Transaction Analysis and Statement of Cash Flows Preparation

Topics: Balance sheet, Generally Accepted Accounting Principles, Accounts receivable Pages: 7 (1772 words) Published: August 18, 2011
July 28, 2009


Part I Although he owned his own business, Jeff Birch was a financial novice. His passion was dogs, and he had finally made the move to start a specialty dog services business in an upscale section of a large mid-Atlantic city. In its first two years, Dog Concierges, LLC, had grown to about $650,000 in sales. Historically, he had left all financial concerns in the hands of his sister, Jennifer Birch, an aspiring CPA. But she had recently graduated from college and was leaving in a month to start her career in Atlanta. Jeff had asked her to give him a crash course in Accounting 101, so he had some handle on the accounting process and the resultant financial statements—well enough, at least, to converse in an informed manner with his sister’s replacement. He had not minded totally leaving the books to her, but he now felt the need to be better informed, since her replacement would not be his “trusted little sis.” Jennifer had thought long and hard about how to cram the equivalent of an entire semester of Accounting 101 into a manageable hour-long tutorial that Jeff conceivably could internalize. She had gravitated to an approach reliant on diagrams, with a minimum of traditional technical jargon. She crafted the diagram depicted in Exhibit 1, explaining to Jeff that it had the capacity to illustrate all his financial transactions. The key to keeping his financial records correct and up to date, she said, was to ask three questions for every business event, all the while keeping the equality of the starting equation true: 1. What parts of the diagram were affected? 2. What direction (increase or decrease)? 3. By what dollar amount? After presenting the diagram and its underlying explanation to Jeff, Jennifer decided she needed to give him a bit of homework. She crafted a number of hypothetical business events that she knew were representative of some the business was likely to incur; those events are listed

This case was prepared by Mark E. Haskins, Professor of Business Administration. It was written as a basis for discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 2009 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. ◊



below. She then instructed Jeff to explain to her, for each of those independent business events, which part of the diagram was affected, in what direction, and by what dollar amount. Jeff felt a bit uncomfortable having to perform for his sister, but he knew it was for his own good. So, he began.

Common Business Events 1. Sold capital stock for $15,000 to three investors. 2. Purchased $55,000 of product raw material on account from suppliers. 3. Sold products for $40,000 cash that had cost $29,000 to make. 4. Borrowed $30,000 from the bank, due in 120 days, with an interest rate of 6%. 5. Collected a $4,500 account receivable from a veterinarian customer. 6. Bought a used pickup truck for $8,000 cash. 7. Disbursed cash dividends of $1,500 to owners. 8. Paid a $2,500 account payable owed to a supplier. 9. Recognized $3,500 annual depreciation on a small warehouse the company owned. 10. Sold an old shed no longer needed that had a recorded cost of $14,000 for $17,500 cash. 11. Accrued 90 days of interest on the bank loan.

Part II Jeff’s sister had taught him well. Not only did he accomplish the task she had set up for him, but he also was able to craft a current balance sheet and income statement by using the actual account...
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