Reporting Investing and Financing

Results on the Balance Sheet

Learning Objectives
• Identify financial effects of common financing
and investing activities
• Apply transaction analysis to financing and
investing transactions
• Use journal entries and T-accounts to show
how transactions affect the balance sheet
• Prepare a classified balance sheet.
• Interpret the balance sheet using the current
ratio and an understanding of related concepts
Building a Balance Sheet
Resources presently owned by a
Assets business that generate future
economic benefit.

=
Amounts presently owed by a
Liabilities business to creditors.

+
The amount invested and
Stockholders’
reinvested in a company by its
Equity shareholders.
Financing and Investing Activities
Companies rely on
Assets Invest
two inofAssets
sources financing:

Liabilities Debt Financing

+ +

Stockholders’
Equity Financing
Equity
Transactions and Other Activities

Exchanges involving assets,

liabilities, and stockholders’
External
equity that you can see
Exchanges
between the company and
someone else.

Events occurring within the

Internal company, for example, using
Events some assets to create an
inventory product.
Study the Accounting Methods
A systematic accounting process is used to
capture and report the financial effects of a
company’s transactions.

1 Analyze 2 Record 3 Summarize

A transaction is a business activity that affects the

basic accounting equation.

Duality of Effects A = L+ SE
Every transaction has at least Assets must equal liabilities
two effects on the basic plus stockholders’ equity for
accounting equation. every accounting transaction.
 Step 1: Analyze Transactions
The chart of accounts is tailored to each company’s
business, so although some account titles are common
across all companies (Cash, Accounts Payable) others
may be used only by that particular company (Cookware).
Depending on the company, you may see a liability for a
bank loan called a Note Payable or a Loan Payable.

Pizza Aroma's Chart of Accounts (Partial)

Account
Number Account Name Description
101 Cash Dollars amount of coins, paper money, funds in bank
113 Cookware Cost of cutlery, pizza pans dishes, ets.
135 Equipment Cost of pizza ovens, restaurant booths, dishwasher, etc.
201 Accounts Payable Owed to suppliers for goods and services bought on credit
222 Note Payable Owed to lenders, as per terms of promissory note.
301 Contributed Capital Stock issued for contributions made to the company
310 Retained Earnings Accumulated earnings (not yet distributed as dividends)
 Step 1: Analyze Transactions
(a) Issue Stock to Owners.
Mr. X incorporates Pizza Aroma Inc., on August 1. The company issues stock to
Mr. X and his wife as evidence of their contribution of $50,000 cash, which is
deposited in the company’s bank account.

1. Pizza Aroma receives $50,000 Cash.

2. Pizza Aroma gives $50,000 Stock (Contributed Capital).

Assets = Liabilities + Stockholders' Equity

(a) Cash +$50,000 Contributed
Capital + $50,000
 Step 1: Analyze Transactions
(b) Investment in Equipment.
Pizza Aroma pays $42,000 cash to buy restaurant booths and other equipment.

1. Pizza Aroma receives $42,000 of Equipment.

2. Pizza Aroma gives $42,000 Cash.

Assets = Liabilities + Stockholders' Equity

(b) Equipment +$42,000
Cash -$42,000
Step 1: Analyze Transactions
(c) Obtain Loan from Bank.
Pizza Aroma borrows $20,000 from a bank depositing those funds in its bank
account and signing a formal agreement to repay the loan in two years.

1. Pizza Aroma receives $20,000 Cash.

2. Pizza Aroma gives a note, payable to the bank for $20,000.

Assets = Liabilities + Stockholders' Equity

(c) Cash +$20,000 = Note Payable +$20,000
 Step 1: Analyze Transactions
(d) Investment in Equipment.
Pizza Aroma purchases $18,000 in pizza ovens and other equipment, paying
$16,000 in cash and promising to pay $2,000 at month end.

1. Pizza Aroma receives $18,000 in equipment (pizza ovens).

2. Pizza Aroma gives a Cash of $16,000 and Accounts
Payable of $2,000.

Assets = Liabilities + Stockholders' Equity

(d) Cash -$16,000 = Accounts Payable +$2,000
Equipment +$18,000
Step 1: Analyze Transactions
(e) Order Cookware.

Pizza Aroma orders $630 of pans, dishes, and other cookware.

None have been received yet.

1. An exchange of only promises is not a transaction.

2. This does not affect the accounting equation.

Assets = Liabilities + Stockholders' Equity

No Impact = No Impact No Impact
 Step 1: Analyze Transactions
(f) Pay Suppliers.

Pizza Aroma pays $2,000 to the equipment supplier from

transaction (d).

1. Pizza Aroma gives cash to settle its debt to the supplier.

2. Pizza Aroma receives a release from its promise to pay.

Assets = Liabilities + Stockholders' Equity

(f) Cash -$2,000 = Accounts Payable -$2,000
 Step 1: Analyze Transactions
(g) Receive Cookware.

Pizza Aroma receives $630 of the cookware ordered in (e) and

promises to pay for it next month.

1. Pizza Aroma receives cookware with a cost of $630.

2. Pizza Aroma gave a promise to pay $630 on account.

Assets = Liabilities + Stockholders' Equity

(g) Cookware +$630 = Accounts Payable +$630
Step 2 and 3: Record and Summarize
Most companies use computerized accounting systems, which
can handle a large number of transactions. These systems
follow a cycle, called the accounting cycle, which is repeated
day-after-day, month-after-month, and year-after-year.
 The Debit/Credit Framework
ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY
+ ASSETS ̶ ̶ LIABILITIES + ̶ STOCKHOLDERS' EQUITY +
Increase Decrease Decrease Increase Decrease Increase
Using Using Using Using Using Using
Debit Credit Debit Credit Debit Credit

Asset accounts Liability accounts Stockholders’ equity

increase on the left or increase on the right accounts increase on the
debit side and or credit side and right or credit side and
decrease on the right decrease on the left or decrease on the left or
or credit side. debit side. debit side.
Steps 2 & 3: Record and Summarize
1 Analyze

2 Record General Journal Page G1

Date Account Title and Explanation Ref. Debit Credit

3 Summarize
 Steps 2 & 3: Record and Summarize
1 Analyze

2 Record General Journal Page G1

Date Account Title and Explanation Ref. Debit Credit
2010
8/1 Cash 101 50,000
Contributed Capital 301 50,000
(Financing from stockholders)

3 Summarize
General Ledger General Ledger
Account: Cash Acct. 101 Account: Contributed Capital Acct. 301
Date Explanation Ref. Debit Credit Balance Date Explanation Ref. Debit Credit Balance
2017 2017
8/1 G1 50,000 50,000 8/1 G1 50,000 50,000
 Steps 2 & 3: Record and Summarize
1 Analyze

2 Record
(a) dr Cash (+A) 50,000
cr Contributed Capital (+SE) 50,000

3 Summarize
General Ledger General Ledger
Account: Cash Acct. 101 Account: Contributed Capital Acct. 301
Date Explanation Ref. Debit Credit Balance Date Explanation Ref. Debit Credit Balance
2017 2017
8/1 G1 50,000 50,000 8/1 G1 50,000 50,000
 Steps 2 & 3: Record and Summarize
1 Analyze

2 Record
(a) dr Cash (+A) 50,000
cr Contributed Capital (+SE) 50,000

3 Summarize
General Ledger General Ledger
Account: Cash Acct. 101 Account: Contributed Capital Acct. 301
Date Explanation Ref. Debit Credit Balance Date Explanation Ref. Debit Credit Balance
2017 2017
8/1 G1 50,000 50,000 8/1 G1 50,000 50,000
Pizza Aroma’s Accounting Records
(a) Issue Stock to Owners.
Mr. X incorporates Pizza Aroma Inc., on August 1. The company issues stock to
Mr. X and his wife as evidence of their contribution of $50,000 cash, which is
deposited in the company’s bank account.
1 Analyze
Assets = Liabilities + Stockholders' Equity
(a) Cash +$50,000 Contributed
Capital + $50,000

2 Record
(a) dr Cash (+A) 50,000
cr Contributed Capital (+SE) 50,000

3 Summarize
 Pizza Aroma’s Accounting Records
(b) Investment in Equipment.
Pizza Aroma pays $42,000 cash to buy restaurant booths and other equipment.

