Completing this activity will allow you to check the degree to which you are meeting the following learning objectives:
The first tab within the Excel Workbook will allow you to record journal entries and answer the following scenarios below.
As you proceed through this activity, be sure to reflect on financial statement articulation. Note that as transactions and journal entries change individual account balances, multiple financial statements may be affected, but across financial statements, balances will reconcile and structural relationships will be maintained.
Review each of Ellsworth Co.’s four financial statements, prepared before considering any additional transactions.
Total Current Assets
Property, Plant, and Equipment
Less: Accumulated Depreciation
Total Assets
LIABILITIES
Income Taxes Payable
Other Accrued Liabilities
Total Current Liabilities
Long-Term Notes Payable
Total Liabilities
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Costs of Goods Sold
Other Operating Expenses
Income before Income Taxes
Income Tax Expense
Cash Flows from Operating Activities
Adjustments to Reconcile Net Income Cash Flows from Operating Activities:
Decrease (increase) in Operating Assets
Increase (Decrease) in Operating Liabilities
Income Tax Payable
Other Accrued Liabilities
Net Cash Flows from Operating Activities
Cash Flows from Investing Activities
Purchase of Property, Plant, and Equipment
Net Cash Flows from Investing Activities
Cash Flows from Financing Activities
Proceeds from Debt
Proceeds from Issuance of Common Stock
Net Cash Flows from Financing Activities
Net Increase (Decrease) in Cash
Issued Shares for Cash
Less Dividends Paid
Ellsworth Corporation collected $10,000 in cash from a customer for an account receivable and properly recorded the transaction with the following journal entry.
Accounts Receivable 10,000
Which financial statements would be affected by this transaction?
That's correct! No, try again.Balance Sheet before Transaction
Total Current Assets
Property, Plant, and Equipment
Less: Accumulated Depreciation
Total Assets
LIABILITIES
Income Taxes Payable
Other Accrued Liabilities
Total Current Liabilities
Long-Term Notes Payable
Total Liabilities
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Balance Sheet after Transaction
Total Current Assets
Property, Plant, and Equipment
Less: Accumulated Depreciation
Total Assets
LIABILITIES
Income Taxes Payable
Other Accrued Liabilities
Total Current Liabilities
Long-Term Notes Payable
Total Liabilities
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Statement of Cash Flows before Transactions
Cash Flows from Operating Activities
Adjustments to Reconcile Net Income Cash Flows from Operating Activities:
Decrease (increase) in Operating Assets
Increase (Decrease) in Operating Liabilities
Income Tax Payable
Other Accrued Liabilities
Net Cash Flows from Operating Activities
Cash Flows from Investing Activities
Purchase of Property, Plant, and Equipment
Net Cash Flows from Investing Activities
Cash Flows from Financing Activities
Proceeds from Debt
Proceeds from Issuance of Common Stock
Net Cash Flows from Financing Activities
Net Increase (Decrease) in Cash
Statement of Cash Flows after Transactions
Cash Flows from Operating Activities
Adjustments to Reconcile Net Income Cash Flows from Operating Activities:
Decrease (increase) in Operating Assets
(8,400)
Increase (Decrease) in Operating Liabilities
Income Tax Payable
Other Accrued Liabilities
Net Cash Flows from Operating Activities
20,000
Cash Flows from Investing Activities
Purchase of Property, Plant, and Equipment
Net Cash Flows from Investing Activities
Cash Flows from Financing Activities
Proceeds from Debt
Proceeds from Issuance of Common Stock
Net Cash Flows from Financing Activities
Net Increase (Decrease) in Cash
46,000
88,000
Why didn’t Total Assets change while Cash Flows from Operating Activities increased?
Enter your response below, then select Submit.
From Ellsworth Corporation’s perspective, one asset (Account Receivable) was exchanged for another (Cash) at the same value. Thus, the composition of assets changed while the total book value of assets did not. Cash was one of the individual assets involved, and thus the amount of Cash recorded on the Balance Sheet and total cash flows on the Statement of Cash Flows were affected. Since the cash was received as a payment from a customer, it represents a cash flow from operations, and Cash Flow from Operating Activities increased.
Why didn’t the income statement change?
Enter your response below, then select Submit.
The revenue (Sales Revenue) and expense (Cost of Goods Sold) associated with this transaction were recognized in the period that the earnings process for revenue recognition was completed, rather than the current period when the cash payment was received. Thus, this transaction did not affect the income statement.
Ellsworth Co. declared and paid $2,000 of cash dividends to shareholders, and properly recorded the transaction with the following journal entry.
Which financial statements would be affected by this transaction?
That's correct! No, try again.Balance Sheet before Transaction
Total Current Assets
Property, Plant, and Equipment
Less: Accumulated Depreciation
Total Assets
LIABILITIES
Income Taxes Payable
Other Accrued Liabilities
Total Current Liabilities
Long-Term Notes Payable
Total Liabilities
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Balance Sheet after Transaction
$76,000
26,900
Total Current Assets
Property, Plant, and Equipment
Less: Accumulated Depreciation
Total Assets
LIABILITIES
Income Taxes Payable
Other Accrued Liabilities
Total Current Liabilities
Long-Term Notes Payable
Total Liabilities
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Statement of Cash Flows before Transactions
Cash Flows from Operating Activities
Adjustments to Reconcile Net Income Cash Flows from Operating Activities:
Decrease (increase) in Operating Assets
Increase (Decrease) in Operating Liabilities
Income Tax Payable
Other Accrued Liabilities
Net Cash Flows from Operating Activities
Cash Flows from Investing Activities
Purchase of Property, Plant, and Equipment
Net Cash Flows from Investing Activities
Cash Flows from Financing Activities
Proceeds from Debt
Proceeds from Issuance of Common Stock
Net Cash Flows from Financing Activities
Net Increase (Decrease) in Cash
Statement of Cash Flows after Transactions
Cash Flows from Operating Activities
Adjustments to Reconcile Net Income Cash Flows from Operating Activities:
Decrease (increase) in Operating Assets
Increase (Decrease) in Operating Liabilities
Income Tax Payable
Other Accrued Liabilities
Net Cash Flows from Operating Activities
Cash Flows from Investing Activities
Purchase of Property, Plant, and Equipment
Net Cash Flows from Investing Activities
Cash Flows from Financing Activities
Proceeds from Debt
Proceeds from Issuance of Common Stock
Net Cash Flows from Financing Activities
Net Increase (Decrease) in Cash
76,000
Statement of Stockholders’ Equity
Issued Shares for Cash
Less Dividends Paid
Statement of Stockholders’ Equity Transactions
Issued Shares for Cash
Less Dividends Paid
How did this transaction affect the stockholders’ equity section of the balance sheet and the statement of stockholders’ equity?
