BUAD301 Sem Review

Accounting equation

Assets = Liability + Equity (contributed capital & retained earnings)

Contributed capital

Money shareholders directly invest into company in exchange for stock, normal balance is credit, accounts include common stock, preferred stock, APIC

Retained earnings

Ending retained earnings = Beginning retained earnings + NI - Dividends, for NI add revenue and gains while subtract expenses and losses, normal balance credit, with normal balance for revenue and gains credit since equity increases as NI increases, normal balance for expenses and losses debit since equity decreases as NI decreases, at end of period revenues, gaines, expenses, and losses close into retained earnings and opposite balance is applied for accounts

General approach to revenue recognition

Revenue recognized when it’s earned not when cash is received, occurs when service are rendered or goods are sold and delivered

Where expenses appear on balance sheet (Inventory)

Asset, stuff bought to sell later, becomes expense only when sold, ex. cost of materials, work in progress, finished goods for sale

Prepaid expense

Asset, amounts paid ahead of time, turns into expense overtime, ex. insurance, prepaid rent

Accounts payable

Liability, already got goods/service but haven’t paid yet, expense already happened and cash will come later

Accrued expenses

Liability, already used something but haven’t been billed yet, expense already happened and payment comes later, ex. accrued payroll

Expenses on balance sheet

What’s waiting to happen like assets being future expenses that you’ll use up and liabilities being future payments and expenses you still owe

Expenses on income statement

What already happened, expenses go here when they’re actually used or incurred

COGS

= Beginning inventory + Purchases - Ending inventory

Long term assets

Amounts spent to place asset in service are capitalized like money spent to buy asset and place in service, improve existing asset, construct asset, or asset acquired in merger, goodwill arises only in merger or acquisition, tangible productive assets depreciated over useful life while finite lived intangible assets amortized over useful life

Income statement

Presents info on operations over specified period of time, helps assess performance of company in past and use this to predict future income or cash flows, elements include revenue, expenses, gains and losses

Comprehensive income

Includes all changes to owner’s equity during period, certain gains and losses temporarily deferred in OCI including gains/losses on cash flow hedge derivatives and unrealized gains/losses on certain debt investment types

Operating items

Revenues and expenses coming from activities company was created to do everyday, ex. revenue/sales, COGS expense, SGA expenses, research and development, restructuring costs, impairments, gains and losses on sales

Nonoperating items

Revenues and expenses that doesn’t come from what company was created to do, ex. interest or dividend revenue, interest expense, gains and losses from sales of investment, income taxes

Standardizing financial statements

Remove effect of company size so companies can be compared more fairly

Common size standardizing

Percentage of whole, for balance sheet divide each item by total assets for that year, for income statement divide each item by revenue for that year

Year over year standardizing

How much changed from last year, calculate ending amount of each item less beginning amount divided by beginning amount

ROA (return on assets)

= NI + Interest exp.( 1 - ETR) / Avg total assets, ETR = Income tax exp / Income before tax exp

ROCE (return on common equity)

= NI / Avg common equity, always higher than ROA

Discontinued operations

Results of operations that discontinued, gain or loss from disposal, potential impairment loss if business sold after reporting date, separated out of financial statements entirely and presented on one line, both crierias have to be met of business component sold or disposed of and disposal represents strategic significant shift

Unusual or infrequent items

Stays within continuing operations but disclosed separately so investors can see unusual, ex. casualty losses, asset impairments, restructuring, considerations include environment company operates in, whether gain/loss is typical, and past occurrences

Reasons why previously reported numbers might change

Change in accounting estimate, change in accounting principle, material error