accoutning final

accounts

balance sheet

• reports the financial position of a company at a specific point in time

• assets = liabilities + SE

• investors and creditors look at the balance sheet to see if the company can pay its debts and its it has enough assets to operate

• stockholders equity is a protective cushion for creditors because creditors always get paid before stockholders

income statement

• reports the performance of a company during a period

• revenues - expenses = net income

• cost of goods sold counts as an expense

statement of stockholders equity

• reports the change in a company’s common stock and retained earnings during the period

• BASE

statement of cash flows

• reports the inflows and outflows of cash during the accounting period

• starts with net income

• broken up into financing, operating, and investing activities

cash flows from operating activities

• day to day operations

• wages, inventory, rent, utilities, interest, income taxes

cash flows from investing activities

• buying/selling long term assets

• land, buildings, equipment

• lending a customer money

cash flows from financing activities

• activities that fund the business, like debt and equity

• issuing stock/bonds, paying dividends, borrowing from bank, paying loans, treasury stock purchases

How are GAAP principles determined?

Congress created SEC which created FASB which created GAAP

Pros and Cons of corporations

pros:

• stockholders have limited liability

• ease in transfer of ownership

• can raise large amounts of money selling stock

cons:

• may be subject to double taxation

unearned revenue

• cash that a copmpany recievedc without performing a service yet

• this is a liability

current ratio

• current assets/current liabilities

• this measures if the company has enough short term resources to pay its short term debt

Accumulated depreciation

• this is a contra-asset account nt

• net book value = PPE - accumulated depreciation

• this shows how much of the assets value has been used up over time

• it has a credit balance even though it is grouped with assets

How is a heading formatted

1. comapny name

2. Type of Statement

3. date (either for the year ended or as of… for the balance sheet)

4. unit of measure

sole proprietorship

an unincorporated business owned by a single individual

current assets

resources the ciompany will use or turn into cash within 1 year (cash, inventory, supplies, account receivable, short term investments, prepaid expenses)

seperate entity assumption

business activities must be accounted for sperately from owners personal activities

going concern assumption

a company is assumed to continue operating into the forseeable future

monetary unit assumption

statements are reported using the national monetary unit

dual effects

every transaction effects at lease two account so that the accounting equation remains in balance

typical income statement format

1. operating revenues

2. less operating expenses

3. income from operations

4. add/less other items (interest revenue/expense, losses/gains on sale of investments)

5. pretax income

6. income tax expense

7. net income

earnings per share

EPS = net income/weighted avg number of outstanding shares of common stock

cash vs. accrual basis accounting

EXAMPLE: did a job in december, got paid in janurary

cash: record revenue in january

accrual: record revenue in december

cash basis accounting

revenues are recorded when you recieve the cash and expenses are recorded when you give the cash away

accrucal basis accounting

• reqired by GAAP

• recognize revenue when goods/services are provided

• recognize expense when incurred

Deferrals

• cash happens FIRST

• unearned revenue - someone pays you $50 for a gift card but you havent given them their service yet, at first unearned revenue is a liability but then it becomes a revenue when they perform the service

• prepaid expenses - you pay $1000 for rent for next month, at first this is an asset but then it becomes an expense once the month goes by

Accruals

• cash hapens later

• accounts receivable - you did the service but havent been paid yet, at first this is an asset, then it is a revenue

• wages payable - your workers worked for you but you havent paid them yet, this is a liability at first and then an expense once you pay them

closing the books

• transfering the balances of all the temporary accounts (INCOME STATEMENT ACCOUNTS ONLY) to retained earnings

• revenues have credit balances so they are debited

• expenses have debit balances so they are credited

who is PRIMARIILY responsible for the info in the financial statements

managers

• the ceo and cfo must certfy that reports filed with the SEC dont contain untrue info

the big 4

• KPMG

• deloitte

• EY

• PWC

FOB shipping point

the title of the goods changes hands at the shipping date

FOB destination

the title of the goods changes hands when delivered to the customer

how do companies motivate sales?

