Business & the Role of Accounting - Essay Example

Part I A. S # Transaction Details Accounting Equation Assets = Liabilities + Equity Assets Liabilities Owner’s Equity Owner invested $6,000 in businessIncrease(Cash)No EffectIncrease (Owner’s Equity)2.Borrowed $2,000 at 12% note payable for 1 year from bankIncrease (Cash)Increase (Notes Payable)Increase (Interest Payable)No EffectDecrease(Increase in Expenses decrease Owner’s Equity by reducing profits)3.Earned $900 revenue(Assumption: Revenue is earned in cash)Increase(Cash)No EffectIncrease(Increase in Revenue increase Owner’s Equity)4.

Incurred $650 expenses(Assumption: Expense is paid in cash)Decrease(Cash)No EffectDecrease(Increase in Expenses decrease Owner’s Equity by reducing profits)5.Distribution to owner $25Decrease(Cash)No EffectDecrease(Owner’s Equity)B.The other information that can be entered into financial statements includes the notes associated with transactions for disclosure purposes; and to identify the parties involved in the transactions.C. Cats and Dogs CompanyBalance SheetAs on March 31, 2007AssetsLiabilities and Owner’s EquityCash $8,225Interest Payable $ 240Notes Payable $2,000Total Liabilities $2,240Owner’s Equity $6,000Net income/ (loss) ($ 15)Total Assets $8,225Total Liabilities and Owner’s Equity $8,225Notes:The interest payments are not payable till next year hence will not be included as expenses in arriving at retained earnings figures above.

Cats and Dogs CompanyIncome StatementFor the month ending March 31, 2007Revenue……………………………………………………………………………… $900Expenses…………………………………………………………………………….($650)Interest Expense………………………………………………………………………($240)Gross Income …………………………………………………………………………$ 10Dividends paid to owner…………………………………………………………… ($ 25)Net Income/(Loss) ……………………………………………………………… ($ 15) Cats and Dogs CompanyCash Flow StatementFor the month ending March 31, 2007Cash Flow from Operating ActivitiesNet Income/(Loss) ($ 15)Add: Increase in Interest Payables $ 240Less: Increase in Cash ($8,225)Net Cash Flow from Operating Activities ($8,000)Net Cash Flow from Investing Activities - $0 –Net Cash Flow from Financing ActivitiesIncrease in Notes Payable $2,000Net Cash Flow from Financing Activities $2,000Cash and Cash Equivalent at start of period - $0 –Cash and Cash Equivalent at end of period ($6,000)Net Cash Flow $6,000Cats and Dogs CompanyStatement of Changes in EquityFor the month ending March 31, 2007Owner’s Activity at beginning of the period $ 0Additions by Owner $ 6,000Net Income/ (Loss) ($ 15)Ending equity $ 5,985Part IIThe reasoning is highly unreasonable.

This is because all activities and transactions that occur before the balance sheet date must be included in the financial statements. This is required to present fair and true picture of the company’s financial position to the stakeholders.The International Accounting Standard number 10 ‘Events after balance sheet date’ provides two types of events. The events that provide evidence of conditions that existed before the balance sheet date (adjusting events) and the events that indicate conditions that arose after the balance sheet date (non-adjusting events).

For the given scenario, since the liability was incurred before the balance sheet date, hence it is an adjusting entry and must be recorded in the financial statements. However, the standard requires ‘changes to financial statements due to all material adjusting entries’. If the company can justify that a $5,000 worth of liability is not material for the company, then the company might be able to omit the recording of the event in financial statements.