ACC100

Introductory Financial Accounting

Chapter 2 - REVIEW

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Review
Be prepared to answer 5-7 M/C questions at the beginning of class. These questions are for YOU they provide you with an understanding of your learning process. My expectation is that you will be able to get at least 80% of the questions correct. Note the questions you were unable to answer and review that content again!

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ACC100
Introductory Financial Accounting

Chapter 3 Processing Accounting Information

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Learning Objectives
LO1: Identify transactions for recording
LO2: Analyze the effects of transactions on the accounting equation LO3: The double entry accounting system.

LO5: The Trial Balance

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External vs. Internal Events

external events: interaction between entity and outside environment

internal events: interaction within entity

LO1
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Events vs. Transactions

If an event is

measurable and realized

then its a transaction
LO1

Only transactions are recorded!

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Exercise 3-1 page 121

Working with a partner answer the question.

Then answer the next 2 M/C questions!

You have 5 minutes.

LO1
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Item 3 in E3-1, page 121, is an

A. B. C. D.

External event Internal event Not recorded None of the above.

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Item 8 in E3-1, page 121, is an

A. B. C. D.

External event Internal event Not recorded None of the above.

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Question
What do we use in order to determine if an event is a transaction, i.e., measurable and realized?

LO1

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Source Documents
Purchase Invoice Sales Invoice

Cash Register Tape

Payroll Records
LO1

Evidence needed in an accounting system to record transactions

Cheques

Shipping Document

Receiving Document
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Transaction Analysis:
Once we have determined, using source documents, that an event is a transaction, we use the accounting equation to analyze the impact on th company.

LO1

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At the beginning of the year assets were $100 and liabilities were $60. During the year Assets increased by $25 and Liabilities decreased by $10. The ending shareholders equity would be:

A. B. C. D. E.

15 35 75 125 Did not have time to finish/Im lost!

LO4

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Remember to deconstruct the question!

Assets = Liabilities + Shareholders Equity 100 = 60 + ? 25 = -10 + ? ?? = ?? + ?? The accounting equation must BALANCE both at the beginning, during and end of the year!
LO4
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If we can do that for a WHOLE years worth of transactions, we can do the SAME THING for individual transactions!

For every transaction we would have to have the accounting equation hold true!

Assets = Liabilities + Shareholders Equity

??? = ?? + ??

We can use this for EVERY transaction!

LO4
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Issue capital stock for cash $50,000

Transactions for Glengarry Health Club Assets ???
Share Certificate

= Liabilities + Shareholders Equity = ??? + ???

The accounting equation must always remain in balance!

LO2
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Issue capital stock for cash $50,000

The impact on the accounting equation would be: A. B. C. D. E. Increase assets, decrease liabilities. Increase assets, increase liabilities. Increase assets, decrease shareholders/ equity. Increase assets, increase shareholders equity. Increase liabilities, decrease shareholders equity.

Extend your learning: Name the ACCOUNTS under each category that would be affected and the $ value of the effect!
LO2
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Issue capital stock for cash $50,000

Transactions for Glengarry Health Club Assets
Share Certificate

= Liabilities + Shareholders Equity

The accounting equation must always remain in balance

LO2
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We can do that for EVERY transaction!

BUT we need to: 1. understand which accounts go in each category (tie into your understanding of the characteristics of every category!) 2. understand how transactions affect the accounting equation (increase, decrease, etc) 3. Understand that the accounting equation is ALWAYS in balance that = sign is IMPORTANT!

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Acquire $75,000 in equipment. Paid $25,000 cash and issued a note payable for the rest
The impact on the accounting equation would be: A. B. C. D. E. Increase assets, decrease liabilities. Increase assets, increase liabilities. Increase assets, decrease shareholders/ equity. Increase assets, increase shareholders equity. Increase liabilities, decrease shareholders equity.

HINT: DRAW out your accounting equation, then THINK: What did I GET? What did I GIVE UP? What do I have to GIVE UP in the FUTURE?
LO2
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Acquire $75,000 in equipment. Paid $25,000 cash and issued a note payable for the rest
Assets = Liabilities + Shareholders Equity

Increase on left has corresponding increase on right

LO2
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Purchase supplies for $800 on credit.

