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CHAPTER 3--ANALYZING CHANGES IN FINANCIAL POSITION

CHAPTER 3--ANALYZING CHANGES IN FINANCIAL POSITION. Business Transaction:. Any financial event that causes a change in the financial position of a business Example Withdraw cash Purchased asset. Originate from source documents. Source Document:.

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CHAPTER 3--ANALYZING CHANGES IN FINANCIAL POSITION

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  1. CHAPTER 3--ANALYZING CHANGES IN FINANCIAL POSITION

  2. Business Transaction: • Any financial event that causes a change in the financial position of a business Example • Withdraw cash • Purchased asset Originate from source documents

  3. Source Document: • Business paper that is the original record of a transaction; provides proof of transaction • Includes all information needed to record the transaction

  4. Examples of Source Documents: • Receipts • Invoices • Bills • Cheques

  5. Objectivity Principle • GAAP states all accounting transactions will be recorded based on facts and not personal opinion • Source documents provide proof/fact of transaction

  6. METROPOLITAN MOVERS –TRANSACTION ANALYSIS: • Using the balance sheet on p. 61fill in the Equation Analysis Sheet for the BEGINNING BALANCES

  7. Transaction 1 • Metropolitan Movers pays $1 200 cash to Mercury Finance. • Cash decreases $1 200 • Accounts Payable- Mercury Finance decreases $1 200

  8. Transaction 2 • K. Lincoln, who owes Metropolitan Movers $2 500, pays $1 100 in partial payment of the debt. • Cash increases $1 100 • Accounts Receivable – K. Lincoln decreases $1 100

  9. Transaction 3 • Equipment costing $1 950 is purchased for cash. • Cash decreases $1 950 • Equipment increases $1 950

  10. Transaction 4 • A new pick-up truck is purchased at a cost of $18 000. Metropolitan Movers pays $10 000 cash and arranges a loan from Mercury Finance to cover the balance of the purchase price. • Cash decreases $10 000 • Truck increases $18 000 • Mercury Finance increases $8 000

  11. Transaction 5 • Metropolitan Movers completes a storage service for B. Cava at a price of $1 500. A bill is sent to B. Cava to indicate the additional amount that Cava owes. • Accounts Receivable increases $1 500 • J. Hofner, Capital increases $1 500

  12. Transaction 6 • J. Hofner, the owner, withdraws $500 for personal use. • Cash decreases $500 • J. Hofner, Capital decreases $500

  13. Transaction 7 • Truck requires engine repair. J. Hofnerpays $75 cash when the truck is picked up. • Cash decreases $75 • J. Hofner, Capital decreases $75

  14. New Balance • Calculate the new balances of each column.

  15. Do the total Assets = Total Liabilities + Owner’s Equity? Total Assets = Total Liabilities + Owner’s Equity 61 025 = 26 920 + 34 105 61 025

  16. Summary of Steps in Analyzing a transaction: • Identify all items (A,L,OE) that must be changed & make necessary changes (increase or decrease) • Make sure at least 2 accounts are affected (ie. A & A, A & L, A & OE) • Accounting Equation must balance after each transaction

  17. *OE is NOT always affected in each transaction • If O.E. has changed: • Increase $ earned (Revenue) • Increase owner investment (Capital) • Decrease owner withdrawal (Drawings) • Decrease Costs of operating business (expense) • Decrease loss on sale (expense)

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