Man. Accounting

What three problems does accounting solve?

the memory problem

the processing problem

the big project problem

what solved the memory problem

record keeping 35000 years ago

When people are allowed to keep records, investors invest ______ and trustees are _____ trustworthy.  

more ; more

Single-entry bookkeeping

Identifying categories of things you care about and tracking quantities using written symbols (e.g., a "cows" account). Key limitation: tracks the number of things, not their value.

Double-entry bookkeeping

(invented ~1,300 AD) Defines economic categories (assets, liabilities, revenues, expenses, profit, loss), measures everything in currency value, and enables transaction-by-transaction calculation of profit and loss.

Cost accounting

Described as the "nervous system" corporations need to handle planning, coordination, and control at scale; the critical complementary innovation that enabled the American Industrial Revolution.

Balance Sheet Equation

Assets = Liabilities + Owner's Equity

Income Statement Equation

Revenues – Expenses = Net Income

Cash Flow Statement Equation

Cash Received – Cash Paid = Net Cash Flow (= sum of Operating + Investing + Financing cash flows)

balance sheet documents:

a firm’s status

income statement documents:

changes in a firm’s status

Assets

Everything a firm owns; things that yield future economic benefits

Liabilities

What the firm owes to outsiders (non-owners)

Owner's/Stockholders' Equity

What the firm owes its owners (common stock, retained earnings); obligations to owners.

Retained Earnings

A permanent (balance sheet) account representing accumulated net income minus dividends; linked to net income.

general ledger

puts general journal entries into accounting lingo

steps of the accounting cycle (6)

• 1: Write down what happened in a “journal”

• 2: Organize these events by account in a “ledger”

• 3: Add up numbers in each account to get “unadjusted trial balances” for each account

• 4: Make accrual accounting adjustments in the ledger

• 5: Add adjustments to trial balances to get “adjusted trial balances” 

• 6: Prepare financial statements by copying adjusted trial balances from the ledger into financial statement templates

the income statement explains the change in what balance sheet account?

retained earnings

Cash and _________statement are linked

net cash flow

_________: an exception to the link between net income and retained earnings

Dividends

Matching

revenues are matched to expenses meaning expenses are recognized at the same time as the revenues they help to generate

The Closing Process

• Transfers net income (or loss) and dividends to Retained Earnings

• Establishes zero balances in all revenue, expense, and dividend accounts. 

Cash Accounting versus Accrual Accounting

• Cash accounting

  • Records something when cash changes hands.

• Accrual accounting

  • Records something when the economics of the business change. The focus is on the economics, not the cash. 

Adjusting entries should or should not involve the “cash” account

should not

expiration of unexpired costs

an asset's use is recognized over time (e.g., prepaid rent expiring, depreciation expense).

Earning of revenues received in advance

Recognizing revenue as a good/service is delivered after being paid for upfront (e.g., unearned revenue, gift cards, prepaid airline tickets).

Accrual of unrecorded expenses

Recognizing expenses that arose but weren't yet paid in cash (e.g., unpaid salaries, accrued interest).

Accrual of unrecorded revenues

Recognizing revenue earned but not yet received in cash (e.g., interest receivable).

two types of financial statment analysis

• Fundamental analysis

  • Value and growth approaches

• quantitative analysis

  • Uses huge amounts of historical and real time data and stats analysis

implicit transactions

economically meaningful changes in value that don’t have an associated “triggering event”

T-accounts

The way that accounting is done in a general ledger

unified rule for debits:

Increases in what the firm owns (assets)

Decreases in what the firm owes (liabilities and owners’ equity)

unified rule for credits

Increases in what the form owes (liabilities and owners’ equity)

Decreases in what the firm owns (assets)

difference between HAM and journal entry accounting

journal entry accounting has to update retained earnings and income while HAM keeps it updated at all times

Costs that are included in inventory.

product costs

Capitalize a cost

put it on the balance sheet

expense a cost

put it on the income statement

Costs that are not included in inventory. Sometimes called “period” or “SG&A” costs.

Selling & Administrative Costs

Selling on account: the selling company calls the promise to pay an:

account receivable

Selling on account: the purchasing company calls the promise to pay an:

account payable

when a purchaser pays the shipping, the charge is:

included as part of Co. Purchaser’s inventory account and the setup is called FOB shipping point

when a seller pays for shipping:

charge is in a non-inventory expense account

Perpetual Inventory System:

Keep inventory and COGS updated all the time

Periodic Inventory System:

Wait until period end to calculate balances in inventory and COGS

when using FIFO, is the inventory on the balance sheet or COGS on the income statement more valuable?

Inventory, as it contains prices of most recent stuff

when using LIFO, is the inventory on the balance sheet or COGS on the income statement more valuable?

COGS, as it is based on more recent purchase prices

how to maipulate LIFO to get low COGS and high income:

 don’t buy enough new inventory so that your COGS will end up being based on crusty old prices.