ACCT 2301 FINAL

Corporation

•Ownership represented by shares of stock

•Separate legal entity (from stockholders)

•Limited liability

•Transferability of ownership (investors can sell shares)

The Accounting System

A system that collects and processes (analyzes/records) financial information for decision-makers

Internal users (managers)

need continuous + detailed info on business activities to manage operations, investments, and finances

Managerial/Management Account

make accounting info for the Internal decision Makers

External users (stockholders / creditors)

need info on business activities to ensure their debts will be paid back with interest and dividends

Financial accounting

make periodic accounting info for external decision makers (included 4 basic accounting statements)

Accounting Entity

An organization whose financial data is being measured.

Ponzi Scheme

Borrowing more money to pay off more creditors

Financing Activities

borrowing or paying money to lenders, and receiving funds from stockholders and paying them dividends

Investing Activities

Purchasing or selling materials used to create the product or service

Operating Activities

day-to-day processes of purchasing materials from suppliers, manufacturing, delivering to customers, collecting payments, and paying suppliers

Accountign Equation

Assets = Liabilities + Stockholders’ Equity

Assets and why important for investors

The total amount of company resources is fully controlled by them. Imp for creditors so they can assess if they have enough financial resources to operate. “Receivable & Prepaid Expenses”

Account receivable

(ASSET) Amounts OWED by customers for prior sales

Inventories

(ASSET) Products ready for sale

Property,plant,equipment

(ASSET) Production equipment, land, and factories

Liabilities and why important for investors

Borrowed money supplied by creditors. Imp to know if they have enough assets to pay it off, if not will push asset sales. “Payable & Unearned”

Accounts Payable

(LIABILITY) Amounts owed to suppliers for prior purchases

Notes to Bank

(LIABILITY) Money owed to banks on written debt contracts

Stockholders’ Equity

All owner investments or earnings retained from the company.

Common Stock

(SE) All the stock bought (amount invested) in business (financed from stockholders so its not asset)

Retained earnings

(SE) Past earnings not distributed to stockholders

Balance Sheet

Summarizes the financial position at a point in time with the accounting equation

Balance Sheet heading

Name of Entity, Type of Statement, Date Sheet FORMED, Units of measurement (million/thousands)

Income Statement

Summarizes the revenues earned and expenses incurred for a period of time

Income Statement Heading Structure

Name of Entity, Type of Statement, Accounting Period “for the year ended”, Units of measurement (million/thousands)

Income Statement Equation

NET INCOME = REVENUES - EXPENSES

Sales revenue

(R) Amount made from selling products or amount promised will be paid by customers

Cost of goods sold

(E) costs to produce products, only the products delivered the cost to produce those

Operating expenses

(E) administrative expenses, selling/delivery, utilities

Interest expense

(E) cost of using borrowed funds the interest

Statement of Stockholder’s Equity:

Showcases Common Stock And Retail, changes in all the company’s stockholder’s equity, showcases their interest in company

Stockholders equity heading

Entity name, Title, Account Period for Equity, Unit of measure

Common Stock

(SE) Money owners invested by buying shares and to contribute to growth of business

Retained Earnings and Equation

(SE) (reinvestments of earnings) all the earnings kept by the business after paying dividends, - beginning retained earnings (end of last year) + Net Income - dividends

Dividends

NOT an expense rather sharing of income

Connection between SE, Balance Sheet, & Income Statement

Net Income (Interest Sheet) as Retained Earnings (Stockholders’ equity) as end Retained Earnings is Total Retained Earnings on SE (Balance Sheet), and Cash on BS (+/-) to Net Cash (Statement of cash flows)

Statement of Cash Flows and Format

Summarizes the cash inflows and outflows for a period of time

(+/-)Cash from operating, investing, and financing

= Net Increase/decrease in cash

(+/-)Last year's cash balance (Balance sheet)

= Cash Balance for new year

Statement of Cash Flows Heading

name of entity, Title of report, Account PERIOD, Units of Measure

Cash Flow of operating

cash flows directly related to earnings income, most imp to investors to see if they generate more cash from operations than it use

Cash Flow of investing

cash flows from purchase/sale of plants, equipment, and investments

Cash Flow of financing

Cash flows from investors and creditors

GAAP

Generally Accepted Accounting Principles - The measurement and disclosure rules used to develop information presented in the financial statements

Primary Objective of financial reporting is to provide _______________ information

useful

How GAAP Is Determined:

SEC (Securities Exchange Commission)

FASB (Financial Accounting Standards Board)

Why is US GAAP important to users?

