Lecture 2 Business Transaction Analysis

Lecture 2 Business Transaction Analysis - LECTURE 2...

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LECTURE 2 BUSINESS TRANSACTION ANALYSIS MCGR 211 – Fall 2008
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Agenda Understanding the basic accounting equation Accrual Accounting vs. Cash Accounting Analyzing transactions and understanding their effect on the basic accounting equation Analysis of a cash flow Profitability Rations
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Basic Accounting Equation Remember that the above equation must ALWAYS balance! When increase one side, the other side must be increased by the same amount ASSETS = Liabilities + Shareholder’s Equity
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Accrual vs. Cash Accounting Accrual Base Accounting : E Expenses are recorded when they are incurred / consumed E Revenues are recorded when they are performed/earned Cash Accounting: E Expenses are recorded when the cash for the expense is disbursed E Revenues are recorded when the cash for the sale or service is received
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Accrual vs. Cash Accounting Example Today is pay day. You receive $2,000 in your bank account for your work over the past 2 weeks. On Sept 7 th , you go on an all inclusive trip and you pay with credit card. Credit card is payable on the last day of every month. Sept 1 Sept 30th $2,000 Cash inflow Today Sept 15th Sept 7th $2,500 went on a trip $2500 Paid credit card
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Accrual vs. Cash Accounting Cash basis is NOT acceptable under ASPE or IFRS. Accrual basis must be used by companies preparing financial statements Accrual basis paints a better picture of the standing of a company at any given point in time. With accrual accounting, you must look at the cash flow statement to interpret the cash inflows and outflows.
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Background Info You and your friend decide to open a coffee shop on campus. In the first month of operation, a variety of events happen and must be recorded in order to produce financial statements. How do the following events affect the accounting equation?
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Transaction Analysis – Share Issuance Issuance of Common Shares for $10,000 E Common shares is an equity account E Common shares are exchanged for cash ASSETS = Liabilities + Shareholder’s Equity cash = 0 + Share capital $ 10K = 0 + $10K
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Transaction Analysis – Equipment purchase on Account We purchase a Cappuccino machine for $3,000 in order to set up the coffee bar. We borrow the $3,000 on our line of credit ASSETS = Liabilities + Shareholder’s Equity equipment = bank indebtedness + 0 $ 3K = $3K + 0
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Transaction Analysis – Inventory Purchase We purchased paper coffee cups for $1,000 and paid cash. ASSETS = Liabilities + Shareholder’s Equity inventory + Cash = 0 + 0 $ 1K - $1K = 0 + 0
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Transaction Analysis – Prepaids We purchase a 1 year insurance coverage for our coffee shop. The insurance costs $500 ASSETS = Liabilities + Shareholder’s Equity prepaid + cash = 0 + 0 $ 500 - $500K = 0
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Transaction Analysis – Unearned Revenue We get a contract to provide coffee and
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Lecture 2 Business Transaction Analysis - LECTURE 2...

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