Financial Accounting: An Integrated Statements Approach, 2nd Edition

60 Chapter 2 Basic Accounting Concepts

The effect of this transaction is an outflow of cash of $1,500 for financing activities.

Thus, a negative $1,500 is entered in the statement of cash flows column as a financ-

ing activity. In addition, the cash and retained earnings are decreased under the bal-

ance sheet column, by $1,500. The effect of this transaction on Family Health Care’s

financial statements is summarized below.

Balance Sheet

Assets  Liabilities  Stockholders’ Equity

Notes Capital Retained

Cash  Land  Payable  Stock  Earnings

6,600 12,000 10,000 6,000 2,600

1,500 1,500

5,100 12,000 10,000 6,000 1,100

Statement of Cash Flows

f. Financing 1,500

Statement of

Cash Flows

Income

Statement

Balances

f. Paid dividends

Balances

You should be careful not to confuse dividends with expenses. Dividends do not rep-

resent assets consumed or services used in the process of earning revenues. The de-

crease in stockholders’ equity from dividends is listed in the equation under

“Retained Earnings.” This is because dividends are considered a distribution of earn-

ings to the owners.

The transactions of Family Health Care are summarized in Exhibit 2. The transac-

tions are identified by letter, and the balances are shown as of the end of September.

You should note that under the balance sheet columns the accounting equation bal-

ances. That is, total assets of $17,100 ($5,100 $12,000) equals total liabilities plus

stockholders’ equity of $17,100 ($10,000 $6,000$1,100).

Balance Sheet

Assets  Liabilities  Stockholders’ Equity

Notes Capital Retained

Cash  Land  Payable  Stock  Earnings

9,500 12,000 10,000 6,000 5,500

2,900 2,900

6,600 12,000 10,000 6,000 2,600

Statement of

Cash Flows

Income

Statement

Balances

e. Paid expenses

Balances

Statement of Cash Flows

e. Operating 2,900

Income Statement

e.1,125 Wages expense

950 Rent expense

450 Utilities expense

100 Interest expense

275 Misc. expense

e.

f.