acct 201a final

operating business activity is always related to

revenues & expenses

• customers

• daily activities

dividends payment is a

financing activity (it cannot be deducted tax wise

investing activity

purchase or sale of long term assets

financing activity

purpose is to raise funds (by borrowing from creditor and issuing stock)

the 4 financial statements

1. balance sheet

2. income statement

3. statement of stockholders equity

4. statement of cash flows

accounting equation and what each means

assets = liabilities + stockholders equity

• assets = resources

• liabilities = creditors claims

• stockholder’s equity = stockholders claims

• liabilities + stockholders equity = claims to resources

what is in the income statement?

revenue, expenses, net income

what is listed in the balance sheet

assets, liabilities, and stockholder’s equity

what is GAAP?

rules/standards you need to follow in financial accounting

who set up GAAP rules?

FASB

accounting cycle

a process of the procedures to measure the business activities and communicate them

step 1/2 of accounting equation

evaluate/analyze how each business transaction impacts acct. equation/balance sheet

step 3 of accounting equation

debit & credit (T account)

what accounts would have ending balance on credit side?

• liabilities

• most equity accounts

what accounts would have ending balance on debit side?

• assets

• expense accounts

• dividend accounts

• treasury stock accounts

step 4 of accounting equation

journal entries

what effect does the payment of dividends have on the accounting equation?

assets decrease and equity decreases

DEALOR

DEA (dividends, expenses, assets)

debit ↑ credit ↑

LOR (liabilities, owner’s equity, revenue

debit ↑ credit ↑

what effect does the payment of dividends have on the acct. equation?

assets decrease and equity decreases

2nd half of accounting cycle

1. Record and post adjusting entries (complete the measurement process).

2. Prepare financial statements (the reporting process).

3. Record and post closing entries (the closing process).

accrual basis accounting

• revenue and expenses are recorded whenever they happen

• never look at cash flow

cash basis accounting

• based solely on cash

• record revenue when cash is received, record expense when cash is paid

adjusting entry golden rules

• does not include cash account

• must include revenue or expense account but NOT BOTH

closing process: temporary accounts & permanent accounts

• revenue

• expense

• dividends

permanent accounts is everything else

what accounts need to be closed in the closing process?

• revenue

• expense

• dividends

(temporary accounts)

fraud triangle

• opportunity

• motivation

• rationalization

opportunity

the situation allows the fraud to occur

motivation

someone feels the need to commit fraud, such as the need for money

rationalization

justification for the deceptive act by the one committing the fraud

what is sox act?

a law to improve internal controls, it prevents company’s from lying about their financial statements and reduces the risk of fraud

2 areas of sox act

to enhance auditor & client relationship, and to provide guidance to managers and increase managers responsibility over internal controls

internal control activities

• monitoring

• control activities

• risk assessment

• control environment

separation of duties & example

Fraud is prevented by not allowing the
same person to be responsible for both controlling the asset and accounting for the asset

physical control & example

Assets and accounting records must be kept
safe and accessible only to authorized personnel

ex: company uses safety locker for cash and document

proper authorization & example

Fraud is prevented when unauthorized
individuals are not allowed to use company resources

employee management & example

The company should provide employees appropriate guidance in how to perform their jobs as well as in their responsibilities for internal control

E-commerce controls & example

Passwords should be required to conduct electronic business transactions, and firewalls and antivirus software should be kept current

bank reconciliation

matches the balance of cash in the bank with the balance of cash in the company’s own record

bank reconciliation - why is there a difference?

time difference (caused by accrual basis) or error

NSF check

customers’ checks written on “non-sufficient funds

deposit in transit

cash receipts of the company that have not been added to the bank’s record of the company’s balance

outstanding check

checks the company has written that have not been subtracted from the bank’s record of the company’s balance

receivables

you expect to receive cash in the future

credit sales journal entry

debit accounts receivable

credit sales/service revenue

allowance method

method used to estimate uncollectible accounts receivable

steps for allowance method

1. estimate accounts receivable

   debit bad debt expense

   credit allowance for uncollectible account

2. write-off

debit allowance for uncollectible account

credit accounts receivable

ignore 3rd step

formula for interest revenue/interest expense of notes receivable

face value of the note (how much you borrowed) x annual interest rate x fraction of the year (x/12).

sale of inventory has 1 or 2 journal entries?

