Acct 2301 1st Edition Lecture 7 Outline of Last Lecture I Adjusting Accounts and Preparing Financial Statements Outline of Current Lecture II Adjusting Accounts and Preparing Financial Statements cont Current Lecture 10 Financial Statements Mode To better understand the effects of transactions on financial statements and see the relationships between a financial statement s elements a statements model can be created There are two forms of a statements model vertical and horizontal As its name implies the vertical model arranges financial statement elements from top to bottom on a page The horizontal model arranges financial statement elements horizontally across a page In the horizontal model the balance sheet is presented to the left followed by the income statement and the statement of cash flows Let us demonstrate the usefulness of the horizontal model and apply it to the five transactions we covered earlier Note that if a transaction does not affect the model a related cell in the table below shows n a In the statement of cash flows FA means cash flows from financing IA means cash flows from investing and OA means cash flows from operating activities Obtained capital acquisition 5 000 Borrowed cash 2 000 Received cash revenue 3 000 Paid expenses with cash 1 000 Distributed cash to owners 500 These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Illustration 14 Horizontal statements model for Friends Company Eve nt No Balance Sheet Income Statement Cash Liabilitie s Equity 1 2 5 000 2 000 n a 2 000 5 000 n a 3 3 000 n a 3 000 n a 1 000 n a n a 500 2 000 6 500 n a 3 00 0 4 5 Total s 1 00 0 500 8 500 Rev n a n a 3 00 0 Cash Flow Exp Net Income n a n a n a n a 5 000 2 000 n a 3 000 3 000 1 00 0 n a 1 00 0 n a 1 00 0 500 2 000 8 500 1 000 With respect to Events 1 and 2 it is clear that only the balance sheet and the statement of cash flows are affected There is no effect on the income statement Furthermore you can see that Event 1 increases assets and equity and that the cash inflow is defined as a financing activity Event 2 has a similar effect except that liabilities increase instead of equity Event 3 affects three financial statements Assets and equity increase on the balance sheet The revenue recognition causes net income to increase and the cash inflow is shown as an operating activity on the statement of cash flows Event 4 is the opposite of Event 3 Assets equity and net income decrease Cash flow statement shows this decrease as an operating activity Finally Event 5 shows a decrease in cash and equity The cash distribution is not shown anywhere in the income statement That s because distribution is not an expense and thus it is not included in the determination of net earnings The cash distribution is categorized as a financing activity in the cash flow statement Using the horizontal model helps in understanding the effects produced by each event so it is advisable to use it as often as possible while learning the principles of financial accounting FA FA O A O A FA
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