Analyzing Transactions of a Business

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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 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

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FINANCIAL STATEMENTS

• Report effects of business events
• Balance Sheet
• See Susans application form Ch. 1
• Income Statement
• See Susans 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 general
• Financing activities
• Investing activities
• Operating activities
• Transactions
• Transfer, exchange between two parties
• Classified into three types of activities

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ACTIVITIES EXPLAINED Financing

• Financing Activities
• Obtaining money to start, maintain, expand
  business

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ACTIVITIES EXPLAINED Investing

• Investing Activities
• Buying things of value with money from financing
  activities

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ACTIVITIES EXPLAINED Operating

• Operating activities
• Applying money, things of value to produce goods,
  services

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TRANSACTION A1 Financing Activity

• Sources of financing
• Lenders
• Owners

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TRANSACTION A1Transaction 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

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TRANSACTION A1Analysis

• What are things of value owned?
• Cash
• What are sources of things of value?
• Owner

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TRANSACTION BInvesting Activity

• Acquiring things of value
• To develop, produce, sell products
• By using money from financing

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TRANSACTION BTransaction 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

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TRANSACTION BAnalysis

• What are things of value owned?
• Cash
• Savings
• What are sources of things of value?
• Owner

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TRANSACTION C1Investing 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

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TRANSACTION C1Analysis

• What are things of value owned
• Cash
• Savings
• Store equipment
• What are sources of things of value?
• Accounts payable
• Owner

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TRANSACTION DOperating Activity

• Developing
• Producing
• Selling
• Products services

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TRANSACTION DTransaction

• Susan acquires 15,000 worth of inventory by
  paying cash

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TRANSACTION DExplanation

• Classified as operating because
• CMU acquires inventory to sell

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TRANSACTION DAnalysis

• 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 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

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AIS

• Accounting information system
• Captures accounting information
• Using criteria to identify monetary transactions
• Processes accounting information
• Gather, determine proper dollar, accounts
• Reports accounting information

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FUNDAMENTAL ACCOUNTING EQUATION

• Assets Sources of Assets
• Assets Liabilities Owners Equity

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TRANSACTION ANALYSISConditions to be Met

• Event must be
• Be measurable in dollars
• Be Related to the entity being measures
• Affect the entitys 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 entitys transactions
• A promise, exchange related to the entity

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TRANSACTION ANALYSIS 3 Effect on Current
Financial Position

• Requires that transaction in
• Assets
• Liabilities
• Owners Equity

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ACCOUNTING TRANSACTIONS

• A financial event
• Usually supported by business document
• Check, Sales invoice
• Results in measurable changes in
• Assets, liabilities, owners equity
• As of current date

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EFFECT ON FUNDAMENTAL EQUATION 1
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EFFECT ON FUNDAMENTAL EQUATION 2
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EFFECT ON FUNDAMENTAL EQUATION 3
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EFFECT ON FUNDAMENTAL EQUATION 4
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EFFECT ON FUNDAMENTAL EQUATION
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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
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Get Give 2
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EFFECTS OF TRANSACTIONSIncome Statement

• Financial statement
• Reports results of operations for period of time
• Information provided
• Revenues earned
• Expenses incurred

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EFFECTS OF TRANSACTIONSStatement 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

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CLASSIFYING TRANSACTIONS INTO ACTIVITIES
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STATEMENT OF CASH FLOWS
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ACCOUNTINGS ROLE IN SOCIETY

• Feedback to decision makers
• Audited information
• Systematically 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 making
• Managing money
• Cash budget
• Bank reconciliation
• Preparing for job interview
• Financial analysis

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BENEFITS OF LEARNING ACCOUNTING 4

• Introduces time value of money
• Planning for retirement, major needs
• Understanding how installment loan works
• Lease or purchase?

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Assignment 3

• Questions, pg. 73-74 1, 6, 14, 20

Assignment 4

• Reinforcement Exercises, pg. 74-78 7, 11, 12,
  14, 16
• Critical Thinking Problems, pg. 79-82 - 3, 7, 9,
  13, 14