense (paid in advance of the coverage period)
Cash decreased $360, prepaid insurance increased $360 (asset)
o Effect operating activity (cash flow), no earnings
Transaction 4: borrowed $10,000 from bank
o Analysis increase cash (asset), increase bank loan (liabilities)
principal + interest amount, no accrual because the loan was not taken out and no
time has passed
o Effect Financing activity (cash flow), no earnings, not revenue
Transaction 5: purchased land for $15000
o Analysis cash decreased by $15000, land (asset) increased by $15000
o Effect investing activity (cash flow), no earnings
Land should be recorded at its acquisition cost because it cannot depreciate in the
long run.
Transaction 6: purchased $23000 inventory on account
o Analysis on account (extended credit by suppliers), increase of inventory (asset) and
promised supplier to pay later (accounts payable liabilities)
Asset increased by $23000, accounts payable increased by $23000
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Document Summary

Chapter 2: analyzing transactions and their effects on fs. How does sets of transactions affect company"s accounts. Basic accounting equation: assets = liabilities + shareholder"s equity. In the beginning the amounts are balanced showed on the outside column. Transactions are recorded in the accounting system (two sides must balance) Comparative statement: have more than 2 periods in the same fs. To find out what transaction happened in the company that changed the fs ending balance we can take a look at the cash flow statement and earnings. Accounting period: the period of time that the fs cover. Revenues increase retained earnings, dividends decrease retained earnings. Transaction analysis: analyze economic substance to decide what accounts are affected and by how much. Transaction 1: issuance of shares for cash from investors: analysis the shareholder"s trade the company (asset) for share ownership rights (share capital)

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