Accountancy 200Fundamentals of Accounting INVESTING & FINANCING DECISIONS: THE BALANCE SHEET Part I
Investing & Financing Decisions • Financing activities – Borrowing funds from creditors and selling ownership equity to investors. • Investing activities – Acquiring assets such as inventories and equipment and hiring employees to engage in its operations. This section focuses on these investing and financing activities and their effects on the accounting statement known as the balance sheet.
The Balance Sheet As we saw earlier, the balance sheet is a statement of a business’ financial position at a point in time. The balance sheet is represented by the equation:
Assets Probable future economic benefits obtained or con-trolled by a particular entity resulting from past transactions or events.
E2-3 Identifying Asset Accounts A company purchases a piece of land for $50,000 cash. An appraiser for the buyer values the land at $52,500.
E2-3 Identifying Asset Accounts A new company is formed and sells 100 shares of stock for $12 per share to investors.
E2-3 Identifying Asset Accounts A manufacturing company purchases the patent on a new digital satellite system for TV reception for $500,000 cash and a $400,000 note payable due one year at 10 percent annual interest.
E2-3 Identifying Asset Accounts The accountant for a well-known snowboard manufacturing company believes that the company has accumulated $800,000 in goodwill over 10 years it has been in business. The company has never been sold in the marketplace.
E2-3 Identifying Asset Accounts A local construction company receives delivery of $5,000 of lumber. Terms indicate that payment will be due within 60 days of delivery.
E2-3 Identifying Asset Accounts An insurance company receives $1,200 from a customer for coverage for next year. Answer from the insurance company’s point of view.
E2-3 Identifying Asset Accounts Answer the insurance premium question from the customer’s point of view.
E2-3 Identifying Asset Accounts A local company is a sole proprietorship (one owner); its owner buys a car for $10,000 for personal use. Answer the question from the company’s point of view.
Liabilities Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future resulting from past transactions or events.
Owners’ Equity The residual interest in the entity’s assets that remain after deducting its liabilities.
E2-5 Identifying Liability Accounts A local construction company places a $5,000 order for lumber to be received next week. The terms indicate that payment is due within 60 days of delivery.
E2-5 Identifying Liability Accounts The construction company receives the $5,000 lumber order today.
E2-5 Identifying Liability Accounts A company signs a six-month note for a $1,000 loan on 6/30/19A to be paid back on 12/31/19A with 10 percent annual interest. Answer for the 6/30/19A date.
E2-5 Identifying Liability Accounts A company pays $1,500 on its accounts payable.
E2-5 Identifying Liability Accounts A retail company orders and receives $1,000 of merchan-dise inventory on accounts payable.
E2-5 Identifying Liability Accounts A landlord receives $12,000 from the local bookstore for rent for the next 12 months. Answer from the landlord’s point of view.
E2-5 Identifying Liability Accounts A local business receives its telephone bill for $200 for the past month. The bill is not yet due, nor has it been paid (the other account affected is Utilities Expense).
E2-5 Identifying Liability Accounts An airline receives $800 from you for a ticket purchased in advance to go to Honolulu next month. Answer from the airline’s point of view.
GAAP Underlying the Balance Sheet Cost principle - Assets and liabilities reported in financial statements are measured in terms of the cash-equivalent payment actually made to acquire the asset or incur the liability. There are exceptions to the historical cost principle, which specify other measurements such as: