ACC 100 Lecture Notes - Lecture 2: Balance Sheet, Retained Earnings, Financial Statement

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8 Apr 2016

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Equity = owner"s capital + retained earnings (e=oc+re) Any transacion that takes place must have the same efect on both sides of the equaions or else the balance will be thrown of. Example: when you pay rent, you lose some of your money but you gain a space. At the same ime, you will atain a loan and therefore you gained an obligaion to pay back that loan meaning your liabiliies will increase as well. When you provide a service for cash, your assets will increase. You are gaining revenue which has a direct impact on your equity. Liabiliies increase when you take on addiional obligaion. Data must be transformed into informaion in order to be meaningful and be used to make any decisions. As the data is changed, the balance will be changed. Depending on the type of acivity, the informaion will be changed in diferent ways. In order to generate revenue, every company has to have costs.

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AECO 3430 Lab Work #5 Understanding Morgan Cattle's FinancialStatements 1 (20pts) How does opening a $125,000 line of creditwith Farm Credit immediately affect the Balance Sheet? Specificallydemonstrate (with hypothetical numbers) how the relevant sectionsof the balance sheet demonstrate this. 2 (20pts) How can a businessfail while showing accrual profits? Which financial statement(s)are needed to demonstrate the answer? Specifically demonstrate(with hypothetical numbers) how the relevant sections demonstratethis. 3 (20pts) What does it mean for a business to show a decreasein Retained Earnings? Which financial statement(s) are needed todemonstrate the answer? Specifically demonstrate (with hypotheticalnumbers) how the relevant sections demonstrate this. 4 (20pts) Howdoes buying more assets immediately affect equity? Which financialstatement(s) are needed to demonstrate the answer? Specificallydemonstrate (with hypothetical numbers) how the relevant sectionsdemonstrate this. 5 (20pts) How does making a final payment of$45,000 with 5% interest on an equipment loan affect equity? Whichfinancial statement(s) are needed to demonstrate the answer?Specifically demonstrate (with hypothetical numbers) how therelevant sections demonstrate this. 6 (10pts) What did you learnfrom this lab exercise?

1.) If you were to take a $150,000 line of credit through FarmCredit your liabilities and cash would automatically increase onthe balance sheet. Hypothetically speaking if your cash account had$100,000 and your total assets were $1,000,000 prior to taking outthe line of credit, your total assets would increase to $1,150,000and your cash account would increase to $250,000. If you alreadyhad $100,000 in notes payable, after accepting the line of creditthat account would increase to $250,000. With these increases thebalance sheet should still balance out if done correctly.

2.) An income statement could show a net profit but still notreflect the actual financial soundness of a business. Incomestatements show revenue and expenses but do not show the amount ofcash on hand and/or other liquid assets. Making it where it couldnot accurately represent the businesses ability to pay a loan back.It could read a net income of $450,000 but the balance sheet couldread that there is only $100,000 in cash and $250,000 inliabilities. To get an adequate representation of the businessesactual financial standing multiple financial statements must beused.

3.) Retained earnings show the relation between the balancesheet and income statement, events that cause net loss in cash flowwill decrease retained earnings. This is usually the result ofoperating costs/expenses. A decrease in retained earnings representa decrease in owners equity on the balance sheet, this is a resultfrom an increase in expenses. These relates to problem 1 somewhat.If you were to take out a loan of $200,000 and your cash was at$300,000 it would increase to $500,000. Subsequently your notespayable would increase by $200,000 as well. The accounts wouldbalance out in the end the same because they increased the same.However the interest expense would increase causing net farmincrease to decrease. The retained earnings would decrease as aresult of notes payable increasing.

4.) If the assets were purchased using cash your current assetswould increase and cash account would decrease because it waspurchased immediately with cash. If a new truck was purchased for$65,000 dollars your cash would decrease by that amount and yourcurrent assets account would increase by the same amount. If theasset was purchased at market value it doesnât affect your equity,because nothing was gained or loss in the acquisition of thetruck.

5.) A final payment of $35,000 with 5% interest would decreasecash on the balance sheet and also decrease liabilities. Theinterest payments would increase and the farms net income woulddecrease on income statement. Statement of owners equity would showan increase on retained earnings amount.

6.) On this lab exercise I learned to show with words the thingswe have learned in class. I learned how to put into words thechanges we see in financial statements and how they affect theoutlook on a business. To me it makes more sense to see it in aword explanation than it does to look at it on paper. I feel like Ihave a better understanding of what is going on when it is inwritten form as opposed to when it is on a spreadsheet surroundedby other numbers where I get lost in it all. When it is in words Ithink it is easier to take that and go back to the financialstatement and really see it. I think this is an important part offinancial management whether you are the accountant or the businessowner. It is important to be able to understand financial recordsand how they affect your business or the person you are workingfor. Either way it is necessary to know somewhat of both sides tounderstand it fully.

I just need these answers worded different.

