ACC 2361 FINAL

A = L + OE

• Assets

• Current vs Long-term Assets

• CURRENT: Cash, A/R, Inventory

• LONG-TERM: Equipment, buildings, machines, land

• Liabilities

• Current vs Long-term Liabilities

• CURRENT: A/P, W/P

• LONG-TERM: long-term bond

• Owner’s Equity: common stock, retained earnings

RETAINED EARNINGS FORMULA:

Re(beg) + Net Income - Dividends paid = Re(end)

• Links the balance sheet to the income statement

Revenue Recognition

• MUST provide the goods/services. If you haven’t left with the goods/services, you do not have revenue.

• Even if you make a deposit, it’s $0.

• You also must provide payment or agree to pay later

• After you left with it, and at least agreed to pay, you can count it as revenue.

Expense Recogntition

• Anytime you get a benefit/revenue, you MUST write down the expenses.

• If you sell something, it had to cost something. Therefore, you must write down the expenses when you get the revenue/benefits (AKA MATCHING PRINCIPLE)

• If you got to use a phone or rented a car for the month, you’ll record expense at the end of the period you used it, not at the beginning.

Revenues - Expenses = Net Income

Adjusting Entries

• Time has passed - have we earned anything

• Received money in advance → Advance from Customer (Liability)

• If you’re paid in October, but won’t do the task until April, you won’t get it until April.

• October: (A) Cash +100, (L) Advance from a customer +100

• April: (A) Rev +100 (L) Advance from a customer - 100

• Time has passed - Have we used up anything?

• Paid ahead (Insurance, rent, subscription) → Prepaid Rent (Asset)

• Ex. paid 2 months rent (A) cash - 1000 (A) prepaid rent +1000

• After the first month: Rent Expense 500 (A) prepaid rent -500

• Depreciation Expense is an adjusting entry!

Inventory

• Perpetual and periodic inventory systems

• Inventory Valuation Methods - LIFO, FIFO, WAVE

• KEY CONCEPT: LOCM (Lower of cost or market)

• Inventory = Asset on the B/S → This CANNOT be inflated (SEC Fraud!!)

• Inventory must be on your books by either what you spent to get it or what it’s worth (pick the lower one).

Accounts Receivable (A/R)

• Allowance Method

• Percentage of Sales Method (calculates BDX)

• Aging Accounts Method (calculates AllowanceEnd)

• KEY CONCEPT: Write-offs do NOT affect Net Income

• Sales on Account → most you count now (revenue), some you don’t count and put it in allowance bucket

• ex. $1000 sales, revenue $950, allowance $50

Depreciation

• Straight Line

• SL - Units of production

• Book Value - Gains and losses when sold

• KEY CONCEPT: Capitalization of Cost on Long-term Assets

• Capitalization → keep track of all costs, and once its done, you call it the asset and start depreciating it.

Invbeg + purchases of inventory - COGS = Invend

(Invbeg + purchases of inventory) → goods available for sale. Companies always has these!

• perpetual (barcodes) tells you COGS

• periodic tells you Invend

• To calculate for shrinkage, use perpetual method

% OF SALES METHOD:

Allowbeg + BDX - Write-off = Allowend

• Solves for BDX

AGING ACCOUNTS METHIOD:

Allowbeg + BDX - Write-off = Allowend

• Solves for Allowend

Straight line depreciation:

Depreciation = (Cost - Residual) / Useful Life

units of production formula:

(cost - residual) / usage

Liquidity

more liquid = More current assets than current liabilities

EPS = (NI - Preferred dividends) / common shares outstanding

INDIRECT FORMULA:

NI + DPX +/- change in assets +/- change in liabilities +/- Inventory

• CFO → NEED THIS TO WORK

• CFI → MOST LIKELY TO BE NEGATIVE