Reading Ch6

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G) Rebought portion of Common Stock from their investors for $103 cash (financing). Contra-account aka TREASURY STOCK

- Contra-account REDUCES an account/section of FS Step 1 (received): CS = 103 Step 2 (given): Cash = -103 Step 3: Common stock 103 = 103 Cash

Z Best, Inc. issued $1,000,000 of stock for cash. Z Best recorded the transaction by increasing cash and decreasing common stock and additional paid-in capital. As a result of this entry, Blank______. (Check all that apply.)

- Contributed capital understated - SE is understated - Accounting Equation is unbalanced

H) Chipotle will pay $2 cash in dividends to shareholders. Dividends from RE (profits) to shareholders.

- Declared = Liability. Ex; Dividends Payable Step 1 (Received): Reduction of owners claims/debt RE = -2 Step 2 (Given): Promise note to pay Dividends Payable = 2 Step 3: RE -2 = 2 DP

A) Chipotle issued (sold) 100 shares of common stock that has par value of $.01 with a market value of $.17 per share, which is $17 cash from the investors (financing)

- Par Value: Legal amount per share created by the BOARD - Common Stock: Voting stock issued by entity - Add. Paid-In capital: Amount contributed - Par Value Stock Transaction Account Received from the shareholders: cash or other Market Value of shares given - 100 shares x $.17 MARKET VALUE = $17 Given to Shareholders: Common Stock of number of shares times PAR VALUE 100 x .01 = $1 - Additional Paid-In Capital (Excess over PV) = $16 .17 MV - .01 PV = $16

Transaction Analysis Illustrated

- Practice, Practice, Practice

How is the BS prepared and analyzed?

- Trial Balance: List of all accounts with their BALANCES, to check that all debits and credits are equal

Cash on T-accounts

1. Beg. balance on left side 2. Increase is DB 3. Decrease is CR 4. Ending Balance in Left side

Identify on which side of the Accounts Payable T-account the following would appear. Select all that are correct.

1. Payments of supplies, purchases prviusly, , is DEBIT 2. Ending of AP is on the CREDIT side 3. Purchase of supplies on the CREDIT side

4 measurements/concepts

1. Separate entity assumption - each business activities is SEPARATED from personal activates Ex; Buying personal property ONLY for personal use. 2. Going concern assumption - Unless there evidence, the business will continue to OPERATE FOR A WHILE, long enough to meets contractual commitments and plans 3. Monetary Unit Assumption - States that accounting data should be measure in MOENTARY UNITS w/o inflation or changes of purchasing powers 4. Historical Cost - Cash value of an assets on the DATE of TRANSACTION

Select the financing activities from the list below. (Check all that apply.)

1. issue stocks 2. issue notes payable

Self-Study Quiz

A) Contribution 50k cash. Exchange, receives 25k shares, par value = .10 B) Buys building for $250k, paying $25k in cash + signing a 10-year note payable for rest C) Purchased $10k for short-term investment paid in cash -------------------------------------------- A: Assets: Cash = 50k L: SE: CS = 2500 (SE), APIC = 47500 Verify: Assets 50k = 50k (2500 + 47500) B: Assets: Building = 250k, Cash = -25k Liabilities: 10yr NP = 225k Verify: Assets 225k = 225k Liabilities C: Assets: STI = 10k, Cash = -10k L: Verify: 0 (the 10k canceled each other)

Accounts

Account - Account: to accumulate the dollar effect of transections they use a standard format "Chart of Accounts" (COA): Has titles and unique numbers - Organized by: Assests, Liability, SE, Revenues, and Expenses. (All in this order). (I guess its Balance Sheet + Income Statement) - Each company has their own version for COA Ex; Lawn Mow and Dell computers may include some assets that the other WONT - So focus on WHERE IT IS LOCATED in the FS instead Ex; Trade AR = AR, Merchandise Inventory = Inventory Summations/Aggregations of records - For instance, Chipotle separated their accounts for food, drinks, and packaging supplies. But later combines them under SUPPLIES on the Balance Sheet - Wages Payable under the Accrued Expenses Payable. (Employee benefits; medical dental, vision, meal breaks, life insurance, free burritos)

How do companies keep track of Accounting Balances?

