UNIT #12 - AN OVERVIEW TUTORIAL

INSTRUCTIONS FOR UNIT #12

~ The first eleven units took you through the complete accounting cycle. Unit #1 gave you the first overview, showing how A = L + E works. Units # 2 through #10 showed you how transactions are recorded to accounts in that equation. At this point we'll take another overview and see how these transactions change the financial position of the company. We'll begin with some definitions. ~ The income statement shows all the revenue and expenses from a time period, e.g. a month, quarter, or year. ~ The balance sheet presents the financial position of assets, liabilities, and equity at a point in time, e.g. 12/31/00. ~ A statement of cash flow shows how the change in each account increased or decreased cash. Once that change is identified, it is summarized in three categories. The first category is operating. These accounts summarize normal revenue and expense related activities. The second category is investing. These accounts summarize the acquisition or disposal of long term assets like land, equipment, etc. Long term means an asset whose life extends beyond one year or operating cycle. The third category is financing. These accounts summarize acquisition or disposal of long term capital such as notes, bonds, or stock. ~ This overview shows how these accounts changed from one point in time to another point in time. The accounts are organized as income statement, and balance sheet; they are shown on the left with the beginning balance at 12/31/99. ~ A series of transactions is presented, a through q. These transactions increase or decrease accounts according to the rules of debits and credits. As transactions unfold, account balances change and the financial position of the company changes for better or worse. The column 12/31/00 shows the new balances. ~ The first spreadsheet shows the old balance, the changes, and the new balances. The second spreadsheet takes the same accounts, grouped as income statement, balance sheet, and computes the increase or decrease to the accounts. It then adds another column, labeled "Effect on Cash Flow". The results of this cash flow change are summarized in the third spreadsheet. To understand cash flow, look at each account. ~ Cash. If current balance is larger than previous balance, it increased. ~ Accounts receivable. If the ending balance is larger than the beginning balance, sales occurred for which you have not collected the cash. Therefore, cash flow decreased. If the reverse occurred, cash flow increased. ~ Inventory. If inventory increased, you used cash. Therefore, cash flow decreased. If the reverse, cash flow increased. ~ Supplies. If supplies increased, you used cash. If they decreased you did not use cash, so cash flow would increase.

INSTRUCTIONS FOR UNIT #12

~ Prepaid Insurance. When you prepay, you use cash. Therefore, if prepays increase, you are using more cash. If they decrease, you are using less cash. ~ Land, Buildings, and Equipment. These assets are long term because they are acquired with the intent of extended life, i.e. beyond one year. Accordingly, if you increase, that uses cash, if you decrease, that does not use cash. The same is true for increasing or decreasing; you use more to increase, less if decreasing. ~ Depreciation and Accumulated Depreciation. Depreciation does not require the use of cash. Therefore, it does not effect cash flow. When you look at the column "Effect on cash flow", you will note no entry for depreciation. ~ Payables. Wages, salaries, accounts payable, etc. require the use of cash. When comparing two year ends, if the payable balance increased, then less cash was used; if the payable balance decrease, then more cash was used. ~ Preferred and Common Stock. If stock was sold for cash, it increased cash flow. When sold for amounts in excess of par, the entire amount increases cash. If stock is redeemed for cash, e.g. preferred stock is called in or redeemed and cash is paid to the investor, that reduces cash. ~ Retained Earnings. Retained earnings change by the amount of net income or loss transferred or closed to the account. Accordingly, the cash flow effect is shown through the income statement accounts. Where sales increase cash flow and expenses and dividends decrease cash flow. Carefully notice that the cash flow amount for increases or decreases does not include depreciation. ~ Once the changes to accounts have been calculated, they are summarized in the third spreadsheet, Statement of Cash Flow. There are three sections to this statement, ~ Operating to show the flow of cash from selling and expense operations. ~ Investing to show the flow of cash from buying and selling long term assets. ~ Financing to show the flow of cash from stock and debt transactions, as well as the payment of dividends. ~ Here are the transactions used in the spreadsheets: a. Bought inventory on account, $ 700. b. Sold inventory on account, $ 1,000. c. Recorded the cost of the merchandise sold, $ 600. d. And **. Paid wage expense, $ 50. e. Accrued salary expense, $ 100, to be paid later. f. Accrued utility expense, $ 50, and rent expense, $ 50, to be paid later. g. Determined the supplies usage to be $ 25. h. Recorded the expired insurance, $ 10. i. Recorded the depreciation expense, $ 10. j. Accrued the income tax expense, $ 50, to be paid later. k. Accrued dividends of $ 30 to be paid later. l. Closed net income or loss to retained earnings.

INSTRUCTIONS FOR UNIT #12

~ Transactions continued: m. And *. Collected accounts receivable, $ 900. n. And **. Paid accounts payable, $ 725. o. And **. Paid wages payable, $ 5. p. And **. Purchased equipment for $ 50, of which $ 25 was in cash and $ 25 was on account. q. And *. Sold common stock receiving $ 100 in cash. The amount recorded to par is $ 10; $ 90 is recorded to paid in capital. ~ For each transaction, trace the debit and credit and respective increase or decrease to the account. Look at the formula bar to see how each cell is programmed. The * is for additions to cash; the ** is for deductions to cash. Since cash has two or more additions and deductions, you need to look at the tool bar to see those entries. ~ Then look at the change to the account balance. In other words, see how the financial position of the company changed from 12/31/99 to 12/31/00. The two balances are shown of the first spreadsheet. On the second spreadsheet, the net increase of decrease is shown and the effect on cash flow. The third spreadsheet will summarize those cash flows in the three categories. Tutorial #12 Overview shows all the transactions. ~ To reinforce the point of seeing the impact of transactions on financial position, make these changes and note the new balances, change, and cash flow effect. b. Change inventory sold to $1,200. c. Change cost of merchandise sold to $ 750. j. Change income tax expense to $ 60. m. Change collected accounts receivable to $950. ~ REMEMBER: Cash has two or more entries for additions and deductions. These changes have to be made on the formula bar. ~ Look carefully at how assets, liabilities, equity, operating income, and cash flow change. ~ Tutorial #12 Overview With Changes shows the above five changes. ~ Make your own changes to see how the company's financial position changes. Remember if you have more than one entry to an account, like cash, make those entries on the formula bar.