Chapter 02 - Investing and Financing Decisions and the Balance Sheet

Chapter 02
Investing and Financing Decisions
and the Balance Sheet

HANDOUT 2 – 1

ANALYZING TRANSACTIONS
Analyze each of the following transactions of World Wide Webster by performing each of the following.
Then, use the chart on the following page to keep track of the amount in each account:

(a) Stockholder invests $10,000 into the business.

1. Decide if a transaction took place. Yes, a transaction took place
Cash: Increased
2. Identify the accounts affected. Contributed Capital: Increased

Cash: Asset
3. Classify each account affected. Contributed Capital: Stockholders' Equity

Direction and Amount:

Cash: +$10,000
4. Identify direction and amount.
Contributed Capital: +$10,000

Assets (+$10,000) = Liabilities (+$0) +

5. Ensure the accounting equation is in balance. Stockholders' Equity (+$10,000)

(b) Borrow $15,000, using a note payable to the bank.

1. Decide if a transaction took place. Yes, a transaction took place
Cash: Increased
2. Identify the accounts affected.
Notes Payable: Increased
Account Classification:
3. Classify each account affected. Cash: Asset
Notes Payable: Liability
Direction and Amount:
Cash: +$15,000
4. Identify direction and amount.
Notes Payable: +$15,000

Assets (+$15,000) = Liabilities (+$15,000) +

5. Ensure the accounting equation is in balance. Stockholders' Equity (+$0)

(c) Acquire a $15,000 truck and $5,000 worth of equipment.

1. Decide if a transaction took place. Yes, a transaction took place

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Chapter 02 - Investing and Financing Decisions and The Balance Sheet

• Cash: Decreased
2. Identify the accounts affected. • Equipment: Increased

• Cash: Asset
3. Classify each account affected. • Equipment: Asset

Direction and Amount:

Cash: -$20,000
4. Identify direction and amount.
Equipment: +$20,000

Assets (+$0) = Liabilities (+$0) +

5. Ensure the accounting equation is in balance. Stockholders' Equity (+$0)

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Chapter 02 - Investing and Financing Decisions and the Balance Sheet

HANDOUT 2 – 1, continued
(d) Purchase $300 worth of supplies on credit. “On credit” means that you receive the supplies now, and
pay for them later.

1. Decide if a transaction took place. Yes, a transaction took place

• Supplies: Increased
2. Identify the accounts affected. • Accounts Payable: Increased

• Supplies: Asset
3. Classify each account affected. • Accounts Payable: Liability

Direction and Amount:

Supplies: +$300
4. Identify direction and amount.
Accounts Payable: +$300

Assets (+$300) = Liabilities (+$300) +

5. Ensure the accounting equation is in balance. Stockholders' Equity (+$0)

(e) Sign contract for first website design for $10,000.

No, this is not a transaction. A contract is an
1. Decide if a transaction took place.
agreement, not an exchange of value.
2. Identify the accounts affected. None.

3. Classify each account affected. N/A

4. Identify direction and amount. N/A
5. Ensure the accounting equation is in balance. N/A

Chart

Assets = Liabilities + SE
Property,
Accounts Notes Contributed
Ref. Cash + Supplies + Plant & = + +
Payable Payable Capital
Equipment
(a)

(b)

(c)

(d)

(e)

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Chapter 02 - Investing and Financing Decisions and The Balance Sheet

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Chapter 02 - Investing and Financing Decisions and the Balance Sheet

HANDOUT 2 – 2

ANALYZING TRANSACTIONS
Analyze each of the following transactions of World Wide Webster by performing each of the following.
Then, use the chart on the following page to keep track of the amount in each account:

(f) Company pays off $300 Accounts Payable.

1. Decide if a transaction took place. Yes, a transaction took place.

Cash: Decreased
2. Identify the accounts affected.
Accounts Payable: Decreased

Account Classification:
• Cash: Asset
3. Classify each account affected.
• Accounts Payable: Liability

Direction and Amount:

• Cash: -$300
4. Identify direction and amount.
• Accounts Payable: -$300

Assets ( -$300) = Liabilities ( -$300) +

5. Ensure the accounting equation is in balance. Stockholders' Equity (+$0)

(g) Company pays for and receives $600 worth of supplies.

