CHAPTER 2 Analyzing Transactions of a Business. 2-2 LARGE ROLE OF SMALL BUSINESS Small businesses...
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Transcript of CHAPTER 2 Analyzing Transactions of a Business. 2-2 LARGE ROLE OF SMALL BUSINESS Small businesses...
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CHAPTER 2
Analyzing Transactions of a Business
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LARGE ROLE OF SMALL BUSINESS
Small businesses
Are independently owned & operated
Are not dominant in field
Have revenues less than $500,000
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DO YOU KNOW?
TRUE OR FALSE99.7% of employers are small businesses
True53% of private workforce employed in small businesses
TrueLarge businesses generate 47% US sales & 96% US importers
False
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FINANCIAL STATEMENTS
Report effects of business events
Balance SheetSee Susan’s application form Ch. 1
Income StatementSee Susan’s operating budget Ch. 1
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TWO QUESTIONS WHEN EVALUATING A BUSINESS
What things of value were owned or controlled?
What are the claims against or sources of these things of value?
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DISTINGUISHING ACTIVITIES & TRANSACTIONS
Activities are generalFinancing activities Investing activitiesOperating activities
TransactionsTransfer, exchange between two partiesClassified into three types of activities
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ACTIVITIES EXPLAINED: Financing
Financing ActivitiesObtaining money to start, maintain,
expand business
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ACTIVITIES EXPLAINED: Investing
Investing ActivitiesBuying things of value with money
from financing activities
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ACTIVITIES EXPLAINED: Operating
Operating activitiesApplying money, things of value to
produce goods, services
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TRANSACTION A1: Financing Activity
Sources of financingLenders Owners
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TRANSACTION A1:Transaction & Explanation
Susan Newman contributes $30,000 cash to finance her business
Classified as financing becauseProvides $30,000 cash to CMU from its
owner, Susan Newman
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TRANSACTION A1:Analysis
What are things of value owned?Cash
What are sources of things of value?Owner
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TRANSACTION B:Investing Activity
Acquiring things of value
To develop, produce, sell products
By using money from financing
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TRANSACTION B:Transaction & Explanation
Susan Newman withdraws $6,000 from business checking account to open a business savings account
Classified as investing becauseTransfer of money into savings gives
business the right to earn interest in future
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TRANSACTION B:Analysis
What are things of value owned?CashSavings
What are sources of things of value?Owner
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TRANSACTION C1:Investing Transaction & Explanation 2
Susan buys $10,000 worth of store equipment on credit
Classified as investing becauseAcquired of $10,000 worth of
productive equipment
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TRANSACTION C1:Analysis
What are things of value ownedCashSavings Store equipment
What are sources of things of value?Accounts payableOwner
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TRANSACTION D:Operating Activity
Developing
Producing
Selling
Products & services
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TRANSACTION D:Transaction
Susan acquires $15,000 worth of inventory by paying cash
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TRANSACTION D:Explanation
Classified as operating becauseCMU acquires inventory to sell
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TRANSACTION D:Analysis
What are things of value owned Cash Savings Inventory Store equipment
What are sources of things of value? Accounts payable Owner
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EFFECTS OF TRANSACTIONS: Balance Sheet
Financial statementReports financial position at a point in time
Information providedAssets: things of value ownedLiabilities: source of assets from creditorsEquity: claim against assets held by
owners
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AIS
Accounting information system
Captures accounting informationUsing criteria to identify monetary
transactions
Processes accounting informationGather, determine proper dollar, accounts
Reports accounting information
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FUNDAMENTAL ACCOUNTING EQUATION
Assets = Sources of Assets
Assets = Liabilities + Owner’s Equity
or
Assets – Liabilities = Owner’s Equity
or
Assets – Liabilities = Net Assets
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TRANSACTION ANALYSIS:Conditions to be Met