Accounting Cycle Accounting Cycle: Process used by businesses to ANALYZE and RECORD transactions. Then ADJUST records at end of period, PREPARE FS, and PREPARE for next cycle During Accounting Period 1. Analyze transactions between company and other parties 2. Record entries in the GENERAL JOURNAL- list of chronological order of each transaction 3. Post Effects to the GENERAL LEDGAR 2 Very important tool used by accountants: 1. Journal Entries 2. T accounts

Assets

Assets Assets: Economic resources that are OWNED/CONTROLLED by a COMPANY. Also, its a "snapshot" of the assets, liabilities, and SE at a specific point of time - "Order of Liquidity". How soon asset can turn to cash Current Assests (CA) - Assests that'll be used or turned to cash within 12 months. - INVENTORY ALWAYS CA Ex: Cash Inventory Short-term investments Accounts receivable Supplies (make/prep operations) Prepaid Expenses (rents, insurance, advertisement paid advanced) Inventories - For Manufactured Company = inventory of finished goods to be sold is an AR - CURRENT ASSEST Noncurrent or Long Term Assests (LAST) - To be used or turned to Cash after 12 months Example: - Property/Equipment: Land, buildings, equipment - Operating Lease Rights: rented facilities, stores in malls centers - Intangibles: Nonphysical assets. Like trademarks and patents

The Direction of Transaction Effects

Directions effects - Increase Assets = LEFT SIDE - Increase in Liability and SE = RIGHT SIDE - Debit: Left side of account - Credit: Right side of account

Manager's decision results from transactions

Examples: - Deciding to expand number of stores - Advertise new product - Change employee benefit packages - Invest excess cash Consequences: - deciding to buy MORE INVENTORY for cash to anticipate more sales. - This will INCREASE INVENTORY and DECREASE CASH Transaction Analysis Decisions: - business decision involves risks - Best to understand how these transactions affect the FS

Analytical Tools Pt2.

Finding Account Balances: Beginning Balance ++ Side -- Side -------------------- Ending Balance

Analyzing Common Transactions

Investing Activities: - Does not mean BUYING stocks and bonds - When company buys and sells its NONCURRENT ASSEST (growing/shrinking capacity) and INVESTMENTS (doesn't matter if current) Financing Activities: - When company Borrows or Repays the loan - Also selling/rebuy stocks and then pay the dividends

Investing vs Financing Activities

Investing: - buying/selling NONCURRENT assets and Investments - Noncurrent assets: Longer than 1 years Financing: - Browing/repaying debt - short-term bank loans - issuing and repurchase (treasury stock) sticvcjs - Paying Dividends

Analytical Tools

Journal Entry: - Journal Entry: Accounting method for expressing the EFFECTS of TRANSACTIONS in the DR-CR formats Ex: Chipotle sold 100 shares of CS. Par values was at $.01 per share, but MARKET VALUE is at .17 per share Cash DR = 17 CS and APIC CR = 1 + 16 - Debits always written first - Order of debits/credits DOES NOT MATTER. As long as DEBITS on top - The above, affect more than two accounts = COMPOUND ENTRY T-Accounts (General Ledger): - T- Account: Tool for summarizing the transactions effects to each account, find balances, and know about company's activities - EVERY T-ACCOUNT starts with BEGINNING BALANCE!!! - Include Reference aka DATE - When done, use HORIZANTAL LINE to signify balance (like math) - Ending Balance on appropriate side

Liabilities

Liabilities: Obligations from past transactions. They are expected handle in the future by Transferring of Assest or provide services - Owing money to their creditors - "Order of Maturity". How soon they can pay these obligations Current Liabilities Current Liabilities: obligations paid/settled in 1 year in CASH, GOODS, OTHER CURRENT ASSETS, or SERVICES Example: - Accounts Payable (suppliers) - Unearned Revs (unredeemed gift cards) - Accrued Expenses Payable: Like Wages, Utilites, and Current Lease Payable. Also includes Interest Payable - Current Lease Liabilities: current amount owed from renting, like shopping centers - Income Taxes Payable: Federal, state, local govts - Other current liabilities Noncurrent Liabilities: - Notes Payable: written promises to pay amount BORRWED + INTERST - Long-term Lease: amount owed longer than 12 months

Self-study quiz 01

My answers: RE = SE Inventories = Current Asset AR = Current Asset Prepaid Exp. = Current Asset Add. Paid-In Capital = SE Long-term Debt = NCL Accounts Payable = NCL. Current Liab. Property and Equipment = CA. Non Current Assets Accrued Payroll = NCL. CurrentLiability

Which of the following is correct regarding posting a transaction?

