Financial Accounting

Chapter 1 (PART III)

Accounting in Action

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Transaction(3). Purchase of Supplies on Credit. (p.15)
Assume: Softbyte SA purchases headsets (and other computer accessories expected
to last several months) for €1,600 from Mobile Solutions. Mobile Solutions agrees to
allow Softbyte to pay this bill in October. This transaction is a purchase on account (a
credit purchase).
Demonstrate: Basic and equation analysis of this transaction.

Assets increase because of the expected future benefits of using the headsets and computer accessories, and
liabilities increase by the amount due Mobile Solutions.

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 Differences between Supplies and Equipment
Differences Supplies Equipment
Example paper, pens, ink cartridges, computers, machinery, furniture,
and cleaning materials. and vehicles.
Nature and Durability consumable items durable and long-lasting items
Value and Cost lower cost more expensive
Lifespan Short lifespan longer lifespan
$ threshold
10,600 10,0004
NTHU

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Transaction (4). Services Performed for Cash. (p.16)
Assume: Softbyte SA receives €1,200 cash from customers for app
development services it has performed. This transaction represents Softbyte’s
principal revenue-producing activity. Recall that revenue increases equity.
Demonstrate: Basic and equation analysis of this transaction.

Recall that revenue increases equity.

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Transaction (5). Purchase of Advertising on Credit.
(p.16)
Assume: Softbyte SA receives a bill for €250 from Programming News for
advertising on its website but postpones payment until a later date.
Demonstrate: Basic and equation analysis of this transaction.

The two sides of the equation still balance at €17,800. Retained Earnings decreases when Softbyte incurs the expense.
Expenses do not have to be paid in cash at the time they are incurred.

When Softbyte pays at a later date, the liability Accounts Payable will decrease and the asset Cash will decrease [see
Transaction (8)]. The cost of advertising is an expense (rather than an asset) because Softbyte has used the benefits.
Advertising Expense is included in determining net income.

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Transaction (6).
Services Performed for Cash & Credit. (p.17)
Assume: Softbyte SA performs €3,500 of app development services for
customers. The company receives cash of €1,500 from customers, and it bills
the balance of €2,000 on account.
Demonstrate: Basic and equation analysis of this transaction.

This transaction results in an equal increase in assets and equity.

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Transaction (7). Payment of Expenses. (p.17)
Assume: Softbyte SA pays the following expenses in cash for September:
office rent €600, salaries and wages of employees €900, and utilities €200.
Demonstrate: Basic and equation analysis of this transaction.

This transaction results in an equal decrease in assets and equity.

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Transaction (8). Payment of Accounts Payable. (p.17)
Assume: Softbyte SA pays its €250 Programming News bill in cash. The
company previously [in Transaction (5)] recorded the bill as an increase in
Accounts Payable and a decrease in equity.
Demonstrate: Basic and equation analysis of this transaction.

Observe that the payment of a liability related to an expense that has previously been recorded does not affect equity.
Softbyte recorded the expense [in Transaction (5)] and should not record it again.

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Transaction (9). Receipt of Cash on Account. (p.18)
Assume: Softbyte SA receives €600 in cash from customers who had been
billed for services [in Transaction (6)].
Demonstrate: Basic and equation analysis of this transaction.

Transaction (9) does not change total assets, but it changes the composition of those assets.

Note that the collection of an account receivable for services previously billed and recorded does not affect equity.
Softbyte already recorded this revenue [in Transaction (6)] and should not record it again.

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Transaction (10). Dividends. (p.18)
Assume: The company pays a dividend of €1,300 in cash to Ray and Barbara
Neal, the shareholders of Softbyte SA. This transaction results in an equal
decrease in assets and equity.
Demonstrate: Basic and equation analysis of this transaction.

Transaction (9) does not change total assets, but it changes the composition of those assets.

Note that the dividend reduces retained earnings, which is part of equity. Dividends are not expenses.
Like shareholders’ investments, dividends are excluded in determining net income.

