Page 12 - FINAL CFA SLIDES DECEMBER 2018 DAY 7
P. 12
Session Unit 6:
22. Financial Reporting Mechanics, p.12
LOS 22d: Describe the process of recording business transactions using an accounting system
based on the accounting equation, p13
Purchase equipment for $10,000 cash:
• Property, plant, and equipment (an asset) increases by $10,000.
• Cash (an asset) decreases by $10,000.
Buy office supplies for $100 cash:
Borrow $10,000 to purchase equipment: • Cash decreases by $100.
• PP&E increases by $10,000. • Supply expense increases by $100.
• Notes payable (a liability) increases by $10,000. • An expense reduces retained
earnings, so OE decreases by $100.
Buy inventory for $8,000 cash and sell it for $10,000 cash:
• Cash decreases by $8,000 and inventory increases (an asset) by $8,000.
• Sale increases cash by $10,000 and decreases inventory by $8,000, so assets increase by $2,000.
• Sales (a revenue account) increase by $10,000 and “cost of goods sold” (an expense)
increases by the $8,000 cost of inventory.
The $2,000 difference is an increase in net income and, therefore, in retained earnings and OE
(ignoring taxes).
