BYU ACC 200 Exam1

FASB

Financial Accounting Standards Board. Provide information to investors and lenders

private company

A company that is owned privately.

Public Company

a company whose shares are traded freely on a stock exchange. Publicly owned

GAAP

Generally Accepted Accounting Principles. The standards and rules that accountants follow while recording and reporting financial activities.

IASB

International Accounting Standards Board --- sets accounting standards in the rest of the world.

Accounting Equation

Assets = Liabilities + Owner's Equity

Assets

Economic resources (things of value) owned by a firm.

Liabilities

what a company owes

Equity

Remaining claim against assets of a business, after liability has been satisfied. Net assets

How to calculate total assets

Current assets+Non Current assets

How to calculate liabilities

Non current liabilities+current liabilities

How to calculate equity

Contributed capital+earned capital

Cash

Current Asset, Balance Sheet

investments

current asset measured at fair value on balance sheet

Accounts Receivable (AR)

A current asset resulting from selling goods or services on credit (on account). On balance sheet

Allowance for Doubtful Accounts

contra-asset account containing the estimated uncollectible accounts receivable. Balance sheet

How to find AR net

AR Gross-allowance for doubtful accounts=AR Net

Inventory

Current Asset, Balance Sheet. Measured by cost to purchase inventory on shelf

prepaid expenses/insurance

Current Asset, Balance Sheet

PPE

Non current asset on balance sheet. Tangible

How to calculate PPE

PPE Gross-accumulated depreciation

Depreciation

A decrease or loss in value. Reported on income statement. Contra asset account

operating lease

Non current asset on balance sheet

intangible assets

long-term assets (e.g., patents, trademarks, copyrights) that have no real physical form but do have value. Net is on balance sheet

How to calculate intangible assets

Total cost to purchase asset-accumulated amortization

Historical Cost

Reliable valuation model on balance sheet. Measures land, inventory, and intangible assets. Amount paid for the asset

amortized cost

Reliable valuation model on balance sheet. Applies to prepaid expenses, PPE, Intangible assets. Historical cost adjusted for cost allocations

net realizable value

Relevance valuation model on balance sheet. Amount of cash expected to be converted for the asset in normal course of business. AR net

benefits of debt financing

-interest rate on debt is usually lower than the expected return on equity

-the interest expense on debt is tax deductible

-debt places constraints on management that help minimize wasting of cash flow on non-value-adding projects

Cost of Debt Financing

-borrowed fund must be repaid

-payment on inflexible schedule

-debt covenants can be restrictive

-lose collateral or go into bankruptcy

debt financing

funds raised through various forms of borrowing that must be repaid

equity financing

money raised from within the firm, from operations or through the sale of ownership in the firm (stock or venture capital)

Equity financing benefits

-no repayment to contributed funds

-dividend payments are optional

-no collateral is pledged

-no debt covenants

-no risk of bankruptcy

Coat of equity financing

-The process of raising equity capital takes time and resources

-A portion of ownership in the business is given up

-Dividends are not tax deductible

Accounts Payable

Amounts to be paid in the future for goods or services already acquired. Current liability on balance sheet

Accrued Liabilities/expenses

The amount owed for purchases you have received, but not yet paid for at the end of the month. Current liability on balance sheet

short-term debt

Any debt that must be paid in less than one year. Current liability on balance sheet

current portion of long-term debt

Portion of long-term debt that will be paid within one year or the operating cycle. Current liability on balance sheet

Current portion of operating lease liability

Lease payments expected to be made within one year. Current liability on balance sheet

long-term debt

any loan or debt obligation with a maturity of more than a year. Non current liability

Differed Revenue

When a service is needed in the future for exchange of cash ex. Plane flights. Non current liability on balance sheet

Contributed Capital

The resources that investors contribute to a business in exchange for ownership interest. Equity account on balance sheet

retained earnings

the amount of net income retained in the corporation

Net Income

Revenues - Expenses

Dividends

earnings distributed to stockholders. NOT AN EXPENSE

retained earnings

An amount earned by a corporation in its lifetime and has not paid out dividends but instead put back into the company. Equity account on balance sheet

How to calculate retained earnings

Beginning Balance + Net Income - Dividends = Ending Retained Earnings

Income Statement

A financial statement that reports a company's revenues and expenses and resulting net income or net loss for a specific period of time.

Income Statement format

Sales revenue-(cost of goods sold), gross profit-(operating expenses), operating income-(non operating income and expenses), pre tax income-(Income tax expense), net income

revenue

the amount of resources a business earns from the sale of its products. First in income statement. On income statement

Cost of Goods Sold (COGS)

the cost of the merchandise inventory that the business has sold to customers. On income statement

Gross Profit

Revenues - cost of goods sold. On income statement

selling, general and administrative expenses (SG&A)

Catch all account. Cost that cannot be directly tied to a specific product. Salaries, wages, marketing, distribution, facilities, utilities, management, depreciation, and amortization. On income statement

Operating Income

Total Revenue - cogs and sga. Tells whether revenue can cover cost of operating expense. Income statement

interest income

Income earned through interest in savings accounts, bonds, CDs, etc. Non operating item on income statement

pre-tax income

operating income +- nom operating income/expenses. Is revenue sufficient to come all operating and non operating expenses. Income statement

Income Tax Expense

Cost of taxes imposed by governments on profits earned during the period. Effective tax rate=tax expense/pretax income

Interest Expense

The cost of borrowing money. Multiply amount of money earned by the interest rate. Non operating item on Income statement

Net Income

Tells if a company can cover all expenses. (Revenue+interest income+other income)-(cogs+sga+other operating expenses+interest expense+income taxes+other net accounts)= net income

Steps in Transaction Analysis

1. Identify the accounts affected

2. Determine the effect on the account

3. Determine that the accounting equation remains in balance