Students Again

Suppose you have saved some money and you are considering an investment in Amazon.com. What accounting information will you use to decide whether or not to invest in Amazon? Which accounting principle do you hope Amazon's accountants follow closely?

All four of the financial statements would contain valuable information to an investor.

• The balance sheet will show the state of the business at that point in time. You can see what the business owns and what it owes.
• Statement of cash flows will indicate the amount of cash going in and out of the business.
• Income statement shows how successful the business performed during a period of time. You can see where all the revenue came from and what the expenses of the business are.
• Statement of Owner’s Equity will show the investors how much previous income was distributed to shareholders in the form of dividends.

All the information provided in these financial statements would help any investor make an informed decision. The most important  accounting principle that Amazon should follow closely is the reliability principle. All information report has to be reliable or an investor could make a very bad decision and invest in the company. All of the information provided by the statements would do no good to  anyone if they were not reliable.

Shelly publishes a travel magazine. In need of cash, she asks her bank for a loan. The bank requires borrowers to submit financial statements to show results of operations and financial position. With little knowledge of accounting, Shelly does not know how to proceed. Explain to her the information provided by the balance sheet and income statement. Indicate why the lender would require this information.

The information you need to provide the bank is a basic balance sheet and an income statement. In the balance sheet you have to provide all of your assets. The bank wants to see if there is any collateral for the loan. You also have to include you liabilities.
This will tell the bank how much money you owe to other people. If your liabilities far exceed the assets you have, you might not get the loan. The last thing you need to put in the balance sheet is your owner’s equity. This will show how much money do you have invested in the company so far. If you have a substantial amount, it might make the bank feel more at ease to lending you that money you need. Lastly, you needed to provide an Income statement. These will show your revenues, expenses, and net income. It will be a plus if you show a net income because it will indicate to the bank that your business is a profitable one and can pay back the loan.

As the manager of a store, you must deal with a variety of business transactions. Give an example of a transaction that has the described effect on the accounting equation:

a. Increase an asset and increase owner's equity.

An owner’s investment of cash into the company

b. Increase an asset and increase a liability.

Purchasing supplies on account

c. Increase one asset and decrease another asset.

Paid cash for office equipment

d. Decrease an asset and decrease owner's equity.

Owner’s withdrawal of cash from the company

e. Decrease an asset and decrease a liability.

Paid cash to supplier for purchase of office equipment last month

A business (a proprietorship) experienced the following events. State whether the event increased, decreased, or had no effect on the total assets of the business. Identify any specific asset affected.

a. Received a cash investment from the owner.

Increase Total Assets. Increase Cash acct

b. Cash purchase of land for a building site.

No effect on Total Assets. Decrease in Cash acct. and increase in Land acct.

c. Paid cash on accounts payable

Decrease Total Assets. Decrease in Cash acct.

d. Purchased machinery and equipment for a manufacturing plant; signed a promissory note in payment.

Increase Total Assets. Increase Equipment acct.

e. Performed service for a customer on account.

Increase Total Assets. Increase Accounts Receivable acct.

f. The owner withdrew cash from the business for personal use.

Decrease Total Assets. Decrease in Cash acct.

g. Received cash from a customer on accounts receivable.

No effect on Total Assets. Increase in Cash acct. and decrease in Accounts Receivable acct.

h. The owner used personal funds to purchase a swimming pool for his home.

No effect on Total Assets

i. Sold land for a price equal to the cost of the land; received cash.

No effect on Total Assets. Increase is Cash acct. and Decrease in Land acct.

j. Borrowed money from the bank.

Increase Total Assets. Increase in Cash acct.