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Analyzing Business Transactions (p.19)
Softbyte SA: Tabular Analysis of Transactions

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Learning Objective 5
Describe the five financial statements
and how they are prepared.

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 company
parent
Microsoft Alphabet
Can you identify the similarities between these two tables
Yi zozo n
1231 2020

10 years ago
13
why do we need standarized Is Now 100 millio
Financial Statements (p.20) compara
Efficiency
Companies prepare financial statements from the summarized accounting data.

1.
FEESE
Income statement: presents the revenues and expenses and resulting net
income or net loss for a specific of time.
period
2. Retained earnings statement: summarizes the changes in retained earnings for
a specific .
period of time 179PEE E OR.E Revetpf
Lenue Dividend
3. Statement of financial position: reports the assets, liabilities, and equity of a
NetIncome
company at
d . (Sometimes referred to as a balance sheet.)
NetLoss
4. Statement of cash flows: summarizes information about the cash inflows
(receipts) and outflows (payments) for a specific .
period of time
EEE FEE
TEEFEEEe
EE O FEE.EE

Stock statement EE RE 3 14
 How statement 4 Ra 1 2.4

Stock versus Flow

83 main Fs 1 3.4

Date Description Stock Flow

1/1/2022 Bank account balance 1000

1/1/2022~12/31/2022 Deposit 1000

Year 2022
1/1/2022~12/31/2022 Withdrawal 500
Year 2022
12/31/20232 Bank account balance 1500

multiple choice question

I answer only 15
TSMC’s Income Statement
EES A period of time

16
consolidation ETF
parent company
E IF

subsidiary 398

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TSMC’s Balance Sheet

a specific date

18
TSMC’s Statement of Cash Flows

A period of time

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 Financial Statement Connections (p.21)
Income Statement
step T Net income is computed first
and is needed to determine
Retained Earnings Statement
step 2 I
the ending balance in retained
earnings.

Statement of Financial Position The ending balance in

step 3 retained earnings is needed in

preparing the statement of

Accrual
financial position.

Statement of Cash Flows basis accountingThe cash shown on the

statement of financial position
step 4 is needed in preparing the
statement of cash flows.
cash basis accounting

Assets Lia 20
 Share Capita Retained Earnings
Financial Statements (p.22)
Income Statement Rev Exp Div
The income statement lists revenues first, followed by expenses.
Then, the statement shows net income (or net loss).

Structure:
• The income statement lists revenues first, followed by expenses.
• Then, the statement shows net income (or net loss).
• When revenues exceed expenses, net income results.
• When expenses exceed revenues, a net loss results.
• The income statement does not include Investmentand distribution transactions
between the shareholders and the business in measuring net income.

t
o Share Capital
t
pay dividends
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Financial Statements (p.22)
Retained Earnings Statement
The information provided by this statement indicates the reasons why
retained earnings increased or decreased during the period. If there is
a net loss, it is deducted with dividends in the retained earnings
statement.
Structure:
• The first line of the statement shows the beginning retained earnings
amount. balance
• Then add net income (or subtract net loss) and subtract dividends .
• The retained earnings ending balance is the final amount on the statement.

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 Financial Statements (p.22)
Statement of Financial Position
The statement of financial position is like a snapshot of the company’s
financial condition at a specific moment in time (usually the month-end or
year-end).

Structure:
Lists assets at the top, followed by equity and then liabilities.
Total assets must equal total equity and liabilities.
When two or more liabilities are involved, a customary way of listing is as
shown as follows:

Liabilities
Assets
Assets 1
Liabilities
Equity of Equity 23
Financial Statements (p.23)
Statement of Cash Flows
The statement of cash flows provides information on the cash
receipts and payments for a specific period of time.
Structure:
The statement of cash flows reports EEIF EP
(1) the cash effects of a company’s operations during a period,
(2) its investing activities, 837g BEEP
(3) its financing activities,
(4) the 84 9 5 ELP
increase or decrease in cash during the period,
hee
and
(5) the cash amount at the end of the period.

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