Accounting for Managers

QUESTION: c) Indicate the effect of each of the following transactions on any or all of the three financial statements of a business: (5 MARKS)

 

  1. Statement of financial position

  2. Statement of financial performance

  3. Statement of cash flows

 

SOLUTION:

 

  • Purchase equipment for cash:

 

  • The purchase of assets for cash affects the statement of financial position by reducing the cash account which is a part of current asset section and increasing the fixed-assets account which is a part of long term assets section. While both of these accounts are listed in the asset side of statement of financial position, it will not immediately affect the liability side of balance sheet.
  • Moreover, the purchase of assets for cash will reduce the amount of cash available to company and it is shown as cash outflow from the investing activities.

 

 

  • Provide services to a client, with payment to be received within 40 days.

 

As a result of above transaction, the debit to Accounts Receivable increases total assets which are reported on its statement of financial position while the credit to Service Revenues will increase revenues and net income which are reported on its statement of financial performance.

 

  • Pay a liability:

 

  • Paying a liability in cash will cause a decrease in both the assets as well as liabilities.
  • Since the accounts payable are paid in cash, it will be shown as cash outflow from operating activities in the statement of cash flow.

 

 

  • Invest additional cash into the business by the owner.

 

As a result of the above transaction, the assets of the company under the column cash will increase along with an increase in the shareholder (owner’s) equity.

 

5) Collect an account receivable in cash:

  • As a result of above transaction, the asset account ‘Account receivables’ is reduced and the asset account ‘cash’ will be increased.
  • No statement of financial performance account is involved at the time of collection.

 

 

  • Pay wages to employees:
  • As a result of above transaction, bank account under asset account will reduce. Moreover, such an expense will reduce the credit balance in the Owner Capital account of a sole proprietorship, or will reduce the credit balance in the Retained Earnings account of a corporation.
  • Such amount will be shown as a part of general and administrative expense under the head other operating expenses in statement of financial performance of company.

 

 

7) Receive the electricity bill in the mail, to be paid within 30 days:

  • As a result of above transaction, account payable in the liabilities account of company will increase while the owner’s equity will decrease but leaves no effect on the asset side of statement of financial position.
  • Such amount will be shown as a part of general and administrative expense under the head other operating expenses in statement of financial performance of company.

 

8) Selling a piece of equipment for cash:

  • If a company sells a piece of equipment for an amount different from its recorded amount in the company's accounting records (its book value), any difference is recorded in the account gain or loss on the sale of equipment - in income statement account.
  • The cash received from the sale is recorded as an investing activity of cash flow statement. But to avoid double entry, an adjustment is also to be made to the net income on cash flow statement. Each gain is deducted from net income and each loss is added to net income and is recorded in the operating activities section of the cash flow statement.
  • It increases the cash account as well as accumulated depreciation account and reduces the equipment account within the asset account.

9) Withdraw cash by the owner for private use:

As a result of above transaction, the company’s asset account cash will decrease, will leave no effect on the liability side of balance sheet and shareholder equity will decrease by an entry to drawings account or retained earnings as the case may be.

10) Borrow money on a long-term basis from a bank:

The above transaction will cause an increase in company asset account cash or bank while the company’s liabilities under the head notes payable or loan payable will also increase.





Share this post