1. Decide if a transaction took place. Yes, a transaction took place.
• Cash: Decreased
2. Identify the accounts affected. • Supplies: Increased

Account Classification:
• Cash: Asset
3. Classify each account affected.
• Supplies: Asset

Direction and Amount:

• Cash: -$600
4. Identify direction and amount.
• Supplies: +$600

Assets (+$0) = Liabilities (+$0) +

5. Ensure the accounting equation is in balance. Stockholders' Equity (+$0)

(h) Company acquires and receives $1,000 worth of equipment.

1. Decide if a transaction took place. Yes, a transaction took place
• Cash: Decreased
2. Identify the accounts affected. • Equipment: Increased

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Chapter 02 - Investing and Financing Decisions and The Balance Sheet

Account Classification:
• Cash: Asset
3. Classify each account affected.
• Equipment: Asset

Direction and Amount:

• Cash: -$1,000
4. Identify direction and amount.
• Equipment: +$1,000

Assets (+$0) = Liabilities (+$0) +

5. Ensure the accounting equation is in balance. Stockholders' Equity (+$0)

(i) Order a $900 lawn mower, to be delivered next month.

No, this is not a transaction. An order is an
1. Decide if a transaction took place.
intent to purchase, not an exchange of value
2. Identify the accounts affected. None

3. Classify each account affected. N/A

4. Identify direction and amount. N/A

5. Ensure the accounting equation is in balance. N/A

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Chapter 02 - Investing and Financing Decisions and the Balance Sheet

HANDOUT 2 – 2, continued

Chart

Stockholders’
Assets = Liabilities +
Equity
Accounts Notes Contributed
Ref. Cash + Supplies + Equipment = + +
Payable Payable Capital
(a) +10,000 = +10,000

(b) +15,000 = +15,000

(c) –20,000 +20,000 =

(d) +300 = +300

(f)

(g)
(h)

(i)

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Chapter 02 - Investing and Financing Decisions and The Balance Sheet

HANDOUT 2 – 3

THE DEBIT/CREDIT FRAMEWORK

Analyze each of the following transactions of World Wide Webster and prepare the journal entry required
to record the related transaction.

(a) Stockholder invests $10,000 into the business.

Debit and credit the accounts affected

Cash +10000
Contributed Capital +10000

Ensure the equation still balances and debits = credits

Assets = Liabilities + Stockholders’ Equity
Cash +10000 Contributed +10000
capital

(b) Borrow $15,000 signing a note payable to the bank that is due in three months.

Debit and credit the accounts affected

Cash +15000

Notes Payable +15000

Ensure the equation still balances and debits = credits

Assets = Liabilities + Stockholders’ Equity
Cash +15000 Notes payable +15000

(c) Acquire a $15,000 truck and $5,000 worth of equipment.

Debit and credit the accounts affected

Equipment +20000

Cash -20000

Ensure the equation still balances and debits = credits

Assets = Liabilities + Stockholders’ Equity
Equipment +20000
Cash -20000

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Chapter 02 - Investing and Financing Decisions and the Balance Sheet

HANDOUT 2 – 3, continued
(d) Purchase $300 worth of supplies on credit.

Debit and credit the accounts affected

Supplies +300

Accounts Payable +300

Ensure the equation still balances and debits = credits

Assets = Liabilities + Stockholders’ Equity
Supplies +300 Accounts payable +300

(e) Sign contract for first website design for $10,000.

Debit and credit the accounts affected

No journal entry is required for this transaction
No journal entry is required for this transaction

Ensure the equation still balances and debits = credits

Assets = Liabilities + Stockholders’ Equity

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Chapter 02 - Investing and Financing Decisions and The Balance Sheet

HANDOUT 2 – 4

THE DEBIT/CREDIT FRAMEWORK

Analyze each of the following transactions of World Wide Webster and prepare the journal entry required
to record the related transaction.

