CHAPTER 2 Analyzing Transactions of a Business

2-2 LARGE ROLE OF SMALL BUSINESS Small businesses Are independently owned & operated Are not dominant in field Have revenues less than $500,000

2-3 DO YOU KNOW? TRUE OR FALSE 99.7% of employers are small businesses True 53% of private workforce employed in small businesses True Large businesses generate 47% US sales & 96% US importers False

2-4 FINANCIAL STATEMENTS Report effects of business events Balance Sheet See Susan’s application form Ch. 1 Income Statement See Susan’s operating budget Ch. 1

2-5 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?

2-6 DISTINGUISHING ACTIVITIES & TRANSACTIONS Activities are general Financing activities Investing activities Operating activities Transactions Transfer, exchange between two parties Classified into three types of activities

2-7 ACTIVITIES EXPLAINED: Financing Financing Activities Obtaining money to start, maintain, expand business

2-8 ACTIVITIES EXPLAINED: Investing Investing Activities Buying things of value with money from financing activities

2-9 ACTIVITIES EXPLAINED: Operating Operating activities Applying money, things of value to produce goods, services

2-10 TRANSACTION A1: Financing Activity Sources of financing Lenders Owners

2-11 TRANSACTION A1: Transaction & Explanation Susan Newman contributes $30,000 cash to finance her business Classified as financing because Provides $30,000 cash to CMU from its owner, Susan Newman

2-12 TRANSACTION A1: Analysis What are things of value owned? Cash What are sources of things of value? Owner

2-13 TRANSACTION B: Investing Activity Acquiring things of value To develop, produce, sell products By using money from financing

2-14 TRANSACTION B: Transaction & Explanation Susan Newman withdraws $6,000 from business checking account to open a business savings account Classified as investing because Transfer of money into savings gives business the right to earn interest in future

2-15 TRANSACTION B: Analysis What are things of value owned? Cash Savings What are sources of things of value? Owner

2-16 TRANSACTION C1: Investing Transaction & Explanation 2 Susan buys $10,000 worth of store equipment on credit Classified as investing because Acquired of $10,000 worth of productive equipment

2-17 TRANSACTION C1: Analysis What are things of value owned Cash Savings Store equipment What are sources of things of value? Accounts payable Owner

2-18 TRANSACTION D: Operating Activity Developing Producing Selling Products & services

2-19 TRANSACTION D: Transaction Susan acquires $15,000 worth of inventory by paying cash

2-20 TRANSACTION D: Explanation Classified as operating because CMU acquires inventory to sell

2-21 TRANSACTION D: Analysis What are things of value owned Cash Savings Inventory Store equipment What are sources of things of value? Accounts payable Owner

2-22 EFFECTS OF TRANSACTIONS: Balance Sheet Financial statement Reports financial position at a point in time Information provided Assets: things of value owned Liabilities: source of assets from creditors Equity: claim against assets held by owners

2-23 AIS Accounting information system Captures accounting information Using criteria to identify monetary transactions Processes accounting information Gather, determine proper dollar, accounts Reports accounting information

2-24 FUNDAMENTAL ACCOUNTING EQUATION Assets = Sources of Assets Assets = Liabilities + Owner’s Equity or Assets – Liabilities = Owner’s Equity or Assets – Liabilities = Net Assets

2-25 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

2-26 TRANSACTION ANALYSIS 1: Money Measurement Concept Financial statements report only the effects of those transactions that can be expressed in monetary or financial terms

2-27 TRANSACTION ANALYSIS 2: Entity Concept Financial statements report only the effects of an entity’s transactions A promise, exchange related to the entity

2-28 TRANSACTION ANALYSIS 3: Effect on Current Financial Position Requires that transaction in Assets Liabilities Owner’s Equity

2-29 ACCOUNTING TRANSACTIONS A financial event Usually supported by business document Check, Sales invoice Results in measurable changes in Assets, liabilities, owner’s equity As of current date

2-30 EFFECT ON FUNDAMENTAL EQUATION 1 Transaction A 1 Assets =Liabilities +Equity On 1/2 Susan contributes $30,000 $30,000

2-31 EFFECT ON FUNDAMENTAL EQUATION 2 Transaction BAssets =Liabilities +Equity On 1/2 Susan transfers $6,000 to savings $6,000

2-32 EFFECT ON FUNDAMENTAL EQUATION 3 Transaction C 1 Assets =Liabilities +Equity On 1/4, acquires store equipment $10,000 on credit $10,000

2-33 EFFECT ON FUNDAMENTAL EQUATION 4 Transaction DAssets =Liabilities +Equity On 1/6, acquires merchandise for cash $15,000

2-34 EFFECT ON FUNDAMENTAL EQUATION Assets =Liabilities +Equity Totals$40,000$10,000$30,000

2-35 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

2-36 Give & Get 1 TransactionAssets =Liabilities +Equity A1BA1B Get cash Get savings Give cash Give owner claim

2-37 Get & Give 2 TransactionAssets =Liabilities +Equity C1DC1D Get store equipment Get inventory Give cash Give promise to pay

2-38 EFFECTS OF TRANSACTIONS: Income Statement Financial statement Reports results of operations for period of time Information provided Revenues earned Expenses incurred

2-39 EFFECTS OF TRANSACTIONS: Statement of Cash Flows Financial statement Reports cash receipts or payments for period of time Information provided Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities

2-40 CLASSIFYING TRANSACTIONS INTO ACTIVITIES TransactionsOperatingInvestingFinancing A1 Owner B Savings C1 Equipment D Inventory$15,000 $6,000 $10,000 $30,000

2-41 STATEMENT OF CASH FLOWS Cash flows Operations Net cash used Cash flows Investing Net cash used Cash flows Financing Net cash provided$30,000 Increase in cash Beginning balance Ending balance $9,000 0 $9,000

2-42 ACCOUNTING’S ROLE IN SOCIETY Feedback to decision makers Audited information Systematically examined

2-43 USER FOCUS Why Study Accounting ? Accounting plays indispensable role in decision making Information system for business

2-44 BENEFITS OF LEARNING ACCOUNTING 1 Introduces business terminology & activities “Language of business”

2-45 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

2-46 BENEFITS OF LEARNING ACCOUNTING 3 Facilitates growth as professional Facilitates personal decision making Managing money Cash budget Bank reconciliation Preparing for job interview Financial analysis

2-47 BENEFITS OF LEARNING ACCOUNTING 4 Introduces time value of money Planning for retirement, major needs Understanding how installment loan works Lease or purchase?

2-48 Assignment #3 Questions, pg – #1, 6, 14, 20 Assignment #4 Reinforcement Exercises, pg – #7, 11, 12, 14, 16 Critical Thinking Problems, pg #3, 7, 9, 13, 14