Question #3 Setup: You come across a small office building for sale with an asking price of $400,000. After careful analysis, you estimate that youâll receive $26,000 in cash flow from operations during the year (after all expenses) plus a 5.00% appreciation of the value of the property. For each part of this question, show your work with the help of a table. We strongly recommend you complete your calculations for this question in Excel (since you can reuse your work). To assist you with this, weâve published the Excel Template for calculating the Benefits and Risks of Financial Leverage from Lecture 7 below: Click Here to Download the Excel Template with the Example from ClassPreview the documentView in a new window Project Value $1,000,000 Cash Flow from Operations $80,000 Appreciation Rate 3.00% Appreciation $30,000 Profit Before Financing Expenses $110,000 Source of Capital Loan-to-Value 50% Loan Amount $500,000 Equity $500,000 Finacing Costs $30,000 Profit After Financing Expenses $80,000 To make your life easier, please review the information on copying and pasting tables from Excel into Canvas, please see Lecture 0.3: Working with Table and Equations in Canvas. As a reminder, to copy and paste tables from Excel into Canvas, please follow the steps below: Zoom out on your browser window to 100% or whichever size that will accommodate the table. Increase the size of your answer box, so the entire table will be visible to you. Copy your table from Excel and Paste into the Canvas Answer Box. Select All (CTRL A) and adjust the Font to size 8pt Add a Border Format the text to match the table you copied Finally, be sure to follow the guidelines for âShowing Your Workâ under Lecture 0.2: Completing Assignments in Canvas when you are asked to âshow your workâ in calculating Return on Assets or Return on Equity (show us the equation youâre using). 3(a). What is your projected Return-on-Assets for this investment? Use a table to show your financial analysis. In addition, show your work for calculating projected Return-on-Assets. 3(b). After talking with your lender, you find you can easily borrow 60% of the propertyâs purchase price. Interest and fees related to the loan will cost you $14,000 per year. What is your projected Return-on-Equity for this investment? Use a table to show your financial analysis. In addition, show your work for calculating projected Return-on-Equity. 3(c). Being a savvy investor, you want to find out what would happen if there is downturn in the market. In the event of a market downturn, you estimate the cash flow from operations generated by the property would be only $6,000 and you estimate the propertyâs value would decreases by 4.0%. What would the Return-on-Assets for this investment be in the event the market downturn above? Use a table to show your financial analysis. In addition, show your work for calculating Return-on-Assets 3(d). Under the same assumptions as Q3(c), what would the Return-on-Equity for this investment be? Use a table to show your financial analysis. In addition, show your work for calculating Return-on-Equity. 3(e). What does the relationship between ROA and ROE in the two cases above tell us about the effect of leverage on real estate investments?

Choose the letter that matches your analysis from the tableprovided here.

Note that "no transaction" means NO transaction needs to berecorded. If assets increase and decrease by the same amount, thatis B, not J.

You may use letters more than once or not at all.

	Assets	Liabilities	Equity	Net Income
A	+	+	ne	ne
B	+,-	ne	ne	ne
C	+	ne	+	ne
D	+	ne	+	+
E	ne	-	+	+
F	-	ne	-	-
G	-	-	ne	ne
H	ne	+	-	-
I	-	ne	-	ne
J	no transaction

Bardo, Inc. is a law firm that prepares monthly financialstatements. The following transaction took place inNovember.

On November 5,The shareholders of Bardo contribute an additional$5,000 to the corporation in exchange for stock.

On November 15, Bardo pays $8,000 for a six month lease thatbegins on December 1.

On November 18, Bardo purchases $8,500 of office supplies oncredit.

On November 20, Bardo orders office furniture for $32,000, oncredit. The furniture will arrive next month.

On November 22, Bardo agrees to provide legal services for atrial in December. The client will pay Bardo $15,000 inDecember.

On November 24, Bardo provides $5,000 worth of legal servicesfor cash.

On November 28, Bardo receives $1,000 for a legal consultationto be provided to a customer in December.

On November 30, Bardo receives $45 from the bank (the bankincreases Bardo's savings account) for interest earned on theaccount during November.

On November 30, Bardo pays $1,500 for November's malpracticeinsurance.

On November 5,The shareholders of Bardo contribute an additional$5,000 to the corporation in exchange for stock.
On November 15, Bardo pays $8,000 for a six month lease thatbegins on December 1.
On November 18, Bardo purchases $8,500 of office supplies oncredit.
On November 20, Bardo orders office furniture for $32,000, oncredit. The furniture will arrive next month.
On November 22, Bardo agrees to provide legal services for atrial in December. The client will pay Bardo $15,000 inDecember.
On November 24, Bardo provides $5,000 worth of legal servicesfor cash.
On November 28, Bardo receives $1,000 for a legal consultationto be provided to a customer in December.
On November 30, Bardo receives $45 from the bank (the bankincreases Bardo's savings account) for interest earned on theaccount during November.
On November 30, Bardo pays $1,500 for November's malpracticeinsurance.

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ACC 100 Lecture Notes - Lecture 2: Balance Sheet, Retained Earnings, Financial Statement

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