The Monday MBA Math series helps prospective MBA students to self assess their proficiency with the quantitative building blocks of the MBA first year curriculum.
The first MBA Math accounting exercise explained that balance sheets provide a snapshot of a firm’s financial condition at a moment in time, with “balance” referring to the equality between the left side’s assets and the right side’s combination of liabilities and equity. This exercise introduces transactions as the means by which the balance sheet changes over time. As long as the balance sheet equation (assets = liabilities + equity) is maintained for each transaction then the new balance sheet that results from a large sequence of transactions will remain in balance.
This exercise introduces the proper treatment of a few standard transactions at the level of the balance sheet equation. The full MBA Math course continues deeper into allocation of transactions to specific balance sheet accounts.
Internalizing the concepts and handling of standard transactions will help students to be ready for the more complex issues of proper revenue recognition and expense matching of accrual accounting that they will encounter in their MBA coursework.
Spending time in the accounting trenches working with transactions is critical to developing an informed understanding of the financial statements that MBAs will analyze in their classes and careers. In a business climate punctuated with outrage over accounting tricks and scandals, it pays to start early to understand accounting from the ground up.
Exercise:
Evaluate each of the following transactions in terms of their effect on assets, liabilities, and equity.
1. Buy $17,000 worth of manufacturing supplies on credit
2. Issue $90,000 in stock
3. Receive payment of $10,000 owed by a customer
4. Purchase equipment for $46,000 in cash
What is the net change in Total Assets?
Solution (with audio commentary): click here
Prof. Peter Regan created the self-paced, online MBA Math quantitative skills course and teaches live MBA courses at Dartmouth (Tuck), Duke (Fuqua), and Cornell (Johnson).