Chapter 2 FS and Transaction Analysis PDF

FUNDAMENTAL ACCOUNTING PRINCIPLES
Tenth Canadian Edition
Larson, Jensen & Carroll
PowerPoint slides by:

Carole Bowman
Copyright  2001 McGraw-Hill Ryerson Limited. All rights reserved. home back next
Ethics Challenge
BJ John is a new entry-level accountant for a
mail order company that specializes in
supplying skateboards and accessories for the
sport. At the end of the fiscal period, John is
advised by a supervisor to include as revenue
for the period any orders that have been ordered
online with COD arrangement but not yet
fulfilled by shipping the product. John is also
advised to include as revenue any orders
received by phone with deposit slips emiled that
are also pending fulfillment.
Required:
1. Identify relevant accounting principles that
John should be aware of in view of the
supervisor's instructions.
2. What are the ethical factors in this situation?
3. Would you recommend that John follow the
supervisor's directives?
4. What alternatives might be available to John
if deciding to not follow the supervisor's
directions?
Financial
CHAPTER
2 Statements and
Accounting
Transactions
Exhibit 2.1
Previewing Financial Statements

Income
Statement
Statement of
Owner’s
Beginning Equity Ending
Balance Balance
Sheet Statement of Sheet
Cash Flows
Point in time Period of time Point in time
Exhibit 2.2
Income Statement
Finlay Interiors
Income S tatement
Inflows of assets
in exchange for For Month Ended January 31, 2001
products and Revenues:
services
Consulting revenue $ 3,800
provided to
customers. Rental revenue 300
Total revenues $ 4,100
Operating Expenses:
Rent expense $ 1,000
S alaries expense 700
Total operating expenses 1,700
Net income $ 2,400
Income Statement
Finlay Interiors
Income S tatement
For Month Ended January 31, 2001
Revenues:
Outflows or Consulting revenue $ 3,800
the using
Rental revenue 300
up of assets
that result Total revenues $ 4,100
from providing Operating Expenses:
products Rent expense $ 1,000
and services to S alaries expense 700
customers. Total operating expenses 1,700
Net income $ 2,400
Income Statement
Finlay Interiors
Income S tatement
Revenues:
Revenues > Expenses Rental revenue 300
Net Income Total revenues $ 4,100
Operating Expenses:
Revenues < Expenses Rent expense $ 1,000
Net Loss S alaries expense 700
Net income $ 2,400
Exhibit 2.3
Statement of Owner’s Equity

Finlay Interiors
Statement of Owner's Equity
Carol Finlay, capital, January 1 $ -
Add:
Investment by owner $ 30,000
Net income 2,400 32,400
Total 32,400
Less: Withdrawal by owner 600
Carol Finlay, capital, January 31 $ 31,800
Exhibit 2.3

Finlay Interiors
Carol Finlay, capital, January 1 $ -
Add:
Net income 2,400 32,400
Total
The value for net income is determined from 32,400
the income
Less: Withdrawal statement.
by owner 600
Carol Finlay, capital, January 31 $ 31,800
Exhibit 2.4
Balance Sheet
Finlay Interiors
Balance Sheet
January 31, 2001
Assets Liabilities
Cash $ 8,400 Accounts payable $ 200
Supplies 3,600 Notes payable 6,000
Equipment 26,000 Total liabilities $ 6,200
Owner's Equity
Carol Finlay, capital 31,800
Total liabilities and
Total assets $ 38,000 owner's equity $ 38,000
Balance Sheet
Finlay Interiors
Balance Sheet
January 31, 2001
Assets Assets are properties or
Liabilities
Cash $ 8,400 economicpayable
Accounts resources owned
$ by200
Supplies 3,600 a business.
Notes payableThey are expected 6,000
to provide future benefits
Equipment 26,000 Total liabilities 6,200
to the business.
Owner's Equity
Balance Sheet
Finlay Interiors
Balance Sheet
January 31, 2001
LiabilitiesAssets
are obligations Liabilities
Cash
of the business.$ They8,400
are Accounts payable $ 200
Supplies
claims against the3,600 Notes payable 6,000
Equipment 26,000
assets of the business. Total liabilities $ 6,200
Owner's Equity
Balance Sheet
Finlay Interiors
Balance Sheet
January 31, 2001
Assets Liabilities
Equipment
Equity is the owner’s26,000
claim Total liabilities $ 6,200
on the assets of the business. Owner's Equity
It is the residual interest in Carol Finlay, capital 31,800
the assets of the business Total liabilities and
after
Totaldeducting
assets $liabilities.
38,000 owner's equity $ 38,000
Balance Sheet
Finlay Interiors
Balance Sheet
January 31, 2001
Assets Liabilities
Equipment 26,000 Total liabilities 6,200
Assets = Liabilities + Equity
Owner's Equity
C. Finlay, capital 31,800
Total liabilities
and owner's
Total assets $ 38,000 equity $ 38,000
Exhibit 2.5
Balance Sheet
Owner’s Investment Owner’s Owner’s Withdrawal

