Analyzing Changes in Financial Position

1
Chapter 3

• Analyzing Changes in Financial Position

2
Business Transactions

• On any given day, many events occur that cause
  the financial position of a business to change.
• Each of these events is called a business
  transaction.
• For example, suppose the business buys a new
  truck for which it pays 20,000 cash. This event
  is a transaction because it causes the financial
  position of the business to change.

3
Equation Analysis Sheet

• Your next step in the study of accounting is to
  learn how various business transactions affect
  and change the financial position.
• Example Figure 3.1 Figure 3.2 on Page 53
• Balance Sheet vs. Equation Analysis Sheet
• Assets Liabilities Owners Equity
• 53,300 20,120 33,180
• Try Transactions 1 to 7 from Page 54 to 59

4
Steps in Analyzing a Transaction

• 1. Identify all items (assets liabilities) that
  must be changed and make all necessary changes
• 2. See if the owners equity has changed
• 3. Make certain that at least two of the
  individual items have changed
• 4. Make sure that the equation is still in
  balance
• Remember the accounting equation Assets
  liabilities owners equity

5
Assignment

• In groups of 2, or individually, type up (in one
  file) and e-mail the following completed sections
  to me
• Section 3.1 Review Questions (1-3) Page 51
• Section 3.2 Review Questions (1-5) Page 60
• Section 3.3 Review Questions (1-5) Page 63
• Section 3.4 Review Questions (1-7) Page 65
• Section 3.4 Exercises (1-3) Page 65-67

6
Section 3.1 Review Questions Page 51

• What is a business transaction?
• A business transaction in a financial event that
  causes a change in the financial position.
• Give an example of a transaction, other than the
  ones above.
• A new office desk is purchased and paid for in
  cash.
• Give an example of an event in a business, other
  than the one above, that is not a transaction.
• The owner examines some new computer equipment
  being demonstrated by a salesperson.

7
Section 3.2 Review Questions Page 60

• Name the form used in this chapter for analyzing
  transactions.
• The equation analysis sheet is used for analyzing
  transactions in this chapter.
• Explain how this form is related to the balance
  sheet.
• All of the assets, liabilities, and the equity
  are shown in columns and are in a balanced state.
• Explain the mathematical way of telling if
  capital has increased after a business
  transaction.
• After a transaction, recalculate the total
  assets, the total liabilities, and the equity.
  If the new equity figure is greater than the
  previous equity figure, the capital has increased.

8
Section 3.2 Review Questions Page 60

• How do you know if the changes for a transaction
  recorded on an equation analysis sheet are
  balanced?
• After each transaction is recorded on the
  equation analysis sheet, new column totals can be
  calculated and these totals balanced according to
  the fundamental accounting equation. The totals
  balance, it can be assumed that the transaction
  was a balanced one.
• Does a transaction always change both sides of
  the balance sheet? How do you know?
• A transaction does not always change both sides
  of the balance sheet. For example, a transaction
  might increase one asset and decrease another by
  the same amount. In this case, the liability
  side of the balance sheet would be totally
  unchanged. The balance sheet still balances
  after the sample transaction.

9
Section 3.4 Review Questions Page 65

• Give the reasons why business papers are created
  within a business.
• For proof of purchase
• For proof of payment
• For reference
• For a permanent record
• When in the business do business papers
  originate?
• The purchasing department
• The sales department
• The receiving department and
• The accounting department
• What must happen to any business paper for which
  an accounting entry is necessary?
• A copy of every business paper that requires an
  accounting entry must be forwarded to the
  accounting department.

10
Section 3.4 Review Questions Page 65

• For accounting purposes, what are these business
  papers called?
• Source documents.
• State and explain the objectivity principle.
  Give an example.
• The objectivity principle states that accounting
  records will be based on objective evidence.
  Source documents represent this objective
  evidence.
• Give some examples of source documents.
• Hydro bills
• Cheque copies
• Cash register summaries
• Credit card statements
• What happens to source documents after the
  accounting entries have been completed?
• Placed in permanent files

11
Section Exercises

• Try the following Exercises in Groups
• Question 1 on Page 60 61
• Question 2 on Page 61
• Question 3 on Page 62

12
Source Documents

• A Source Document is a business paper, for
  example a bill. It is the original record of a
  transaction and it provides the information
  needed when accounting for the transaction
• For example Hydro Bills, telephone bills, Cheque
  copies, credit card statements, cash register
  summaries.
• All source documents must be kept on file for
  reference purposes and as proof of transactions

13
Section Exercise - Question 1, Page 65

• Who issued the bill?
• Campbell Associates
• Who received the bill?
• Smokey Valley Ski Club
• When was the bill issued?
• July 22, 19-0
• Does the bill say when payment is due?
• No, the bill does not say when payment is due.

• In your opinion, what accounting changes will be
  made by the receiver?
• When the bill is paid, the receiver will decrease
  Bank 1,712 and decrease Capital 1,712.
• For what service was the bill issued?
• Campbell and Associates audited the records of
  Smokey Valley Ski Club and also prepared
  financial statements for them.
• Does the bill represent good objective evidence?
  Why?
• Yes, because it originates from a source
  independent of the business.

14
Chapter 3, Assignment 2

• Complete the following tasks in groups and submit
  one Word and one Excel file (named Chapter 3,
  Assignment 2).
• Read Chapter Highlights Page 73
• Exercise 1 on Page 73
• Exercise 2 on Page 74
• Exercise 6 on Page 74
• In Excel Challenge Exercise 6, page 74-75

15
Exercise 2 Page 66

1. The Davey Company issued the bill
2. Smokey Valley Ski Club received the bill
3. The bill was issued December 5, 19-0
4. The goods were delivered December 5, 19-0 by CPX
5. The bill is due for payment in 30 days from
   December 5, 19-0, which would be January 4, 19-1
6. The source document was issued as evidence of the
   transaction to be used in the accounting records
   of both the purchaser and the vendor
7. The accounting changes for the purchaser will
   increase Supplies by 170.20 and increase
   Accounts Payable The Davey Company by 170.20
8. No, this was not a cash sale transaction
9. The bill comes from an independent source

16
Exercise 3 Page 67

1. The source document is a cheque
2. Smokey Valley Ski Club issued a cheque
3. Mid-West Ski Lifts and Equipment received the
   cheque
4. The source document is likely paying for ski
   lifts and/or other equipment
5. B and C are both possible. B is more likely
   because this type of equipment would normally be
   first purchased on credit and paid for later.

17
Exercise 1 Page 73

1. F. Vanweers paid a debt of 250
2. On credit, 150 worth of supplies were purchased
   from Norpaints
3. B. Provost, the owner, put 300 cash into his
   business
4. The business performed a service for C. Sulley,
   who has 30 days to make payment
5. The debt to B.M. Co. was paid in full

18
Exercise 2 Page 74

1. The business performed a service for L. Swan for
   1800, of which 500 was paid in cash and 1300
   is still owing
2. The auto was sold to High Finance for 6500,
   paying off the debt of 5000 and leaving B. Lee
   with 1500 cash and a 500 loss on the sale of
   the auto
3. A 20000 auto was bought with 1000 cash and a
   19000 Bank Loan
4. The owner withdrew 150 from his personal account
5. Supplies worth 50 have been destroyed