The main idea behind all gaap rules is that use of

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The main idea behind all GAAP rules is that use of funds has to equal the source of funds at any point in time. Source of Funds come from the investments from Owners (Owner's Equity) and the borrowings from Creditors (Liabilities) These funds are used to invest in Assets - items under the control of the organization that can bring them future economic benefits. Owners invest through an initial contribution (Contributed capital) and by retaining a certain portion of their earnings (Retained Earnings). Obligations to Creditors due wuthin a year are called Current Liabilities and the rest, Long-term Liabilities. Assets that are expected to be turned into cash within a year are called Current Assets and the rest, Long-term Assets. Every transaction calls for a change in two or more of these accounts while preserving the balance of this accounting equation. Transactions during first operating cycle 1 Owners contributed capital to the business 1777 2 Business borrowed money from bank 1000 3 Invested in equipments (start-up costs) 1150 4 Spent on other start-up costs 800 5 6 7 Rent 150 8 Manager Salary 150 9 10 11 Advertising 350 12 Fee collected during the tournament 1350 13 Paid wages 180 14 Insurance 100 15 Recognize all expenses incured to generate this revenue Interest payable 6.67 Accounting fee payable 8 Depreciation expense 19.1666667 Use of inventories; prepaid rent & insurance 500 Transaction Analysis Use of Funds Total $ CF from operations -800 -150 -150 -350 1350 -270 -100 -470 4 7 8 11 12 13 14 CF from investments -1150 -1150 3 CF from financing 1777 1000 2777 1 2 Cash 1157 Current assets 150 350 -500 0 8 11 15D Long-term assets 1150 -19 1131 3 15C Total Assets 2288 Source of Funds Total $ Current liabilities 7 8 15 15A 15B Long-term liabilities 1000 1000 2 Contributed capital 1777 1777 1 Earnings -800 -150 -90 1350 -180 -100 -7 -8 -19 -500 -504 4 7 12 13 14 15A 15B 15C 15D Dividends 0 Total Liabilities plus Owner's Equity 2288 Use of Funds (Assets) = Source of Funds (Liabilities + Owner's Equity) [Current assets + Long-term assets] = [Current liabilities + Long-term liabilities] + [Contributed capital + Retained earnings]
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Cash Flow Statements for OC-1 Y1 Y2
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