Enter your response below, then select Submit.
Ordinary dividends represent a distribution to shareholders from Retained Earnings. Thus, ordinary dividends reduced the balance of Retained Earnings on the Balance Sheet. Since Retained Earnings are a component of Stockholders’ Equity, the Total Stockholders’ Equity balance on the Balance Sheet also decreased. Because Cash was also reduced by the payment of dividends, Total Assets continues to equal the Total Liabilities & Stockholders’ Equity on the Balance Sheet (i.e., the balances of both, as reported prior to this transaction, changed by $2,000). On the Statement of Stockholders’ Equity, Dividends Paid are included as a line item that reduces Stockholders’ Equity, so the balance on this statement equals that reported on the Balance Sheet.
Why didn’t this transaction affect the income statement?
Enter your response below, then select Submit.
Ordinary dividends are NOT an expense! Rather they are distribution from retained earnings. Thus, neither the declaration nor payment of the dividends affects the income statement.
Ellsworth Co. sold an additional $25,000 of services, with one half paid in cash and the other half on account. Ellsworth properly recorded the transaction with the following journal entry.
Accounts Receivable 12,500
Sales Revenue 25,000
Which financial statements would be affected by this transaction?
That's correct! No, try again.Balance Sheet before Transaction
Total Current Assets
Property, Plant, and Equipment
Less: Accumulated Depreciation
Total Assets
LIABILITIES
Income Taxes Payable
Other Accrued Liabilities
Total Current Liabilities
Long-Term Notes Payable
Total Liabilities
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Balance Sheet after Transaction
$90,500
39,400
Total Current Assets
Property, Plant, and Equipment
Less: Accumulated Depreciation
Total Assets
LIABILITIES
Income Taxes Payable
Other Accrued Liabilities
Total Current Liabilities
Long-Term Notes Payable
Total Liabilities
Total Stockholder’s Equity
Total Liabilities and Stockholders’ Equity
Statement of Net Income
Costs of Goods Sold
Other Operating Expenses
Income before Income Taxes
Income Tax Expense
Statement of Net Income Transactions
Costs of Goods Sold
Other Operating Expenses
Income before Income Taxes
Income Tax Expense
Statement of Cash Flows
Cash Flows from Operating Activities
Adjustments to Reconcile Net Income Cash Flows from Operating Activities:
Decrease (increase) in
Operating Assets
Increase (Decrease) in Operating Liabilities
Income Tax Payable
Other Accrued Liabilities
Net Cash Flows from Operating Activities
Cash Flows from Investing Activities
Purchase of Property, Plant, and Equipment
Net Cash Flows from Investing Activities
Cash Flows from Financing Activities
Proceeds from Debt
Proceeds from Issuance of Common Stock
Net Cash Flows from Financing Activities
Net Increase (Decrease) in Cash
Statement of Cash Flows Transactions
Cash Flows from Operating Activities
Adjustments to Reconcile Net Income Cash Flows from Operating Activities:
Decrease (increase) in
Operating Assets
Increase (Decrease) in Operating Liabilities
Income Tax Payable
Other Accrued Liabilities
Net Cash Flows from Operating Activities
Cash Flows from Investing Activities
Purchase of Property, Plant, and Equipment
Net Cash Flows from Investing Activities
Cash Flows from Financing Activities
Proceeds from Debt
Proceeds from Issuance of Common Stock
Net Cash Flows from Financing Activities
Net Increase (Decrease) in Cash
Statement of Stockholders’ Equity
Issued Shares for Cash
Less Dividends Paid
Statement Stockholders’ Equity Transactions
Issued Shares for Cash
Less Dividends Paid
Will a transaction that affects a revenue and/or expense account always affect all four of the major financial statements? Explain.
Enter your response below, then select Submit.
Yes. When and revenue or expense is recorded, Net Income will be affected. Changes in Net Income will also affect the Retained Earnings balance. Thus, the Income Statement, Balance Sheet and Statement of Stockholders’ Equity will all be affected by a transaction that involves a revenue or expense account. When revenue is recognized, cash or a receivable are typically received. When an expense is recorded, it is typically paid or accrued by recording a payable. Thus, the cash flow statement will be affected.
In this activity, you have seen that transactions affect multiple elements on a financial statement and/or multiple financial statements. These relationships among financial statement elements and the inter-connectedness of the financial statements illustrate the concept of financial statement articulation. As you continue your studies in financial accounting, challenge yourself to think beyond the journal entries to consider the financial statement impacts of transactions. This will deepen your understanding of financial accounting and provide a foundation for meaningful analysis of business transactions, financial condition, and performance.
Congratulations! You have successfully completed the financial statement articulation activity. Enter your name below to get a summary of your answers.
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