Event must be:
Be measurable in dollars
Be Related to the entity being measures
Affect the entity’s current financial position
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TRANSACTION ANALYSIS 1: Money Measurement Concept
Financial statements report only the effects of those transactions that can be expressed in monetary or financial terms
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TRANSACTION ANALYSIS 2: Entity Concept
Financial statements report only the effects of an entity’s transactionsA promise, exchange related to the entity
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TRANSACTION ANALYSIS 3: Effect on Current Financial Position
Requires that transaction inAssetsLiabilitiesOwner’s Equity
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ACCOUNTING TRANSACTIONS
A financial event Usually supported by business
documentCheck, Sales invoice
Results in measurable changes inAssets, liabilities, owner’s equity
As of current date
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EFFECT ON FUNDAMENTAL EQUATION 1
Transaction A1 Assets = Liabilities + Equity
On 1/2 Susan contributes $30,000
$30,000 $30,000
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EFFECT ON FUNDAMENTAL EQUATION 2
Transaction B Assets = Liabilities + Equity
On 1/2 Susan transfers $6,000 to savings
$6,000
<6,000>
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EFFECT ON FUNDAMENTAL EQUATION 3
Transaction C1 Assets = Liabilities + Equity
On 1/4, acquires store equipment $10,000 on credit
$10,000 $10,000
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EFFECT ON FUNDAMENTAL EQUATION 4
Transaction D Assets = Liabilities + Equity
On 1/6, acquires merchandise for cash
$15,000
<$15,000>
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EFFECT ON FUNDAMENTAL EQUATION
Assets = Liabilities + Equity
Totals $40,000 $10,000 $30,000
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DUAL EFFECT CONCEPT
Every recorded transaction must have at least 2 effects on the fundamental accounting equation.
Balance sheet shows effect in balance between assets & their sources
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Give & Get 1
Transaction Assets = Liabilities + Equity
A1
B
Get cash
Get savings
Give cash
Give owner claim
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Get & Give 2
Transaction Assets = Liabilities + Equity
C1
D
Get store equipment
Get inventory
Give cash
Give promise to pay
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EFFECTS OF TRANSACTIONS:Income Statement
Financial statementReports results of operations for
period of time
Information providedRevenues earnedExpenses incurred
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EFFECTS OF TRANSACTIONS:Statement of Cash Flows
Financial statementReports cash receipts or payments for period
of time
Information providedCash flows from operating activitiesCash flows from investing activitiesCash flows from financing activities
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CLASSIFYING TRANSACTIONS INTO ACTIVITIES
Transactions Operating Investing Financing
A1 Owner
B Savings
C1 Equipment
D Inventory $15,000
$6,000
$10,000
$30,000
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STATEMENT OF CASH FLOWS
Cash flows Operations
Net cash used <$15,000>
Cash flows Investing
Net cash used <$6,000>
Cash flows Financing
Net cash provided $30,000
Increase in cash
Beginning balance
Ending balance
$9,000
0
$9,000
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ACCOUNTING’S ROLE IN SOCIETY
Feedback to decision makers
Audited informationSystematically examined
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USER FOCUSWhy Study Accounting ?
Accounting plays indispensable role in decision making
Information system for business
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BENEFITS OF LEARNING ACCOUNTING 1
Introduces business terminology & activities “Language of business”
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BENEFITS OF LEARNING ACCOUNTING 2
Facilitates business decision making Investors: return on investment; analyze
opportunities: Creditors: lending decisions Government: tax & regulation Other Not-for-Profit organizations: assurance
about use of contributions Union negotiators: improve worker pay Media investigators: financial wrongdoing
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BENEFITS OF LEARNING ACCOUNTING 3
Facilitates growth as professional
Facilitates personal decision makingManaging money
Cash budget Bank reconciliation
Preparing for job interviewFinancial analysis
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BENEFITS OF LEARNING ACCOUNTING 4
Introduces time value of moneyPlanning for retirement, major needsUnderstanding how installment loan
worksLease or purchase?
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Assignment #3Questions, pg. 73-74 – #1, 6, 14, 20
Assignment #4Reinforcement Exercises, pg. 74-78 – #7, 11, 12, 14, 16
Critical Thinking Problems, pg. 79-82 - #3, 7, 9, 13, 14