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Money transaction as a tool of regulating Economics

Duchac, Reeve, & Warren (2007) define a money transaction as an financial event that impacts an detail of the economic statements and must be recorded. An accounting transaction affects at least two factors of the monetary statements. The accounting equation “belongings=liabilities + stockholder’s equity” is the framework for analyzing the impact of transactions at the 4 financial statements. A transaction ought to affect both of the three elements; the assets, the liabilities, or the equity.
The recording of the transactions applies the double entry machine. for example, the purchase of gadget on credit score will affect an asset and a legal responsibility account, impacting on the stability sheet. Any other example of a transaction is income on credit score; it has an impact on a legal responsibility account and increases the stockholder’s equity by increasing the retained earnings. Such a transaction affects the income statement and the balance sheet.
Elements and purpose of each financial statement
The income statement reveals the changes in financial conditions resulting from business operations. Its purpose is to show the performance by recognizing the revenues, matching these revenues with the expenses, and most importantly, reporting the net income generated during the accounting period. It has three main elements: revenues, expenses, and the net income or loss. Revenue is the income generated from the sale of goods or provision of services and is associated with the primary operations of an entity while expenses are the resources used up in the generation of the revenues. A business will report net income when the revenues exceed the expenses.
The purpose of the statement of changes in equity is to show the changes that happen to the owner’s contributions or equity. The elements depend on the form of business organization; for a sole proprietorship and partnerships, changes in equity are due to the net income, increase in member contributions, or drawings. However, companies have complicated ownership structures, and equity changes may result from comprehensive income, contributions from and distributions to owners, and any reconciliation of the carrying amounts of the equity components (Kieso, Weygandt, & Warfield 2014).
The purpose of the balance sheet is to detail the financial position of business as at any point in time. The assets and the claim to those assets represent the financial position. The claims to assets refer to the rights of creditors (liabilities) and the rights of the owners (owner’s equity). Duchac et al. (2007) note that the total assets should be equal to their rights or claims. Therefore, a balance sheet shows the resources that a company owns (assets) and those it owes (liabilities) and the contribution from the owner’s (equity). From this, its elements are assets, liabilities, and owner’s equity.
The purpose of the statement of cash flows is to show the changes in cash and cash equivalents for a financial year. It shows the cash inflows or outflows from business activities which are operating, investing, and financing. Operating cash flows (CFs) are from the primary revenue-generating activities, investing CFs from acquiring or disposing of assets and financing CFs from activities that seek to raise or repay funds. It has three elements; cash generated from or used by operating, investing, and financing activities.
Financial analysis
Common size analysis and financial ratio analysis are the components of financial analysis. Common size analysis involves restating the financial statements, and it is either horizontal or vertical. The horizontal analysis uses a specified year as the base and then re-stating and comparing other years as a percentage of the base year values. The vertical analysis involves using an aggregate value such as sales for income statement and then restating all other elements as a percentage of the aggregate value. Financial ratio analysis uses the various interrelationships among the financial statements to examine the performance and condition of a company through the following ratio categories: activity, liquidity, solvency, and profitability.
Financial analysis is used to assess the past and present financial performance and condition of business, for instance, its profitability, efficiency, or solvency. From this information, the stakeholders such as investors, creditors, customers can predict the future performance of a company and make the right decisions. For instance, will this company continue to grow, generate revenue, and be profitable in the foreseeable future? Also, financial analysis is used to compare one firm to another, and this provides useful information for decision-making. For instance, the management will identify the areas in which competitors are better and develop solutions to improve the competitiveness.

References
Duchac, J., Reeve, J. and Warren, C. (2007). Financial Accounting An Integrated Statements Approach. 2nd ed. Thomson South Western
Kieso, D., Weygandt, J., & Warfield, T. (2014). Intermediate accounting. Hoboken, NJ: Wiley

July 24, 2021

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