1 Analyze
Assets = Liabilities + Stockholders' Equity
(b) Cash -$42,000
Equipment + $42.000

2 Record
(b) dr Cash
Equipment
(+A) (+A) 42,000
cr Cash (-A) 42,000

3 Summarize
Pizza Aroma’s Accounting Records
(c) Obtain Loan from Bank.
Pizza Aroma borrows $20,000 from a bank depositing those funds in its bank
account and signing a formal agreement to repay the loan in two years.
1 Analyze
Assets = Liabilities + Stockholders' Equity
(c) Cash +$20,000 Note Payable +$20,000

2 Record
(c) dr Cash
Cash (+A)
(+A) 20,000
cr Note Payable (+L) 20,000

3 Summarize
Pizza Aroma’s Accounting Records
(d) Investment in Equipment.
Pizza Aroma purchases $18,000 in pizza ovens and other equipment, paying
$16,000 in cash and promising to pay $2,000 at the end of the month.

1 Analyze
Assets = Liabilities + Stockholders' Equity
(d) Cash -$16,000 Accounts Payable +$2,000
Equipment +$18,000

2 Record
(d) dr Equipment (+A) 18,000
cr Cash (-A) 16,000
cr Accounts Payable (+L) 2,000

3 Summarize
Pizza Aroma’s Accounting Records
(f) Pay Suppliers.
Pizza Aroma pays $2,000 to the equipment supplier from
the last transaction.
1 Analyze
Assets = Liabilities + Stockholders' Equity
(f) Cash -$2,000 Accounts Payable - $2,000

2 Record
(f) dr Cash
Accounts
(+A)Payable (-L) 2,000
cr Cash (-A) 2,000

3 Summarize
Pizza Aroma’s Accounting Records
(g) Receive Cookware.
Pizza Aroma receives $630 of the cookware previously ordered
and promises to pay for it next month.
1 Analyze
Assets = Liabilities + Stockholders' Equity
(g) Cookware +$630 Accounts Payable + $630

2 Record
(g) dr Cookware (+A) 630
cr Accounts Payable (+L) 630

3 Summarize
 T-Accounts for Pizza Aroma
Cash Supplies
Beg. Bal. - Beg. Bal. -
(a) 50,000 42,000 (b) (g) 630
(c) 20,000 16,000 (d) End. Bal. 630
2,000 (f)
End. Bal. 10,000

Accounts Payable Equipment

- Beg. Bal. Beg. Bal. -
(f) 2,000 2,000 (d) (b) 42,000
630 (g) (d) 18,000
630 End. Bal. End. Bal. 60,000

Notes Payable Contributed Capital

- Beg. Bal. - Beg. Bal.
20,000 (c) 50,000 (a)
20,000 End. Bal. 50,000 End. Bal.
Preparing a Trial Balance
Pizza Aroma, Inc.
Trial Balance It’s a good idea to
August 31, 2017 check that the
Debit Credit accounting records
Cash $ 10,000 are in balance by
Cookware 630
Equipment 60,000 determining whether
Accounts Payable $ 630 debits = credits. We
Note Payable 20,000
Contributed Capital 50,000 do this by preparing a
Totals $ 70,630 $ 70,630 Trial Balance.
 Classified Balance Sheet
Pizza Aroma, Inc.
Balance Sheet
As of August 31, 2017
Current Assets: Current assets will be used up
Cash $ 10,000 or converted into cash within
Cookware 630
the next 12 months
Total Current Assets 10,630
Property, Plant, and Equipment:
Equipment 60,000
Non-current assets include
Total Assets: $ 70,630
resources that will be used or
Liabilities and Stockholders' Equity:
Current Liabilities: turned into cash beyond 12
Accounts Payable $ 630 months from balance sheet date
Long-Term Liabilities:
Note Payable 20,000
Total Liabilities: 20,630
Stockholders' Equity
Contributed Capital 50,000
Total Liabilities and Stockholders' Equity $ 70,630
 Assessing the Ability to Pay
Pizza Aroma, Inc.
Balance Sheet
As of August 31, 2017
Current Assets:
Cash $ 10,000
Current Current Assets
=
Cookware 630 Ratio Current Liabilities
Total Current Assets 10,630
Property, Plant, and Equipment:
Equipment 60,000 $ 10,630
=
Total Assets: $ 70,630 $ 630
Liabilities and Stockholders' Equity:
Current Liabilities: = 16.9
Accounts Payable $ 630
Long-Term Liabilities:
Note Payable 20,000 A higher current ratio generally
Total Liabilities: 20,630
means a better ability to pay.
Stockholders' Equity
Contributed Capital 50,000 Pizza Aroma’s current ratio is
Total Liabilities and Stockholders' Equity $ 70,630 unusually high.
 Balance Sheet Concepts and Values
Pizza Aroma, Inc.
Balance Sheet
As of August 31, 2017
Current Assets:
Cash $ 10,000 What is (is not) recorded?
Cookware 630 • Includes items acquired
Total Current Assets 10,630 through exchange.
Property, Plant, and Equipment: • Excludes other items
Equipment 60,000
(such as secret recipes).
Total Assets: $ 70,630
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 630
What amounts?
Long-Term Liabilities: • Initially recorded at cost.
Note Payable 20,000 • Conservatism leads to
Total Liabilities: 20,630 recording decreases in
Stockholders' Equity asset value but generally
Contributed Capital 50,000
not increases.
Total Liabilities and Stockholders' Equity $ 70,630
Checkpoint
Problem 1. Identifying Transactions and Preparing Journal Entries