The impact on the accounting equation would be: A. B. C. D. E. Increase assets, decrease liabilities. Increase assets, increase liabilities. Increase assets, decrease shareholders/ equity. Increase assets, increase shareholders equity. Increase liabilities, decrease shareholders equity.

Extend your learning: Name the ACCOUNTS under each category that would be affected and the $ value of the effect!
LO2
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Purchase supplies for $800 on credit.

Assets

I.O.U.

= Liabilities + Shareholders Equity

At least two accounts affected by every transaction

LO2
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Lets quickly look at one more example.

These examples are for your benefit. Even though I am not giving you M/C questions for every one, YOU should be able to provide the impact on the accounting equation AND the accounts affected!

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Paid $6,000 for the first six-months rent

Assets = Liabilities + Shareholders Equity

Consider: Is this an EXPENSE? Think of the CHARACTERISTICS!

LO2
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Sold $5,000 in day passes for cash.

The impact on the accounting equation would be: A. B. C. D. E. Increase assets, decrease liabilities. Increase assets, increase liabilities. Increase assets, decrease shareholders equity. Increase assets, increase shareholders equity. Increase liabilities, decrease shareholders equity.

Extend your learning: Name the ACCOUNTS under each category that would be affected and the $ value of the effect!
LO2
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Sold $5,000 in day passes for cash.

Assets = Liabilities + Shareholders Equity

Revenues increase retained earnings, which increases shareholders equity!

LO2
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Sold $12,000 in annual memberships for cash.

The impact on the accounting equation would be: A. B. C. D. E. Increase assets, decrease liabilities. Increase assets, increase liabilities. Increase assets, decrease shareholders equity. Increase assets, increase shareholders equity. Increase liabilities, decrease shareholders equity.

Extend your learning: Name the ACCOUNTS under each category that would be affected and the $ value of the effect!
LO2
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Sold $12,000 in annual memberships for cash.

Assets

= Liabilities + Shareholders Equity

Receipt of annual membership payment creates liabilities

LO2
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Pay wages and salaries of $3,000.

Assets

= Liabilities + Shareholders Equity

Expenses decrease retained earnings

LO2
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Pay dividends of $400.

Assets = Liabilities + Shareholders Equity

Dividends directly reduce retained earnings

LO2
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Pay dividends of $400.

Assets = Liabilities + Shareholders Equity

Dividends directly reduce retained earnings

LO2
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Move from transaction analysis (individual) to financial statements (cumulative):

Although we analyze the transactions INDIVIDUALLY, we have to gather the information together in order to help us produce the financial statements.

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Cumulative Effect of Transactions for Glengarry Health Club

Assets = Liabilities + Shareholders

Equity

LO2

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Glengarry Health Club Income Statement For the Month ended January 31, 2008 Revenues: Day passes

Expenses: Salaries and wages Net income

LO2

$ $
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Glengarry Health Club Statement of Retained Earnings For the Month ended January 31, 2008 Opening R/E: + Net Income - Dividends Closing R/E: $ $

Carried to the Balance Sheet!

LO2
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Glengarry Health Club Balance Sheet January 31, 2008

Assets: Cash Supplies Prepaid rent Equipment

Liabilities: Accounts payable Unearned revenue Notes payable Owners Equity Capital stock Retained earnings
Total liabilities & owners equity

Total assets

LO2

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Problem 3-2 Part I page 126

Complete this question with a partner. Complete only Part (1).

HINT: Use the format noted on the following slide.

You have 10 minutes to complete

this question and answer the M/C questions that follow.

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Problem 3-2 Part I page 126

+ Date Cash Assets A/R = Equip. Supplies Liab. A/P Shareholders' Equity Capital Retained Stock Earnings

01-May 01-May 05-May 09-May 10-May 15-May May 17 24-May 29-May 30-May 30-May 31-May Balance

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For P3-2, Part 1, on page 126: what is the impact on the accounting equation for the second transaction on May 1st?