1. allowing customers to use credit cards

2. providing discounts for early payment

3. allowing returns

why are credit cards accepted

1. increase cutomers traffic

2. avoid the cost of priving credit directly to customers

3. lower risks due to bad checks

4. avoid losses due to fraudulent credit card sales (banks absorb losses)

5. to recieve money faster

what is a credit card discount?

the company must pay the credit card company a fee for the service it provides

early payment incentives

2/10, n/30 → the person saves 2% if they paying within 10 days and they pay the full if they pay between 11-30 days

annual report

contains 4 basic financial statments, notes, comments from managers and auditors, summarized financial data for 5 year period

10-K

reported to the SEC, 4 basic statements, notes, summarized 5 year data, description of those responsible for statements, no opinion from managmemnt

10-Q

unaudited, report of quarterly financial statments except for stockholders equity

press release

initial quarterly earnings, hiring of new vide pros of sales

8-K

special news, mergers, change of auditors

quarterly report

brief unaudited report w/ balance sheet and income statement

retained earnings equation

ending RE = beginning RE + net income - dividends

gross profit

gross profit = net sales - COGS

DEALER

dividends - debit

expenses - debit

assets - debit

liabilities - credit

equity - credit

revenues - credit

board of directors

they oversee the CEO and senior management to ensure the best interest of the stockholders, they are elected by the stockholders

audit committee of the board of directors

they hire independent auditors, they meet seperately with the auditors to make sure management is reporting finances correctly

fair disclosure

the SEC requires important company news to be provided to investors, no insider trading

classified balance sheet

• organized by time (current vs. concurrent)

• helps you determine what liabilities must be paid within the current year

adjustewd trial balance

• shows the ending account balances after adjusting entries in a debit credit format

should the customer borrow fro the bank to take advantage of the sales discount?

yes as lng as the interest rate the bank charges is less than the discount interest rate

how to calculate the discount interest rate

example 2/10, n/30:

2/98 × 365/(30-10) =0.372

bank reconciliation general format

company’s books:

ending cash balance

-NSF checks

-bank service charges

± company errors

banks books:

ending cash balance

+deposits in transfer

-outstanding checks

± bank errors

THE ENDING CORRECT CASH BALANCE SHOULD BE THE SAME

ONLY COMPANYS BOOKS SIDE NEEDS JOURNAL ENTRIES

gross to net sales

sales revenue

-credit card discounts

-sales discounts

-returns

=net sales(first line of income statement

these are all contrarevenue accounts

how to update allowance for doubtful accounts

beginning balance (ADA)

+bad debt expense

-write offs

=ending ADA (credit)

costs included in inventory purchases

• stop accumulating costs when the raw materials are ready for use or the merch is ready for shipment

• Total inventory costs = invoice price+freight in+preparation costs-purchase returns-purchase discounts

COGS equation

COGS=BI+purchases-EI

updating accounts receivable

beginning accounts recievable

sales

(collections of sales)

(write offs)

=ending accounts receivable

4 inventory costing methods

1. FIFO - use when prices are going down

2. LIFO - use when prices are rising

3. specific identification - used for big ticket items only

4. average cost me

errors in measuring inventory

• this would effect both balance sheet and income statement

• would effect current year and next year income before taxesx

FIFO

• the oldest inventory (usually cheapest) leaves first

• COGS lower

• net income higher

• ending inventory higher

• higher income taxes

• usually used on financial statements

LIFO

• newest inventory leaves first (usually more expensive)

• COGS higher

• net income lower

• ending inventory lower

• income taxes are lower

• usually used on the tax return

valuation at lower of cost or NRV

NRV = price you would sell inventory at - price it costs to sell inventory

if NRV is lower than the price you bought the inventory for then you need to write it down

• you would debit COGS and credit inventory

• this is becasue of the conservatism constraint (avoidng overstating assets and income)

periodic vs. perpetual inventory

• periodic does not update COGS r inventory throughout the year, sales require 1 entry