Companies incur the cost of preparing financial statements and bear the consequences from their publication

Relevance

A Basis of GAAP, Information shows the past and help predict future

Faithful Representation

A Basis of GAAP, An agreement between a measure and the real-world phenomenon it is supposed to represent

a. Complete: includes all info

b. Neutral: Free from bias

c. Free from error: accurate

Predictive Value

Past info used as input to predict future cash flow/earnings

Confirmatory Value

Information that can confirm or change(correct) previous evaluations

Materiality

Size of amount and impact it makes on statement

Conservitism

Under GAAP Is good news/reporting you need to have higher verification of it

Comparability (Consistency)

Items treated similarly across companies and overtime (using same accounting period)

Verifiability

Its verifiable, Any Independent person could reach the same conclusion on that information

Timeliness

For info to be useful it need to be available for decisions

Understandability

users should be able to comprehend info

Enhancing Qualitative Characteristics

4 characteristics that improve the usefulness of financial information after the two fundamental characteristics (relevance and faithful representation) are already met

Comparability (Consistency), Verifiability, Timeliness, Understandability

To Ensure Accuracy Of Records:

Have system of internal controls (company provided), External Auditors for credibiliy, and Board of directors to oversee the integrity of records

Elements of an Annual Report

1) Letter from the President, Chairperson of the Board of Directors

2) Description of Products and Markets

3) Financial Section: Management’s Discussion and Analysis (MD&A), Financial Statements & Notes, Independent Auditor’s Report

SEC

(Securities Exchange Commission) determines measures for financial statements for companies that issue stocks

FASB

(Financial Accounting Standards Board): Was assigned by SEC to handle specific responsibilities and make detailed rules

Objective of financial reporting

Provide useful information for decision-making (investors, creditors, suppliers)

Cost benefit Analysis

Accounts ask if benefit < cost, then the company should NOT provide the financial reporting (Tracking electricity cost is to expense so not added)

Income Statement Format

Revenues

(-) Expenses

= Income before income Taxes

(-) Income Tax Expense

= Net Income

Monetary Unit Assumption

financial statements & elements measured in US dollars

Economic Entity Assumption

Business Events are identified with particular business entity, keep business strictly in business not mix to personal

Periodicity Assumption

the life of a company reported in shorter time periods

Going Concern/Continuity Assumption:

Assumed the business is going to continue to operate till all operationa/plans complete

Recognition Principals - Mixed Attribute

Picking the best measurement method that maximizes relevance and best representation

Historical Cost:

Amount given/received in original transaction (ex: investing in larger machinery use its historical cost)

Net realizable value:

“realistic cash value” Net Amount, which asset will be converted (Inventory XX but packaging to sell it is XX so you realistically make Inventory -packaging )

Present Value

Value today of a future cash flow, after discounting it for the time value of money

Fair Value

Price that would be received to sell assets or transfer liabilities in a market today

Full Disclosure

Any information useful to decision makers must be provided in the financial statements

CONSOLIDATED CLASSIFIED Balance Sheet

Balance Sheet with all subsidiaries combined (Business + all franchised financial data)

Consolidated Assets

They are commonly listed on their liquidity (how soon it can be turned to cash)

Current Assets:

Can turn into cash within one year or be used quickly

a. Cash

b. Short-term Investments (marketable securities)

c. Accounts Receivable (A/R)

d. Inventory/Supplies - ALWAYS CURRENT ASSEt

e. Supplies

f. Prepaid Expenses: pay and can receive a benefit from later

Non-Current Assets

To be used or turned to cash after a year time

a. Long-term Investments

b. Plant, Property and Equipment (PP&E): Furniture, buildings owned, land, equipment (Initially recorded at historical cost)

c. (-) Accumulated Depreciation (All PPE except land will be depreciated)

d. = Net Property & Equipment

e. Right of Use Assets (lease arrangements)

f. Intangible Assets – Trademarks, copyrights, franchise rights, patents, goodwill (Recorded at purchase price)

g. Long-term Investments

Current Liabilities

Need to be paid within the current year. All Liabilites ordered in Maturity (how fast something needs to be paid off)

a. Accounts Payable (A/P)

