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7-3 Describe the changes in balance sheet accounts that would constitute sources of funds. What changes...

7-3 Describe the changes in balance sheet accounts that would constitute sources of funds. What changes would be considered uses of funds?

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Expert Solution

Balance sheet is based on the accounting equation. The accounting equation is given below:

Assets = Liabilities + Stockholder's equity

Balance sheet is prepared in the above format of accounting equation. On the right side, is the liabilities and stockholder's equity side, which constitutes the sources of funds. It shows from where the funds are coming in to the business. All the sources of funds are divided into two categories, viz liabilities & stockholder's equity. In the liabilities section, the funds obtained from the sources other than the owner's or shareholders' contribution are taken. So sources of funds under this category will be loans or debts taken from banks or other outside parties or lenders creditors etc. The other side of source of funds is funds obtained from owners' contribution. It includes capital contributions by owners. In big companies, it will include proceeds from issue of stocks.

On the other side, assets represents uses of funds. It shows where the funds are used. It includes the transactions of purchase of property plant and equipment, other assets and inventory. All the investments made by the business also constitutes uses of funds.

jeff jeffy answered 8 months ago
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