3.2. Measuring and Reporting Financial Position Continued

General Journal and Ledger (T-Accounts)

General Journal

• chronological list of each transactions effects

General Ledger or T-accounts

• a record of effects to and balances of each account

Journal Entry

• an accounting method for expressing the effects of a transaction on accounts in a debits-equal-credits formats

• Transactions are recorded in chronological order

General Ledger/T-accounts

Debit: simply the left side of an account

• Increase in the asset account are on the left (debit) because assets are on the left side of the accounting equation

Credit: simply on the right side of an account

• Increase in the liability and equity account are on the right (credit) because they are on the right side of the accounting equation

Trial Balance

• list the names of the T-accounts in financial statement order (assets, liabilities, stockholder’s equity, revenues and expenses)

• The purpose of the trial balance is to check the equality of the debits and credits

• Errors may still exist if the wrong accounts or amounts were used in the journal entries

How to Prepare the Financial Statement Summary

1. Analyze transactions

   1. Journal entry for each transaction

   2. Post to T-account

2. Trial balance

3. Classified financial statement

US GAAP & IFRS Reporting Transactions

• Both US GAAP & IFRS require firms to separately report their current and non-current assets, and their current and non-current liabilities

• US GAAP & IFRS have different formatting of financial statements

US GAAP Balance Sheet Format

Assets

• Current

• Noncurrent

Liabilities

• Current

• Noncurrent

Shareholders’ Equity

IFRS Balance Sheet Format

Assets

• Current

• Noncurrent

Liabilities & Shareholders’ Equity

• Current

• Noncurrent

Common-Size Analysis

• state each balance sheet item as a percentage of total assets

• useful in comparing a company’s financial position over time & compare across companies in the same industry

• analysis of a company’s balance sheet can provide insight into the company’s liquidity and solvency, as well as the economic resources the company controls

Liquidity

a company’s ability to meet short-term financial obligations

Solvency

a company’s ability to meet long-term financial obligations by assessing the company’s financial structure

Valuing Assets

• assets should be recorded at historic cost. However some assets may be measured differently (some use fair value and some are adjusted for inflation/deflation)

  • Value inventories

  • Value trade receivables

  • Valuing PPE

Valuing PPE as an Asset

• PPE will be used over time as a result of wear and tear and so on, so should allocate its cost over time in the form of depreciation

• the amount of depreciation will not only appear as depreciation expense on the I/S, but will also affect the carrying value (net book value) of asset on the B/S

• Record accumulated depreciation on B/S as a net against PPE’s historical cost

• Accumulated depreciation: the sum of depreciation which has already been taken since the purchase of the asset

Inventory

tangible assets that is (1) held for sale, or (2) used to produce goods or service for sale. It is report on B/S as a current asset. The types of inventory will depend on the nature of the business

Type of Business Inventories

Wholesale/Retail Business

• Merchandise inventory: goods held for resale in the ordinary course of business

Manufacturing Business

• Raw Materials Inventory: items acquired for processing into finished goods

• Work in Progress Inventory: goods in the process of being manufactured

• Finished Goods Inventory: manufactured goods that are complete and ready for sale

Relationship Between Inventories and COGS

1. Company starts each accounting period with a stock inventory, beginning inventory (BI)

2. During the accounting period, new purchases (P) are added to the inventory

3. The sum of two becomes goods available for sale during that period

4. The portion that are sold becomes cost of goods sold (COGS)

5. What remains unsold at the end of a period becomes ending inventory (EI)

This process and relationship can be explained by the cost of goods sold equation

Reporting Accounts Receivable

• allowance for doubtful debt is recorded as an estimate of uncollectible accounts receivables (bad debt). It is recorded on B/S to net against the gross accounts receivables amount (prudence purpose)

• It is a contra-asset account of account receivable.

Cost of Goods Sold Equation

COGS = BI + P - EI

Beginning inventory (BI) + Purchased (P) - Cost of Goods Sold (COGS) = ending inventory (EI)