Transaction 7, Sale of asset for cash

January, 7. Book Corner sells a store showcase to a DVD dealer after Eugene decides he dislikes it. Its selling price, $2,000, exactly equals to its cost. The dealer pays cash.

Assets				=	Liabilities	+	Owners' Equity
	Cash	Inventory	Store Equipment		Note Payable	Accounts payable	Eugene, Capital
Bal.				=
(7)				=
Bal.				=
88,500					88,500

Transaction 8, Return of inventory to supplier

January, 8. Book Corner returns rejected inventory of $500 to its supplier.

Assets				=	Liabilities	+	Owners' Equity
	Cash	Inventory	Store Equipment		Note Payable	Accounts payable	Eugene, Capital
Bal.				=
(8)				=
Bal.				=
88,000					88,000

Transaction 9, Payment to creditor

January 10. Book Corner pays $2,000 described in transaction 5.

Assets				=	Liabilities	+	Owners' Equity
	Cash	Inventory	Store Equipment		Note Payable	Accounts payable	Eugene, Capital
Bal.				=
(9)				=
Bal.				=
86,000					86,000

Transaction 10, Purchase car (to be analyzed entirely by you)

January 13. Eugene buys a Volvo car for $35,000 and pays by check form his personal bank account.

►Now on the basis of your transaction analyses fill in the blanks in the balance sheet below showing a cumulative total for each account at a specific point in time. Also translate the balance sheet into Russian.

Book Corner
Balance Sheet
January 13, 20_ _
Assets						Liabilities and Owners' Equity
Cash						Note payable
Merchandise inventory						Accounts payable
Store equipment						Total liabilities
						Eugene, capital
Total						Total

‘SHOW-1’ POINT

►Make up teams of three to five students each. Each team should choose one of the companies included in the Dow Jones Industrial Average, and find its most recent balance sheet (try the company’s homepage on the Internet). Ignore much of the detail on the balance sheet, focusing on the following accounts:

• Cash

• Inventory

• Equipment

• Notes payable

• Accounts payable

• Total stockholders’ equity

Divide the following six assumed transactions among the tea members:

1. Sold one million of common stock for a total of $11 million cash.

2. Bought inventory for cash of $3 million.

3. Borrowed $5 million form the bank, receiving the $5 million in cash.

4. Bought inventory for $6 million on open account.

5. Paid $4 million to suppliers for inventory bought on open account.

6. Bought equipment for $9 million cash.

What is required?

1. The students responsible for each transaction should explain to the group how the transaction would affect the company’s balance sheet, using the accounts listed earlier.

2. By using the most recent published balance sheet as a starting point, prepare a balance sheet for the company, assuming the preceding six transactions are the only transactions since the date of the latest balance sheet.

‘THEORY-4’ POINT

Income statement

(1) You can think of income statement as filling in the gaps between balance sheets. The balance sheets show the financial position of the company at discrete points in time, and the income statements explain the changes that have taken place between those points. Net income or net earnings is the famous bottom line in an income statement – the remainder after deducting all expenses from revenues.

(2) Most companies follow a similar operating cycle, during which the company uses cash to acquire goods and services, which in turn it sells to customers. The customers in turn pay for their purchases with cash, which brings us back to the beginning of the cycle. Let’s consider a retail company:

(3) The box for the amounts owed to the entity by customers is larger than the other two boxes because the company’s objective if to sell its goods at a price higher than it paid for them. The amount by which the selling price exceeds expenses is profit or income or earnings. The total amount of profit earned during a particular period depends on the difference between the selling price and costs and on how much merchandise the company sells during the fiscal year. The fiscal year is established for accounting purposes, which may differ from a calendar year, and does not necessarily end on December, 31. The fiscal year is usually the low point in annual business activity.

(4) Therefore, companies gain assets when they sell goods or services and record or recognize sales revenues, which increase the owner’s interest or equity in the business by the amount of assets received in exchange for the delivery of goods and services to customers. In contrast, companies give up assets when they recognize expenses, which decrease the owner’s interest or equity. Together revenues and expenses define the fundamental meaning of income or profit or earnings. For example, when Coca Cola sells a box of Coca bottles to a retailer, it gains revenue. But when it uses refined sugar, Coca concentrate and purified water to produce Coca Cola, or when it pays the costs of delivering Coca Cola to the retailer, it incurs expenses. The total cumulative owners’ equity generated by income or profits is called retained earnings or retained income.

►Question/Answer session:

1. What is an income statement and what is it used for?

2. When do companies gain and when do they give up assets? How do these revenues and expenses affect the balance sheet?

(5) Let’s now get back to Book Corner and suppose that it sold stationery and office supplies of $900 on open account to a large multinational company. Let’s also assume that the cost to Book Corner of the inventory sold was $200, which leaves us $700 of revenue. Selling on open account creates Account receivable or Trade receivable or simply Receivables. How should we recognize this transaction?