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Questions and Answers

What is the effect on total assets after the equipment purchase in Transaction 3?

  • Increases by $1,950
  • Remains unchanged (correct)
  • Decreases by $1,950
  • Increases by $52,100

Which of the following correctly describes the Accounting Equation after Transaction 3?

  • Assets + Liabilities = Equity
  • Assets = Liabilities + Equity (correct)
  • Assets < Liabilities + Equity
  • Assets > Liabilities + Equity

What is the total decrease in cash after Transaction 3?

  • $1,200
  • $10,000
  • $5,000
  • $1,950 (correct)

In the context of Transaction 3, what component of the balance sheet remains unchanged?

<p>Total Assets (D)</p> Signup and view all the answers

What is the change in equipment balance after Transaction 3?

<p>Increased by $1,950 (A)</p> Signup and view all the answers

What must occur for the accounting equation to remain in balance after a transaction?

<p>An asset must be replaced with a different asset of equal value (B)</p> Signup and view all the answers

Regarding the owner's equity after Transaction 3, which statement is true?

<p>Owner's equity remains unchanged. (B)</p> Signup and view all the answers

What type of transaction occurs when cash is paid to acquire equipment?

<p>Expenditure transaction (C)</p> Signup and view all the answers

What must be done first when analyzing a transaction?

<p>Identify all asset and liability items that must be changed. (B)</p> Signup and view all the answers

If assets decrease and there is no change in liabilities, what must happen to owner's equity?

<p>Owner's equity must decrease. (C)</p> Signup and view all the answers

Which step ensures the fundamental accounting equation remains in balance?

<p>Make sure at least two individual items have changed. (A)</p> Signup and view all the answers

Which statement is true regarding the owner's equity after a successful transaction?

<p>Owner's equity decreases if the business is worse off after a transaction. (B)</p> Signup and view all the answers

How is an asset defined in the context of a transaction analysis?

<p>A resource owned by a business that is expected to provide future benefits. (B)</p> Signup and view all the answers

What must be confirmed about changes in a transaction?

<p>There must be at least two individual items that have changed. (A)</p> Signup and view all the answers

In the context of balance sheet analysis, what does the accounting equation imply?

<p>Total assets must equal total liabilities plus owner's equity. (D)</p> Signup and view all the answers

When analyzing transactions, what is the goal of identifying changes in assets or liabilities?

<p>To adjust the owner's equity accordingly. (B)</p> Signup and view all the answers

What was the total increase in assets after Transaction 5?

<p>$8,000 (A)</p> Signup and view all the answers

How did Transaction 5 affect the liabilities of Metropolitan Movers?

<p>Liabilities remained unchanged (C)</p> Signup and view all the answers

What is the effect of Transaction 5 on the owner's equity?

<p>It increased by $1,500 (C)</p> Signup and view all the answers

Which entry correctly represents the processing of Transaction 5?

<p>Increase Accounts Receivable and increase Revenue (A)</p> Signup and view all the answers

What balance did the Owner's Capital account hold after Transaction 5?

<p>$34,680 (D)</p> Signup and view all the answers

In terms of the accounting equation, what was the formula applied after Transaction 5?

<p>Assets = Liabilities + Owner's Equity (A)</p> Signup and view all the answers

What major change occurred in the Accounts Receivable after Transaction 5?

<p>It increased by $1,500 (B)</p> Signup and view all the answers

Which asset account was impacted by the increase affecting the total assets after Transaction 5?

<p>B.Cava (D)</p> Signup and view all the answers

Flashcards

Analyzing a transaction

The process of determining how a transaction affects assets, liabilities, and owner's equity.

Accounting Equation

Assets = Liabilities + Owner's Equity; a fundamental principle of accounting.

Asset

Something of value owned by a business.

Liability

A business's financial obligations or debts.

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Owner's Equity

The owner's stake (or residual) in the business, equal to assets minus liabilities.

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Transaction Analysis Steps

Identify affected items (assets, liabilities), determine increase/decrease, check owner's equity change, and ensure the accounting equation balances.

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Transaction impact on owner's equity

An increase or decrease to a business' owner's equity shows how profitable or unprofitable a transaction is.

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Minimum item changes in a transaction

At least two financial items (assets, liabilities, or owner's equity) must change in any accounting transaction.

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Accounting equation remains balanced

After a transaction, the total assets equal the sum of liabilities and owner's equity.

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Asset exchange

Trading one asset for another of equal value, without changing the total amount of assets.

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Transaction 3

Purchasing equipment for $1950 cash.