ABC Builders was incorporated on July 1, 2017. Prepare journal

entries for the following events from the first month of business. If
the event is not a transaction, write “no transaction.”

a. Received $55,000 cash invested by owners and issued stock.

b. Bought an unused field from a local farmer by paying $45,000 cash.
As a construction site for smaller projects it is estimated to be worth
$50,000 to ABC Builders.
c. A supplier delivered lumber to ABC Builders for future use. The
lumber would have normally sold for $10,000, but the supplier gave
ABC Builders a 10% discount. The firm has not received a bill from
the suppliers.
d. Borrowed $25,000 from the bank with a plan to use the funds to build
a small workshop in August. The loan must be reported in two years.
e. One of the owners sold $10,000 worth of his stock to another
shareholder for $11,000 cash.
Solutions to Problem 1

a. dr Cash (+A) 55,000

cr Contributed Capital (+SE) 55,000

b. dr Inventory (+A) 45,000

cr Cash (-A) 45,000

c. dr Supplies (+A) 9,000

cr Accounts Payable (+L) 9,000

$10,000 × 10% = $1,000; $10,000 - $1,000 = $9,000

d. dr Cash (+A) 25,000

cr Notes Payable (+L) 25,000

e. No transaction

Event (e) is a transaction between two independent individuals and

does not involve the company, ABC Builders.
Problem 2. Identifying Transactions and Preparing Journal Entries

Mr. X founded bookmart.com at the beginning of August, which

sells new and used books online. He is passionate about books
but does not have a lot of accounting experience. Assist Mr. X by
preparing journal entries for the following events. If the event is
not a transaction, write “no transaction.”

a. The company purchased bookshelves for $2,000 cash. The

bookshelves are expected to be used for ten or more years.
b. X’s business bought $8,000 worth of books from a publisher. The
company will pay the publisher within 45-60 days.
c. Mr. X’s friend Mr. Y lent $4,000 to the business. Mr. Y had Mr. X
write a note promising that bookmart.com would repay the $4,000
in four months. Because they are good friends, Mr. Y is not going
to charge Mr. X interest.
d. The company paid $1,500 cash, for books purchased on account
earlier in the month.
e. Bookmart.com repaid the $4,000 loan established in (c).
Solutions to Problem 2

a. dr Equipment (+A) 2,000

cr Cash (-A) 2,000

b. dr Inventory (+A) 8,000

cr Accounts Payable (+L) 8,000

c. dr Cash (+A) 4,000

cr Notes Payable (+L) 4,000

d. dr Accounts Payable (-L) 1,500

cr Cash (-A) 1,500

e. dr Notes Payable (-L) 4,000

cr Cash (-A) 4,000
Problem 3. Identifying Transactions and Preparing Journal Entries

Ms. O is the manager of Blue Light Arcade. The company

provides entertainment for parties and special events. Prepare
journal entries for the following events relating to the year ended
December 31. If the event is not a transaction, write “no
transaction.”

