2 Chapter investing and financing decisions and the balance sheet Primary objective of external financial reporting is to provide usefully economic information about absiness to help external parties make sound financial decisions Separate entity assumption states that business transactions are separart from the trasnsactions of the owners Unit-of-measure assumption accounting info shouldbe measured and reported in the national monetary unit Continuity assmption (going-conern) businesses are assumed to continue to operate intot he foreseeable future\ Elements of Balance Sheet Assets resources with probablye future economic beneftits owned by the entity as a result of past transactions List in order of liquidity Current assets assest that will be used or turned into cash within one year. Inventory is always considred a current asset regardless of time needed to produce and sell it. Include cash, accts receivable, supplies, prepaid expenses and other CA Long term assets are turned or used into cash beyone coming year Historical cost principle assets are required to be recoreded at the historical case equivalent cost, which on the date of the transaction is cash paid plus the current dollar value of all noncash considerations also given in the exchange Liabilities probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services Current liabilities obligatiosn that will be paid in cash or satisfied by providing cash, goods, or services, within the coming year Liabilities listed in order of maturity how soon to be paid Stockholders equity financing provided by owners and by business operations Contributed capital results from owners providing cash (and sometimes other assets) to the business Retained earnings refers to the cumulative earnings of a company that are not distributed to the owners and are reinvested in the business Nature of business transactions Only economic resources and debts resulting from past transactiosn are recoreded on balance sheet o External events exchanges of assets and btw liabilities busieness and one or more parties purchase machine, sale of merchandise, borrowing cash, investment in business by owner o Internal events events that are not excahgnes btw business and other parties but have a direct and measurable effect on entityfire damge or other nat disasters, use of property plant and equipment Account a standardized format that organizatisons use to accumulate the dollar effect of transactison on each financial statement item. Companies establish charts of accounts to facilitate recording of transactions receivable always assets
payable always liability prepaid expenses asset unearned liability procecss for determinng the effects of transactions is called transaction analysis Principles of transaction analysis transaction analysis the process of studying a transaction to determine its economic effect on the businss in temrs of the accounting equation Assets (A) = Liabilities (L) + Stockholders equity (SE) o Every transaction effects two accounts o Must be balanced Duality of effects each transaction effects two accounts How do companies keep track of account balances? Transactiosn are analyzed and recorede in the general journal in chronological order and the related acts are updated in the general ledger. Use of t accounts and journal entries Debit left side of an account Credit right side o an account Asset accts increase on the left (debit) side; they have debti balances Liability and SE increase on right (credit) side); have credit balances Analytical tool: the journal entry Journel entry an accounting method for expressing the effects of a transaction on accounts in a debits-equal-credits format o Debits written first on top after date o Credits written below and indented to the right o Any journal entry that affects more than two accounts is a compound entry Analytical tool: t-account T account a tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a companys activities How is the Balance Sheet prepared? Use old info and t accounts and ledgers