Posting: means to transfer journal data to the ledger

Stockholders' Equity

SE: Shareholders EQ or Owners EQ. Interest of assets minus liabilities. Combination of financing provided by OWNERS + BUSINESS OPERATIONS 1. Financing by owners - aka "Contributed Capital" - In exchange for stocks of ownership, owners invest with cash and other assets - Investors Paid/invested by Common Stock and Additional Paid-in Capital 2. Financing by operations - aka "Retained Earnings" or "Earned Capital" - After earning profits, its either to shareholders or reinvestment to business - Retained Earnings: Cumulative earnings of business, that are not given to owners but is reinvested into the business

D) Chipotle acquired $20 in additional land and $40 in new buildings, signed leases for $86 for ROU assets, paid $29 Cash and signed $6 in current leases and $111 in LONG-TERM Leases to rent facilities (aka INVESTING)

Step 1 (Received): Land = + 20 (+A), Building (+A) = 40, ROU (A+) = 86 Step 2 (Gave up): Cash = -29, Current Lease Liability (-L) = -6, Long-term Liability (-L) = -111 Step 3 Verify: Assets 117 (146 - 29) = 117 (6 + 111)

E) Chipotle sold $19 in SHORT-TERM INVESTMENT for $19 CASH (Investing activity)

Step 1 (received): Cash = 19 Step 2 (given): Short-term Invest = -19 Step 3: Cash 19 = -19 Short Term

F) Within the quarter, assume Chipotle paid $1 for NOTES PAYABLE from (b) (financing)

Step 1 Received: Reducing Notes Payable -1 Step 2 (Given): Cash = -1 Step 3 Verify: Reduce NP -1 = -1 Cash

B) Chipotle borrowed $4 from local bank, signing note to be paid in 3 years (noncurrent liability). This is a financing activity

Step 1: Received the $4 (+Assets) Step 2: Written PROMISE to pay bank aka NOTES PAYABLE (+Liability) of 4 Step 3: Make sure accounting equations A4 = L4 + SE0

C) Chipotle purchase a new item in cash $26 and $5 more of intangible assets

Step 1: received Equipment = 20 (A+) Also received Intangible Assets = 5 (+A) Step 2: Given Cash = -31 (20 + 5) (-A) Step 3: Cash -31 = 31 for Assets

Principle of Transaction Analysis

Transaction Analysis (TA): - Its the process of studying the transactions to see its ECONMIC EFFECT on the entity - Use of Accounting Equation Assests = Liabilities + Stockholders Equity 2 Principles of TA 1. All transactions affects 2 accounts; Identify those accounts + Direction of ethe effects (increase or decrease) 2. The accounting equation must be BALANCE Duel Effects - Duel Effects: Every transactions having two effects Accountants call this "Double-Entry system of recordkeeping" - Exchanges of businesses to receiving and giving up something. Ex; Paying cash to buy the tomatoes - Increase food supplies (increase asset) and Decrease cash (decrease asset). Supplies and Cash were duel effected - But since most purchases are on Credit, then 2 transactions exists - receiving the supplies through credit, and paying for the accounts payable later with cash Balance the Account Equation - Total Assests = Total Labilities + Total SE

Business Transactions

Transactions Transactions: It's an exchange between a business and/or one more external parties to a business or a Measurable Internal Event like when using an asset in operations - 2 types of transactions: External and Internal Events External Events - Exchanges of assets, goods, or services from 1 party for their to pay liabilities from one or more party Examples: - Purchase of machine from supplier for cash - Sale of merchandise to a customer on account (store credit) - Borrowing cash from bank and signing that note for repayment - Invesment of cash in business by owners for stock Internal Events - NOT EXCHANGES! - Using things up! Example: - Using insurances up paid and using buildings/equipment over several years Future Economic Impacts - are NOT in Financial Statements - Ex; Signing contract because it only exchanges PROMISES at that time not money - Exchange of promises IS NOT A TRANSACTION


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