May 1: Purchased 10 bicycles for $300 each on an open account. The company has 30 days to pay for the bicycles. A. B. C. D. E. Increase assets, decrease liabilities. Increase assets, decrease shareholders equity. Increase assets, increase liabilities. Increase assets, increase shareholders equity. None of the above.
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For P3-2, Part 1, on page 126: what is the impact on the accounting equation for the second transaction on May 24st?

May 24: Billed the local park district $1,200 for in-line skating lessons provided to neigbourhood kids. The park district is to pay of the bill within 5 working days and the rest within 30 days.
A. B. C. D. E. Increase assets, increase liabilities. Increase assets, increase shareholders equity. Increase liabilities, increase shareholders equity. increase liabilities, decrease shareholders equity. None of the above.
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Using this information can we create the financial statements??

Date Balance Cash Assets A/R Equip. Supplies Liab. A/P Shareholders' Equity Capital Retained Stock Earnings

The issue: we have the accounts to produce the Balance Sheet but we do not have the necessary detailed information to create the Income Statement! For that we would have to record all the transactions at the ACCOUNT level.

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Account
Cash A/R Sales Dividends Wages Supplies A/P Rent

Account is record for each individual assets, liabilities, revenue, expenses, and component of owners equity.
LO3
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Using this information can we create the financial statements??

Assets A/R Liab. A/P Shareholders' Equity Capital Retained Stock Earnings

Date Balance

Cash

Equip.

Supplies

The balance in the Retained Earnings Accounts would have to be broken down into accounts in order to create the income statement.

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Using this format, input the necessary transactions to help you create the income statement. You have 5 minutes!
Retained Earnings
Date 01-May 01-May 05-May 09-May 10-May 15-May May-17 24-May 29-May 30-May 30-May 31-May Balance Revenue Vendor Advertising Wage Expense Expense Expense

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Question: What are total revenues?

A. B. C. D. E.

1,800 3,000 4,800 6,000 None of the above.

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The breakdown into accounts showing the revenue and expenses allows the creation of the income statement.
Retained Earnings
Date 01-May 01-May 05-May 09-May 10-May 15-May May-17 24-May 29-May 30-May 30-May 31-May Balance Revenue Vendor Advertising Wage Expense Expense Expense

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FUN-ON-WHEELS INC. INCOME STATEMENT FOR THE MONTH ENDED MAY 31, 2008

Revenues: Rental fees Lessons Expenses: Registration fee Advertising Salaries and wages Net income

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Balance Sheet:
Assets A/R Liab. A/P Shareholders' Equity Capital Retained Stock Earnings

Date
Balance

Cash

Equip.

Supplies

We can then use the accounts under assets, liabilities and shareholders equity to produce the classified balance sheet.

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FUN-ON-WHEELS INC. BALANCE SHEET AT MAY 31, 2008 Assets Current assets: Cash Accounts receivable Supplies Total current assets Property, plant, and equipment: Equipment Total assets Liabilities and Shareholders Equity Current liabilities: Accounts payable Capital stock Retained earnings (0+$5,700 0 =) Total shareholders equity Total liabilities and shareholders equity

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Exercise 3-4 page 122-123

With an understanding of the impact of transactions on the accounting equation, you should be able to work backwards given the affect on the accounting equation, provide an entry which would cause this affect.

With a partner complete E3-4.

You have 5 minutes.

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E3-4, pages 122-123: One possible transaction that would satisfy the changes in the accounting equation for Part (1) of this question is:

A. B. C. D. E.

Sell goods for cash. Purchase office equipment on account. Sell common shares to investors. Sell goods on account. Repay a bank loan with cash.

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E3-4, pages 122-123: One possible transaction that would satisfy the changes in the accounting equation for Part (4) of this question is:

A. B. C. D. E.

Sell goods for cash. Sell common shares to investors. Pay wages to employees. Repay a bank loan with cash. None of the above.

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For Next Week:

1. Complete the Chapter 3 Homework Assignment 2. Read Chapter 4, pages 146-154 (top) 3. Complete the Chapter 4 Pre-Lecture Quiz.

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End of Chapter 3

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