2 -

1. sales transaction

2. cost of COGS

net realizable value

expected/estimated sale price of inventory - cost of sale

gross profit ratio

( net sales(or net revenues) - cost of goods sold ) / net sales

2 types of long term assets

tangible(physical) & intangible

tangible assets examples

• building

• land improvement

• equipment

(should be able to value or capitalize)

long term assets costs are determined by

the original cost of the asset + all expenditures necessary to get the asset ready for use

what is included in the tangible assets cost?

• sales tax

• commissions

• remodeling costs

• closing fee

what is not included in the intangible assets cost?

• annual registration fees

intangible assets examples

• copyrights

• trademarks

• franchises

• goodwill

if you sell materials from an asset,

it decreases the value

depreciation

a process to allocate costs of a long term asset

depreciation expense

(assets cost - residual value) / service life

book value

original cost of the asset - accumulated depreciation

when you dispose a long term asset you need to calculate

a gain and loss and how much (by calculating sale & book value)

profit margin formula

net income / net sales

gross profit ratio

used to evaluate profitability of a company

current liabilities

anything that will be paid in 1 year

current version of long term debt

current liability

record occurrence of current liability:

debit cash

credit liability account

record interest

debit interest expense

credit interest payable

deferred revenue

• current liability

• company receives cash in advance, provide services in the future

ex: gift card

current ratio

current assets / current liabilities

why should only current assets and liabilities be included in the current ratio?

no long term because it is used to determine a company’s ability to pay off current debt

installment notes

most car loans and home loans call for payment in monthly installments rather than by a single amount at maturity

the payments includes

1. interest on borrowed amount

2. reduction of outstanding loan balance

bonds

Formal debt instrument that obligates the borrower to repay a stated amount, referred to as the principal or face amount, at a specified maturity date (only worry about face amount!)

6 features of bonds

• secured

• unsecured

• term

• serial

• callable

• convertible

secured bond

are backed by collateral

unsecured bond

not backed by collateral

term bond

issue matures on a single date

serial bond

issue matures in installments.

callable bond

Issuing company can pay off bonds early

convertible bond

Investor can convert bonds to common stock

bonds journal entries

• issuance of bonds

  • debit cash

  • credit bonds payable

• interest expense

  • debit interest expense

  • credit cash

• retirement (pay off) of bonds

  • debit bonds payable

  • credit cash

what is effect of interest expense on balance sheet?

decreasing assets, decreasing stockholder’s equity

stated interest rate vs market interest rate

The stated interest rate is specified in the

bond contract.

The market interest rate is not specified in

the bond contract

advantages of a corporation

• limited liability

• ability to raise capital and transfer ownership

disadvantages of a corporation

• additional taxes

• more paperwork

common stock

preferred stock

additional paid-incapital

investment from stockholders

authorized stock

shares available to sell (issued + unissued)

issued stock

shares actually sold (outstanding + treasury)

outstanding stock

shares issued and held by investors

treasury stock

shares issued and repurchased by the company

preferred stock preferences

• has priority to receive dividend over common stock

• PS has a priority to receive distribution of assets

statement of cash flows; is it

• operating?

• investing?

• financing?

• inflow or outflow?

no cash flow

• issue stock

• purchase car

• borrow money from creditor

• purchase house

indirect method

prepare for operating section of cash flows

4 steps in preparing for statement of cash flows

1. non-cash operating items

   • ex: depreciation expense, amortization expense

2. non-operating

   • ex: gain (-) or loss (+) from selling equipment, land, …

3. changes in current asset (non-cash):

   • increase in current asset (-)

   • decrease in current asset (+)

4. changes in current liabilities

   • increase in current liabilities (+)

   • decrease in current liabilities (-)

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net cash flows from operating

financing and investing activities for statement of cash flows

no formula

cash inflow - add

cash outflow - subtract

the face value of a bond (par value)

the price that the issuer pays at maturity

net revenue

total revenue-sales discounts