Equity
Revenues Expenses
Exhibit 2.6
Finlay Interiors
Statement of Cash Flows
Describes
Cash flows from operating activities: the
Cash received from clients $ 4,100 sources
Cash paid for supplies (2,500) and uses
Cash paid for rent (1,000) of cash
Cash paid to employee (700) for a
Net cash used by operating acitivities $ (100) reporting
Cash flows from investing activities: period.
Purchase of furniture $ (20,000)
Net cash used by investing activities (20,000)
Cash flows from financing activities:
Partial repayment of note (900)
Withdrawal by owner (600)
Net cash provided by financing activities 28,500
Net increase in cash $ 8,400
Cash balance, January 1 -
Cash balance, January 31 $ 8,400
Fundamental Principles of Accounting
Business Entity Principle


A business
Objectivity is accounted for
Principle
Cost
separately
Principle from its owner
or owners.
Going-Concern Principle
Monetary Unit Principle
Revenue Recognition Principle
Objectivity Principle
Cost Principle
Financial statement information
Going-Concern
is supported byPrinciple
independent,
unbiased evidence.
Cost Principle
Going-Concern
Financial Principle
statements are based
Monetary
on actualUnit
costs incurred in
Principle
business transactions.
Cost Principle
Monetary
A businessUnit
continues operating
Principle
instead of being closed or sold.
Cost Principle
Express
Revenue Recognition
transactionsPrinciple
and
events in monetary units.
Cost Principle
 Revenue is recognized when earned, not
just when cash has been received.
Transactions and the Accounting Equation
The accounting equation must remain in balance

after each transaction.
Transaction Analysis
Carol Finlay invests $30,000 cash to
start her business.
The accounts involved are:

(1) Cash (asset)
(2) Owner’s Equity (equity)
Carol Finlay invests $30,000 cash to
start her business.
Owner's
Accounts Notes Owner's
Cash Supplies Furniture Payable Payable Capital
(1) $ 30,000 $ 30,000
$ 30,000 $ - $ - $ - $ - $ 30,000
$ 30,000 = $ 30,000
Purchased supplies paying $2,500 cash.

(1) Cash (asset)
(2) Supplies (asset)
Purchased supplies paying $2,500 cash.

Owner's
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
$ 27,500 $ 2,500 $ - $ - $ - $ 30,000
$ 30,000 = $ 30,000
Purchased furniture for $20,000 cash.

(1) Cash (asset)
(2) Furniture (asset)
Purchased furniture for $20,000 cash.
Owner's
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
(3) (20,000) $ 20,000
$ 7,500 $ 2,500 $ 20,000 $ - $ - $ 30,000
$ 30,000 = $ 30,000
Purchased supplies of $1,100 on account

and furniture of $6,000 by signing a note.

(1) Supplies (asset)
(2) Furniture (asset)
(3) Accounts payable (liability)
(4) Notes payable (liability)
Purchased supplies of $1,100 on account and
furniture of $6,000 by signing a note.
Owner's
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
(3) (20,000) $ 20,000
(4) 1,100 6,000 $ 1,100 6,000
$ 7,500 $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 30,000
$ 37,100 = $ 37,100
Now let’s look at transactions involving
revenues and expenses.
Owner's

Bal. $ 7,500 $ 3,600 $ 26,000 $ 1,100 6000 $ 30,000
$ 7,500 $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 30,000
$ 37,100 = $ 37,100
Performed consulting services receiving $2,200 cash.

(1) Cash (asset)
(2) Owner’s capital (equity)
Performed consulting services receiving $2,200 cash.
Owner's
Bal. $ 7,500 $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 30,000
(5) 2,200 2,200
$ 9,700 $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 32,200
$ 39,300 = $ 39,300
Paid rent for January, $1,000 and salaries to
the business’s only employee, $700 cash.

(1) Cash (asset)
(Rent expense)
(Salaries expense )
Paid rent for the month, $1,000 and salary to
employee, $700 cash.
Owner's
Bal. $ 7,500 $ 3,600 $ 26,000 $ 1,100 6000 $ 30,000
(5) 2,200 2,200
(6) (1,000) (1,000)
(7) (700) $ (700)
$ 8,000 $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 30,500
$ 37,600 = $ 37,600
Provided consulting services of $1,600 and
rented furniture for $300 to a homebuilder.

(1) Cash (asset)
(Consulting revenue)
(Rental revenue)
Provided consulting services of $1,600 and
rented furniture for $300 to a homebuilder.
Owner's
Account Accounts Notes Owner's
Cash Receivable Supplies Furniture payable Payable capital
Bal. $ 8,000 $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 30,500
(8) 1,900 1,900
$ 8,000 $ 1,900 $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 32,400
$ 39,500 = $ 39,500
Received $1,900 cash on account.

