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Analyzing Changes in Financial Position

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

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Analyzing Changes in Financial Position

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    1. 1 Analyzing Changes in Financial Position

    2. 2 Business Transactions Events occur daily that cause the financial position of a business change. Each of these events is called a business transaction. When an asset, liability, or equity item is recorded for accounting purposes, a business paper or source document is required to verify the dollar amount.

    3. 3 Source Documents What would be some examples of source documents? Hydro bill Telephone bill Cheque copies Store receipts Cash register summary Credit card slips

    4. 4 Source Documents They provide proof for the transaction …… proof of payment, proof of purchase, and reference. They are kept on file for future reference in order to answer questions from owners, managers, auditors, government agencies, etc.

    5. 5 GAAP – The Objectivity Principle What does that mean? Different people looking at the same evidence will arrive at the same values for the transaction. Transactions are recorded on fact, not personal opinion.

    6. 6 Exercise #1 (Page 50) Given that a transaction is a financial event that requires changing the statement of financial position, decide whether or not each of the following is a transaction for Best Consultants of Kenora, Ontario. The business pays $800 to Mercury Finance to reduce the amount owed to them. The owner, P. Dufour, withdraws $500 from the business for her personal use. A new employee is needed in the payroll department. P. Dufour interviews Stan Martin for the job.

    7. 7 Exercise #1 (continued) A $700 consulting service is provided for Rita Bertoli on credit. The business pays the rent for the month, $500. The employee in question C above is hired to start work next Monday at $400 per week. The business purchases a new computer for cash at the price of $3,000. The computer in question G above is defective and is replaced at no cost to the business.

    8. 8 Exercise #2 (Page 51) You are working for Ace Collection Agency of Cornwall, Ontario, owned by Ingrid Lencz. Determine whether or not each of the following is a transaction: Gasoline for the company automobile was purchased for $40 cash. Ingrid Lencz paid $15 out of her own pocket for lunch. Ingrid’s personal car was damaged and needed a $500 repair job.

    9. 9 Exercise #2 (continued) A $250 service was performed for a customer who paid cash. A leased computer broke down and needed to be replaced at no cost to the business. The man who brought the replacement said that the new machine was a $2,500 model. A customer who owed the business $1,200 made a partial payment of $300. The business bank loan was reduced by a direct payment to the bank of $1,000. A burglar broke into the office and stole the leased computer. The business has 100 per cent replacement insurance to cover breaking and entering and theft.

    10. 10 Exercise #3 (Page 51) Examine this source document and answer the following:

    11. 11 Exercise #4 (Page 52) Examine this source document and answer the following:

    12. 12 Exercise #5 (Page 53) 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. Is the memorandum objective evidence? Why / Why not? What is the best objective evidence in this case?

    13. 13 Equation Analysis Sheet Analyzing Changes in Financial Position

    14. 14 Equation Analysis 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.

    15. 15

    16. 16 Equation Analysis Sheet

    17. 17 Equation Analysis Sheet

    18. 18 Equation Analysis Sheet

    19. 19 Equation Analysis Sheet

    20. 20 Equation Analysis Sheet

    21. 21 Equation Analysis Sheet

    22. 22 Equation Analysis Sheet

    23. 23 Equation Analysis Sheet

    24. 24 Equation Analysis Sheet

    25. 25 Equation Analysis Sheet

    26. 26 Equation Analysis Sheet

    27. 27 Equation Analysis Sheet

    28. 28 Equation Analysis Sheet

    29. 29 Equation Analysis Sheet

    30. 30 Equation Analysis Sheet

    31. 31 Equation Analysis Sheet

    32. 32 Equation Analysis Sheet

    33. 33 Summary of Steps in Analyzing a Transaction Identify all items (assets and liabilities) that must be changed and make all necessary changes. Carefully analyze the information given for each transaction. Classify each item affected as an asset or liability. Decide whether each item affected is to be increased or decreased.

    34. 34 Summary of Steps in Analyzing a Transaction See if the owner’s equity has changed. Remember the accounting equation. If assets decrease and liabilities are unchanged, the equation must be balanced by a decrease in owner’s equity. Make certain that at least two of the individual items / accounts have changed. It is possible for several items to change, but there can never be only one change.

    35. 35 Summary of Steps in Analyzing a Transaction Make sure that the equation is still in balance. The fundamental accounting equation (Assets = Liabilities + Owner’s Equity) must always be in balance.

    36. 36 Using a spreadsheet program, set up a Equation Analysis Sheet (as per below) and record the following transactions. Calculate the new totals after each entry to make sure the equation balances.

    37. 37 The balance sheet of Triangle Real Estate of Tweed, Ontario, at the close of business on September 30, 2007, is as follows:

    38. 38 Prepare an equation analysis sheet, using a spreadsheet program, and record the figures from the balance sheet provided Analyze the transactions of October 1, listed below, and record the necessary changes on the equation analysis sheet. After each transaction, ensure that the equation is still in balance. After completing transaction 5, prepare a new balance sheet.

    39. 39 Alliance Appliance Service in Renforth, Ontario, owned by Wayne Dalli, has the following assets and liabilities at the close of business on October 20, 2007.

    40. 40 Prepare an equation analysis sheet, using a spreadsheet program, and record the above items. Do not forget to calculate and include the capital figure. Analyze the transactions of October 21, listed below, and record the necessary changes on the equation analysis sheet. After each transaction, ensure that the equation is still in balance. After completing transaction 5, prepare a balance sheet.

    41. 41 Homework Review Exercises Exercise 1 (pg. 70) Exercise 2 (pg. 71)

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