Accrued Expenses Payable:

b. Wages/Salaries Payable

c. Utilities/Operating Leases Payable: rent to pay within next yea

c. Interest Payable

d. Taxes Payable: based on govt.

e. Short-Term Notes Payable

f. Unearned Revenue: Unredeemed gift cards purchased by customers

Non-Current Liabilities

a. Notes Payable: long-term

b. Bonds Payable

c. LONG-TERM Lease Liabilities: due more than a year away

Stockholders Equity Consolidated Balance Sheet

1. Common Stock/Paid-in Capital (Everything Issued about Par)

2. (-) Treasury Stock: Paid to repurchase stocks from investors

3. Retained Earnings:

Balance Sheet Current Ratio

To measure Liquidity, can a company pay off short-term obligations with short-term assets? A higher ratio means yes.

Current Ratio: (Current Assets/ Current Liabilities)

Consolidated Balance Sheet FORMAT

Company Name

“Consolidated Balance Sheet”

Date Made

Measurement

ASSETS:

Current Assets & Total Current Assets

Property and Equipment & Total costs (-) Accumulated Depreciation from total costs = net property and equipment

(+) Operating lease right-of-use assets & Intangible assets = Total Assets (make sure to add total current assets)

LIABILITIES & STOCKHOLDER EQUITY

Current liabilities (includes accrued expenses PAYABLE section) = Total Current Liabilities

(+) Non-current Liabilities - dont need to add title “non current” just list them

= Total liabilities

(+) Total Stockholders equity fromt he section

How liquidity can be found

Current Ratio

how fast assets turn into cash

how soon liabilities must be paid

how strong operating cash flow is

Business Transaction

An event that has economic impact on the entity

External events

Involves outside people. Exchange of Assets/Service from business for assets/services/liabilities from another party(s) (ex: cloths resale in turn for store credit) - dont include future economic impact activites

Internal events

No outside involvement. Direct and measurable effect of the entity (using equipment) - dont include future economic impact activites

Accounts

Standard format to accumulate the dollar effect of transactions

Chart of Accounts

List of all account titles and unique numbers (Table of contents for acct system)

Transactional Analysis

How companies determine how transactions impact the financial statement, every transaction effects 2 accounts and the Accounting equation must stay balanced after

7 Steps of accounting cycle

During the new period, 1) Analyze transactions, 2) Record all journal entries to the general journal (affect t-accounts after), 3) Post amounts to the general ledger (individual accounts)

At the end of the period - 4) Prepare trial balance, 5) Adjust revenues and expenses, 6) Prepare and disseminate (spread) complete set of financial statements, 7) Close Income statement accounts (rev,exp,gains, losses) to retained earnings, record and post to ledger

STEP 1 Accountign Cycle

Analyze Transactions - ICDV

IDENTIFY: Identify Transaction

CLASSIFY: Classify affected accounts of the main 5 (A, L, SE, R, E)

DETERMINE: Determine the direction (+increase/-decrease)

VERIFY: Verify if the equation still balances

Step 2 acounting Cycle

Record Entires in the General Journal, then change the respective T-Accounts

Beginning balance

FIRST (+) the + side of account

(-) the - side of account

= Ending balance of account

Compound Entry:

Journal effecting more than 2 accounts

Step 3 of accounting cycle

Post the accounts to the general ledger from the T-Accounts. The general ledger is the formal version of T‑accounts.

STEP 4 Accounting Cycle

Trail balance. List of all accounts with final balances to check the equality of debits and credits. Usually, in order of financial statements (assets, liabilties, SE, revenes, & expenses)

When you lend money its a

Asset since youll be recivng it later

Operating Cycle

Time it takes for companies to pay back suppliers, sell goods and services, and receive profit

Time Period Assumption:

Dividing the indefinite life of a company into shorter time periods, but when should they be recorded and by what amounts?

Operating Expenses

costs of goods sold