• periodic calucates cogs at the end of each period

acquisition costs

• all expenditures in acquiring and preparing an asset for use should be capitalized (included in the cost of the asset)

• prepatation costs

• transportation costs

• sales tax

• legal fees

• installation costs

• NOT interest expenses, mainenence. costs, insurance after purchase

when to capitalize or expense something?

capitalize:

• improvements increase productive life

• occur infrequently

• involve large amounts of money

expense:

• these are ordinary repairs and maintenance

• miantains the productive capacity of the asset

• recurring in nature

• involve small amounts

• dont increase productive life

straight line depreciation

formula:

(cost-residual value) x 1/useful life = depreciation expense

• depreciation expense is a conastant amount each year

• net book value decreases by same amoutn each year until it equals the estimated residual value

units of production method

(cost - residual value) / estimated total production or activity level units = unit rate

unit rate x activity level for the period = depreciation expense

double declining balance method

(cost - accumulated depreciation) x 2/useful life = depreciation expense

• this uses accumulated dep in the formula

• this is used if an asset is more proudctive in its earlier years

amortization

• a cost allocation process similar to depreciation except it is forintangible assets with definitie lives (patents, liscences, etc.)

• straight line method is used

disposal of p,p,e

1. first update book value with depreciaiton

2. then debit the cash you recieve from the sale

3. then credit the asset you are selling by the book value

4. if it is a gain you credit is

5. if it is a loss you debit it

contingent liabilities

• remote - discolsure is not required

• chance of event happening is reasonably probable - disclose in footnotes

• chance of event happening is probable - record as liability if amount can be easily estimated, disclose in footnotes if amount cant be easily estimated

secured vs. unsecured debt

secured debt - when creditors require the borrower to pledge certain assets so that they have secutrity with their liabilites

unsucerued debt - the creditor relies on the borrowers integrity

pros/cons of issuing bonds

pros:

• stockholder maintain control becasue bondholders dont get dividends

• a portion of interest is tax deductible so lowers the cost of borrowing money

• the return of shareholders can be positive if $ is borrowed at a low interest rate and invested in projects w/ a higher interest rate

cons:

• risk of bankrupcy, interest MUST be paid each month regardless of whether income was made

relationship between market rate and bond price

• if market rate increases then bond price decreases because this makes older bonds look less valuable then the new bonds that pay hgiher interest rate

• investors ALWAYS earn the market rate (the price of the bond adjusts so that your return = market rate)

relationship between market rate and coupon rate

1. if market rate = coupon rate then bond is issues at par

2. if market rate > coupon rate then bond is issued at discount

3. if market rate < coupon rate then bond is issued at premium

what is the accrual method for accounting for uncollectible accounts

• the practice of reccording the NRV pf receievables in the financial statements

what do administrative controls do

1. evaluate performance

2. ensure compliance with company policies and public laws

opinions cpas give

1. unqualified - no errors so n qualifications

2. qualified - small issue to correct

3. adverse opinion - when statements are wrong

4. disclaimer - cant form an opinion

goodwill

• a long term operation asset

• when a company buys another company for more than its fair value of their assets (usually because of brand reputation)

updating ADA

beginning ADA

+bad debt expense

-write offs

=ending ADA

authorized, issued, and unissued shares

authorized - max number of shares that can possibly be issued

issued - outstanding shares held by stockholders + treasury stock

unissued - shares that have NEVER been sold

key dividend dates

1. declaration date - when the board of directors approves the dividend. a libaility is created and recorded

2. date of record - when the corporation prepares a list of stockholders who will recieve a dividend payment. no entry made.

3. date of payment - date that cash is disbursed to pay the liability

preferred stock

• get their dividends paid to them before common stock

• typically no voting rights

• typically has a fixed didvden rate

dividends on preferred stock

1. current didivend preference - these shareholders get paid this years dividend first

2. cumulative preferred stock - any unpaid didivends on preferred stock accumulate and are required to be paid first the next year

   1. if preferred stock in noncumulative and not paid then it is lost and never will be paid