(1) Cash (asset)
(2) Account receivable (asset)
Received cash of $1,900 on account.
Owner's
Bal. $ 8,000 $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 30,500
(8) 1,900 1,900
(9) 1,900 (1,900)
$ 9,900 $ - $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 32,400
$ 39,500 = $ 39,500
Paid $900 on account.

(1) Cash (asset)
(2) Account payable (liability)
Paid $900 cash on account.
Owner's
Bal. $ 8,000 $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 30,500
(8) 1,900 1,900
(9) 1,900 (1,900)
(10) (900) (900)
$ 9,000 $ - $ 3,600 $ 26,000 $ 200 $ 6,000 $ 32,400
$ 38,600 = $ 38,600
Carol Finlay withdrew $600 cash for
personal living expenses.

(1) Cash (asset)
Withdrawals
Carol Finlay withdrew $600 for personal
living expenses.
Owner's
Bal. $ 8,000 $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 30,500
(8) 1,900 1,900
(9) 1,900 (1,900)
(10) (900) (900)
(11) (600) (600)
$ 8,400 $ - $ 3,600 $ 26,000 $ 200 $ 6,000 $ 31,800
$ 38,000 = $ 38,000
Financial Statements
Let’s prepare the financial statements
reflecting the transactions we have recorded.
Income Statement
Finlay Interiors
Income Statement
Revenues:
Rental revenue 300
Total revenues 4,100
Operating expenses:
Rent expense $ 1,000
Salaries expense 700
Net income $ 2,400
Finlay Interiors
Owner's equity, January 1 $ -

Plus: Investment by owner $ 30,000
Net income 2,400 32,400
$ 32,400
Less: Withdrawal by owner 600
Owner's equity, January 31 $ 31,800
Balance Sheet
Finlay Interiors
Balance Sheet
January 31, 2001
Assets Liabilities
Equipment 26,000 Total liabilities $ 6,200
Owner's equity
End of Chapter 2
Lets see if you

understand
Lets see if you understand:
Rocky began a professional practice as a photographer on
Feb. 1. He plans to prepare a monthly financial statements.
Following are his transactions
1. He invested 50,00 cash along with an SLR camera with
a market value of 20,000 two months ago but is now
worth 10,000 only
2. Paid 25,000 cash for February rent (including 500 water
bill) of a fully furnished office.
3. Purchased 120,000 worth of state of the art equipment
(laptop, lighting and other equipment) on credit for
thirty monthly installment payments starting next month
Rocky Photography
4. Purchased office supplies worth 2,500
5. Completed work for a client and immediately
collected 32,000 cash
6. Completed work for a client and sent a bill for
27,000 to be paid within 45 days
7. Paid assistant 6,200 cash for 15 days work
8. Collected 15,000 cash on the amount owed by the
client
9. Completed work for another client who paid only
40,000 or 40% of the total bill amount. The client
promised to pay the balance in thirty days
Rocky Photography
10. Owner withdrew 5,000 cash for personal use
11. Paid the 1st installment for the equipment purchased
12. Paid the 30th salary of the assistant
13. Received PLDT bill 1,800 and Meralco bill 3,800
14. Consumed 2,000 worth of supplies
15. Loan application was approved and credited to Rocky’s
account
Required: Prepared a complete set of Financial Statement
using the following accounts titles.
Cash, Accounts Receivable, Office Supplies, Equipment,
Accounts Payable, Loans Payable, Utilities Payable, Rocky
Capital, Rocky Drawing, Service Income, Utilities Expense,
Salary Expense, Supplies Expense, Rent Expense

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FUNDAMENTAL ACCOUNTING PRINCIPLES

Tenth Canadian Edition

Larson, Jensen & Carroll

PowerPoint slides by:

Previewing Financial Statements

Point in time Period of time Point in time

Statement of Owner’s Equity

Statement of Owner’s Equity

Owner’s Investment Owner’s Owner’s Withdrawal

Business Entity Principle

The accounting equation must remain in balance

Assets = Liabilities + Equity

The accounts involved are:

Purchased supplies paying $2,500 cash.

The accounts involved are:

Purchased supplies paying $2,500 cash.

$ 27,500 $ 2,500 $ - $ - $ - $ 30,000

Purchased furniture for $20,000 cash.

The accounts involved are:

$ 7,500 $ 2,500 $ 20,000 $ - $ - $ 30,000

Purchased supplies of $1,100 on account

The accounts involved are:

Accounts Notes Owner's

$ 7,500 $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 30,000

The accounts involved are:

$ 9,700 $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 32,200

The accounts involved are:

The accounts involved are:

$ 8,000 $ 1,900 $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 32,400

The accounts involved are:

$ 9,900 $ - $ 3,600 $ 26,000 $ 1,100 $ 6,000 $ 32,400

The accounts involved are:

$ 9,000 $ - $ 3,600 $ 26,000 $ 200 $ 6,000 $ 32,400

The accounts involved are:

Owner's equity, January 1 $ -

Lets see if you

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