Accounting Final

Unqualified audit opinion

As far as the auditor can tell, the financial statements were prepared in accordance with GAAP.

Qualified audit opinion

For the most part, the financial statements were prepared in accordance with GAAP.

But there are some minor deviations from GAAP that are described by the auditor.

Adverse audit opinion

The financial statements are “materially misstated,” meaning that they do not comply with GAAP and are seriously screwed up.

Disclaimer

The auditor could not form an opinion on the financial statements.

• Cash Flows from Investing Activities

• inflows (Receipts)

  • Selling property, plant, and equipment

  • Selling investment securities

  • Collecting loans

• Outflows (Payments)

  • Purchasing property, plant, and equipment

  • Purchasing investment securities

  • Lending to others

• Cash Flows from Financing Activities

• Inflows (Receipts)

  • Borrowing

  • Issuing stock

• Outflows (Payments)

  • Repaying debt (excluding interest)

  • Purchasing treasury stock

  • Paying dividends

three steps to get indirect CFO

• Step 1: Start with Net Income

• Step 2: Reverse the impact of receivables

• Step 3: Reverse the impact of taxes payable

two methods for estimating bad debt expense.

• Percentage of sales: income statement approach

• Percentage of A/R: balance sheet approach

Percentage of sales:

• Step 1: Bad debt expense = ___% * sales 

• Step 2: Allowance = old allowance + bad debt expense

• Percentage of A/R: balance sheet approach

• Step 1: New allowance for doubtful accounts = ___% of A/R

• Step2: Bad debt expense = New allowance – old allowance from

Capitalize:

to record an expenditure as an asset on the balance sheet, only recognizing the expense over time as the asset is used.

Expense:

to record an expenditure as an expense immediately, never listing it as an asset on the balance sheet.

Acquisition cost

all of the costs incurred to get the thing in place and ready to use.

Depreciation expense

the cost recognized in a given period for the use of the asset

3 types of depreciation

• Straight-line: depreciation even over time.

• Units: depreciation based on use.

• Declining-balance: accelerated over time.

Depreciation Based on Units formula

D = DV * (UTP / TU)

D = depreciation expense

DV = depreciable value

TU = total units expected from the machine over its life

UTP = units produced by the machine this period

Double Declining-Balance Example

• Step 1: straight-line percentage = 1 year / 10 years life = 0.1

• Step 2: multiply the percentage = 0.1 * 2 = 0.2

• Step 3: depreciation expense = book value * 0.2

goodwill formula

Goodwill = PP – (FVAA – FVLA)

PP = purchase price

FVAA = fair value of the assets of the acquired firm

FVLA = fair value of the liabilities of the acquired firm

Note: (FVAA – FVLA) = “fair value of net assets”

PV =

FV / (1+i)^n

2 types of pension plans

Defined contribution plans

Defined benefit plans

Defined contribution plans

Employer pays money into a retirement fund that is owned by the employee

Defined benefit plans

Employer guarantees the employee some amount of pay when they retire

deferred tax liability

taxes that we will have to pay in the future, but haven’t paid yet.

Steps to value a magic box (and a bond)

• List the future cash flows

• Discount the future cash flows to their present values

• Add up the present values of the future cash flows

• The sum of the PVs of the future cash flows is the bond’s valu