(f) Company pays off $300 Accounts Payable.

Debit and credit the accounts affected
Accounts Payable -300

Cash -300

Ensure the equation still balances and debits = credits

Assets = Liabilities + Stockholders’ Equity
Cash -300 Account
payable -
300

(g) Company pays for and receives $600 worth of supplies.

Debit and credit the accounts affected
Supplies +600

Cash -600

Ensure the equation still balances and debits = credits

Assets = Liabilities + Stockholders’ Equity
Supplies +600
Cash -600

(h) Company acquires and receives $1,000 worth of equipment.

Debit and credit the accounts affected
Equipment +1000

Cash -1000

Ensure the equation still balances and debits = credits

Assets = Liabilities + Stockholders’ Equity
Equipment +1000
Cash -1000

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Chapter 02 - Investing and Financing Decisions and the Balance Sheet

HANDOUT 2 – 4, continued
(i) Order a $900 computer, to be delivered in 90 days.
Debit and credit the accounts affected
No journal entry is required for this transaction.

No journal entry is required for this transaction.

Ensure the equation still balances and debits = credits

Assets = Liabilities + Stockholders’ Equity

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Chapter 02 - Investing and Financing Decisions and The Balance Sheet

HANDOUT 2 – 5

POSTING TO T-ACCOUNTS
Post the transactions from handouts 2-3 and 2-4 and determine the ending balances of each of the
following T-accounts.

Assets Liabilities Stockholders’ Equity

+ Cash – - Accounts Payable + - Contributed Capital +

10000 300 300 300 10000

15000 600
1000

20000 total 300 300 total Total 0 10000 Total

total 24700 21300 total

+ Supplies – - Notes Payable + - Retained Earnings +

300 15000

600

Total 900 0 Total Total 0 15000 Total

+ Equipment –
20000

1000

Total 21000 0 Total

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Chapter 02 - Investing and Financing Decisions and the Balance Sheet

HANDOUT 2 – 6

PREPARING A BALANCE SHEET

Use the ending balances from the T-accounts on Handout 2-5 to prepare a classified balance sheet for
World Wide Webster as of December 31, 2010.

_______________ World Wide Webster__________________

________________ Balance Sheet_________________

At December 31, 2010

A balance sheet is a financial statement that shows a company's assets, liabilities, and stockholders' equity
at a specific point in time.

Assets

Current Assets
Cash: $3,400
Supplies: $900
Total Current Assets: $4,300
Non-Current Assets
Equipment: $21,000
Total Non-Current Assets: $21,000
Total Assets: $25,300

Liabilities

Current Liabilities
Notes Payable: $15,000
Total Current Liabilities: $15,000
Total Liabilities: $15,000

Stockholders' Equity

Contributed Capital: $10,000

Total Stockholders' Equity: $10,300
Total Liabilities and Stockholders' Equity: $25,300

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Chapter 02 - Investing and Financing Decisions and The Balance Sheet

HANDOUT 2 – 7

CURRENT RATIO

Refer to the classified balance sheet from Handout 2-6 and calculate the current ratio of World Wide
Webster as of December 31, 2010. Then, interpret the current ratio.

The current ratio is a liquidity ratio that measures a company's ability to pay its short-term obligations. It
is calculated by dividing current assets by current liabilities.

Calculation:

Current Ratio = Current Assets / Current Liabilities

Current Ratio = $4,300 / $15,000

Current Ratio = 0.29

Interpretation:

A current ratio of 0.29 indicates that World Wide Webster has $0.29 of current assets for every $1 of
current liabilities. This is a low current ratio, which suggests that the company may have difficulty
meeting its short-term obligations. It is important to note that the ideal current ratio varies by industry.

Conclusion:

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Chapter 02 - Investing and Financing Decisions and the Balance Sheet

By analyzing the transactions and preparing the balance sheet, we have gained a better understanding of
World Wide Webster's financial position. The company has a low current ratio, which may be a concern.
However, more information is needed to fully assess the company's financial health.

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