a. Blue Light Arcade received $50 cash on account for a birthday

party held two months ago.
b. Agreed to hire a new employee at a monthly salary of $3,000. The
employee starts work next month.
c. Paid $2,000 for a hockey equipment purchased last month on
account.
d. Repaid a $5,000 bank loan (ignore interest).
e. The company purchased an air hockey table for $2,200, paying
$1,000 cash and signing short-term note for $1,200.
Solutions to Problem 3

a. dr Cash (+A) 50
cr Accounts Receivable (-A) 50

b. No Transaction
The employee has yet to provide any services to the company

c. dr Accounts Payable (-L) 2,000

cr Cash (-A) 2,000

d. dr Notes Payable (-L) 5,000

cr Cash (-A) 5,000

e. dr Equipment (+A) 2,200

cr Cash (-A) 1,000
cr Notes Payable (+L) 1,200
Problem 4. Identifying Transactions and Preparing Journal Entries

Sweet Shop Co. is a chain of candy stores that has been in

operation for the past ten years. Prepare journal entries for the
following events, which occurred at the end of the most recent
year. If the event is not a transaction, write “no transaction.”

a. Ordered and received $12,000 worth of cotton candy machines

from Candy Makers, Inc., which Sweet Shop Co. Will pay for in 45
days.
b. Sent a check for $6,000 to Candy Makers, Inc. For the cotton
candy machines from (a)
c. Received $400 from customers who bought candy on account in
previous months.
d. To help raise funds for store upgrades estimated to cost $20,000,
Sweet Shop Co. Issued 1,000 shares of $15 each to existing
stockholders.
e. Sweet Shop Co. bought ice cream trucks for $50,000 total, paying
$10,000 cash and signing a long-term note for $40,000.
Solutions to Problem 4

a. dr Equipment (+A) 12,000

cr Accounts Payable (+L) 12,000

b. dr Accounts Payable (-L) 6,000

cr Cash (-A) 6,000

c. dr Cash (+A) 400

cr Accounts Receivable (-A) 400

d. dr Cash (+A) 15,000

cr Contributed Capital (+SE) 15,000

1,000 shares × $15 each = $15,000

e. dr Equipment (+A) 50,000

cr Notes Payable (+L) 40,000
cr Cash (-A) 10,000
 Problem 5. Financial Statement Effects of Several Transactions

The following events occurred for XYZ Company:

a. Received $10,000 cash from owners and issued stock to them.
b. Borrowed $7,000 cash from a bank and signed a note.
c. Purchased land for $12,000; paid $1,000 in cash and signed a note for the balance.
d. Bought $8,000 of equipment on account.
e. Purchased $3,000 of equipment, paying $1,000 in cash and signing a note for the rest.

Required:
For each of the events ( a) through ( e), perform transaction analysis and indicate the
account amount, and direction of the effect ( for increase and for decrease) on the
accounting equation. Check that the accounting equation remains in balance after each
transaction.

Assets + Liabilities + Stockholders' Equity

(a) Cash +10,000 Contributed Capital +10,000
(b) Cash +7,000 Notes Payable +7,000
(c) Land +12,000
Cash -1,000 Notes Payable +11,000
(d) Equipment +8,000 Accounts Payable +8,000
(e) Equipment +3,000
Cash -1,000 Notes Payable +2,000
 Solutions to Problem 5

Assets + Liabilities + Stockholders' Equity

(a) Cash +10,000 Contributed Capital +10,000
(b) Cash +7,000 Notes Payable +7,000
(c) Land +12,000
Cash -1,000 Notes Payable +11,000
(d) Equipment +8,000 Accounts Payable +8,000
(e) Equipment +3,000
Cash -1,000 Notes Payable +2,000
Problem 6. Recording Investing and Financing Activities

The following events occurred for XYZ Company:

a. Received $10,000 cash from owners and issued stock to them.
b. Borrowed $7,000 cash from a bank and signed a note.
c. Purchased land for $12,000; paid $1,000 in cash and signed a note for the
balance.
d. Bought $800 of equipment on account.
e. Purchased $3,000 of equipment, paying $1,000 in cash and signing a note
for the rest.

Required:
For each of the events, prepare journal entries, checking that debits equal
credits.
Solutions to Problem 6

a. dr Cash (+A) 10,000

cr Contributed Capital (+SE) 10,000

b. dr Cash (+A) 7,000

cr Notes Payable (+L) 7,000

c. dr Land (+A) 12,000

cr Notes Payable (+L) 11,000
cr Cash (-A) 1,000

d. dr Equipment (+A) 800

cr Accounts Payable (+L) 800

e. dr Equipment (+A) 3,000

cr Notes Payable (+L) 2,000
cr Cash (-A) 1,000