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Financial Analysis

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Financial Accounting MidTerm

I. Debit vs. Credit
A. Debit
Debit = left side of T-account
On the Balance Sheet a debit indicates:
1. An increase in an asset
2. A decrease in a liability
3. A decrease in shareholders’ equity item
B. Credit
Credit = Right side of T-account
On the Balance Sheet a credit indicates:
1. A decrease in an asset
2. An increase in a liability
3. An increase in shareholders’ equity item

** HINT** - Identify two components of each transaction: 1.) what did you get; 2.) where did it come from. The debit is what you got, and the credit is the source of the item you received.

For instance, let’s imagine that you purchase a computer with your credit card. Since the computer is what you received it’s going to result in a debit to the asset account for your computer. The credit will be applied to the credit card liability account for the same amount.

II. What accounts Increase/Decrease with debits and credits

Account Type Debit Credit
Balance Sheet Assets Increase Decrease
Balance Sheet Liabilities Decrease Increase
Balance Sheet Owner’s Equity Decrease Increase
Income Statement Revenue Decrease Increase
Income Statement Cost of goods sold Increase Decrease
Income Statement Expenses Increase Decrease

III. Typical Accounts
A. Assets
Cash Marketable Securities
Accounts receivable Notes receivable
Interest Receivable &nb...

... middle of paper ...

...ccounts decrease cash and appear with negative signs.
2) Step 2: Classify the change in each balance sheet account as an operating, or investing, or financing activity and enter it in the appropriate column of the work sheet using the same sign as the first column.
3.) Step 3: Sum the entries in the Operations, Investing, and Financing Columns and net the 3 sums to ensure that they equal the net change in cash.

***Things to Remember***

In T-accounts the balance are as follows:
Asset: balance on the left
Liability: balance on the right
Stockholders’ equity: balance on the right

Balance Sheet is written as follows:
Assets
Liabilities
Stockholders’ equity

Income Statement is written as follows:
Sales
Other Revenue
Cost of Goods Sold
Expenses
Net Income

Statement of Cash Flows (Indirect Method) is written as follows:
Operations
Investing
Financing
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