Acct 2301 1st Edition Lecture 7Outline of Last Lecture I. Adjusting Accounts and Preparing Financial Statements Outline of Current Lecture II. Adjusting Accounts and Preparing Financial Statements (cont.)Current Lecture10. Financial Statements ModeTo 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 apage. 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: $500These 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 CompanyEventNoBalance Sheet Income StatementCashFlowCash =Liabilities+EquityRev.Exp. =NetIncome1 5,000 = n/a + 5,000 n/a n/a = n/a 5,000 FA2 2,000 = 2,000 + n/a n/a n/a = n/a 2,000 FA3 3,000 = n/a + 3,0003,000n/a = 3,000 3,000OA4(1,000)= n/a + (1,000) n/a(1,000)= (1,000)(1,000)OA5 (500) = n/a + (500) n/a n/a = n/a (500) FATotals8,500 = 2,000 + 6,5003,000(1,000)= 2,000 8,500 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 notshown 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 principlesof financial
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