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Equipment purchase impact

Decreasing cash by $1950 and increasing equipment by $1950.

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Transaction 4 (partial)

Purchase of a pick-up truck for $18000, partly with cash and loan.

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Total assets unchanged

The sum of all assets in a business stays the same after a transaction, no matter the type of transaction.

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Storage Service Revenue

Earnings generated from providing storage services to customers. The revenue increases owner's equity. Example: Metropolitan Movers completing a storage service for a customer.

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Accounts Receivable

The money owed to a business by its customers for goods or services already delivered but not yet paid for.

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What happens to Accounts Receivable when a bill is sent?

Accounts receivable increases when a bill is sent to a customer for a service provided. This signifies that the business has a claim on the customer for payment of the service.

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What happens to Owner's Equity when a bill is sent?

When a bill is sent for a storage service, owner's equity increases, reflecting the revenue earned from providing the service.

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Impact of a Transaction on the Accounting Equation

Every transaction must impact at least two components of the accounting equation (Assets = Liabilities + Owner's Equity).

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Assets in the Accounting Equation

Assets are the resources owned by a business, such as cash, equipment, or accounts receivable.

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Liabilities in the Accounting Equation

Liabilities represent the financial obligations or debts owed by a business.

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Owner's Equity in the Accounting Equation

Owner's equity represents the owner's stake (or residual) in the business, equal to assets minus liabilities.

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Study Notes

Chapter 3 Study Notes

  • Analyzing changes in financial position is covered in Chapter 3
  • Business transactions cause changes in financial position
  • A business transaction is a financial event causing a change in financial position
  • Source documents are essential for verifying transaction amounts
  • Examples of source documents include hydro bills, phone bills, cheque copies, store receipts, cash register summaries and credit card slips
  • Accounting standards require objective evidence for transactions
  • Objective evidence means different people evaluating the same information arrive at the same result; based on fact not opinion

Chapter 3, Review Questions

  • Definition of business transaction
  • Examples of business transactions (beyond those in the text)
  • Examples of non-transactional business events (beyond those in the text)
  • Definition of source document
  • Examples of source documents
  • Source document usage after accounting entries are complete
  • Explanation of the objectivity principle with example

Chapter 3, Exercises

  • Determine if the following are transactions (applying to Best Consultants of Kenora, Ontario):
    • Business pays $800 to reduce debt
    • Owner takes $900 from the business personally
    • Employee interview for payroll position
    • Business provides $700 consulting service on credit
    • Business pays rent $3500
    • Business hiring an employee for $800 per week
    • Business buys computer for $3000
    • Defective computer is replaced
  • Determine if the following are transactions for Ace Collection Agency of Cornwall, Ontario:
    • Gas purchase for company car $100 cash
    • Owner eats lunch
    • Ingrid's car needs a $500 repair
    • $250 service with cash payment from a customer
  • Leased computer replaced for no cost to the business
  • Customer pays $300 toward a $1200 debt

Chapter 3 Summary

  • Understanding financial position: assets, liabilities and equity
  • Identifying transactions as financial events
  • Recording transaction effects on assets, liabilities, and equity on Equation Analysis Sheet, and calculating new balances
  • Calculating updated balance sheets
  • Identifying source documents
  • Importance of objective evidence

Chapter 4 Study Notes

  • Chapter 4 covers the Simple Ledger, focusing on ledgers, accounts, debit and credit theory
  • Accounts are used to record changes in the accounting equation, one for each asset, liability, or equity item
  • Ledger is a complete set of accounts
  • Debits are increased assets or decreased liabilities and equities; recorded on the left side of an account
  • Credits are decreased assets or increased liabilities and equity; recorded on the right side of an account
  • Trial balances verify that debits total credits for accounts

Chapter 4, Review Questions

  • Defining debit and credit
  • Setting up beginning financial position in a ledger
  • Accounts which increase by debit
  • Accounts which decrease by debit
  • Accounts which increase by credit
  • Accounts which decrease by credit
  • Purpose of transaction analysis sheet
  • Definition of accounting entry
  • Feature of a correct accounting entry
  • Conditions of an accounting entry that doesn't balance
  • Conditions of a balancing accounting entry
  • Definition of double-entry accounting

Chapter 4, Exercises

  • Balance sheets for Stevens Woodworking and Dr. Inaba
  • Prepare trial balances for C. Hernandez and Ceco Co.
  • Balance ledgers for transactions from previous chapter, recording necessary debits and credits.

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BAF Chapter 3 & 4 (1) PDF

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