Intermediate Accounting 1 Maksy - Midterm 1

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ways in which financial information is used by financial statement users

outside users use financial information for investment and lending decisions. They don’t use financial information to plan and control the company’s operations. Only internal managers of the company use managerial accounting information to plan and control the company’s operation.

the objective of financial reporting

provide accurate, relevant, and useful financial information to businesses and stockholders to support informed decision-making and accountability.

the role of the SEC in setting accounting standards

the sec requires companies to follow GAAP as developed by the FASB

the FASB “due process” in setting accounting standards

to develop well-thought-out new accounting standards, the FASB goes thru due process to discuss the pros and cons of the issue from various interested groups/individuals

the pervasive criterion by which accounting information is judged

• place topic on FASB agenda

• research conducted and Discussion Memorandum issued

• conduct public hearing

• evaluate feedback in Exposure Draft

• Evaluate responses and post a Financial Accounting Standard Update

the two fundamental qualities of accounting information

relevance and faithful representation

the enhancing quality of comparability of accounting information

info is measured and reported in a similar manner for different companies.

the situations in which “materiality in accounting” is used

applied whenever a decision must be made about whether to disclose, adjust, or highlight information in financial statements because it could influence the judgments of users of those statements

the meaning of the enhancing quality of consistency of accounting information

when a company applies the same accounting treatment to similar events, period to period.

Journal entry to record rent received in advance

Cash ............................................... XX

Unearned Rent Revenue ........................ XX

the effects of some transactions on stockholders’ equity

issuance of stock and revenues increase equity; and expenses and dividends decrease equity. Some transactions (e.g., purchase of assets or payment of liabilities) do not have any effect on equity.

Adjusting journal entry to record accrued interest expense on a 3-month note payable if the note was signed on November 1. In this case, the interest accrued is for two months only, not three months.

Interest Expense ............................... XX

Interest Payable .................................. XX

interest = PxRxT, time is 2/12 bc only two months have passed

Adjusting journal entry related to bad debt expense

bad debt expense for the period is the amount of accounts receivable (A/R) estimated to be uncollectible. If the uncollectible amount is estimated based on the “aging of accounts receivable” method, bad debt expense = Estimated amount - the credit balance (or + the debit balance) in the Allowance for Doubtful Accounts.

Bad Debt Expense .................................... XX

Allowance for Doubtful Accounts ..................... XX

Adjusting entry to record salaries and wages expense and salaries and wages payable for the last three days of the year for 10 employees. The salary per employee for a 5-day work week is given in the question.

Salaries and Wages Expense ......................... XX

Salaries and Wages Payable .......................... XX

find salary: (weekly salary / 5) x 3 × 10

Adjusting entry to record depreciation expense for the last three months of the first year of a building.

Depreciation Expense – Building ...................... XX

Accumulated Depreciation – Building ................ XX

find annual depreciation: cost - residual value (estimated value @ end of life) / useful life

take 3 months of that: annual depreciation x 3/12

Adjusting entry for rent received in advance that was incorrectly recorded as a credit to rent revenue not unearned rent revenue.

correcting entry:

Rent Revenue ........................................ XX

Unearned Rent Revenue ............................... XX

adjusting entry @ the end of the year:

Unearned Rent Revenue ............................ XX

Rent Revenue .............................................. XX

in this case, you need to make an adjusting entry to reduce rent revenue (i.e., debit it) and increase unearned rent revenue (i.e. credit it)

compute total revenues in a single-step income statement

all revenue accounts (sales revenue, dividend revenue, rent revenue, etc.) are added together to get total revenues.

compute gross profit in a multi-step income statement

Gross Profit = Net Sales Revenue – Cost of Goods Sold

Net Sales Revenue = Sales Revenue – Sales Returns & Allowances – Sales Discount, if any

COGS = Beginning Inventory + Net Purchases − Ending Inventory

compute operating income in a multi-step income statement

operating income = Gross Profit – Selling & Administrative Expenses.

Any nonoperating revenues, expenses, gains, or losses are not included in operating income

compute Basic Earnings per Share

EPS = Net Income − Preferred Dividends / Weighted Average Common Shares Outstanding

WA CS = shares outstanding x months outstanding / 12

reporting the disposal of a major business component

Income (loss) from operations of discontinued component …… $XX

Gain (loss) on disposal of component …………………………… $XX

Total discontinued operations (net of tax) ………………………… $XX

“Income from discontinued operations” include both income or loss from discontinued operations and gain or loss on disposal of the discontinued operations and reported net of tax on a separate line below income from continuing operations.

compute total shareholders’ equity

Common Stock + Preferred Stock + Additional Paid‑In Capital + Retained Earnings – Treasury Stock

• Common Stock, par

• PIC in Excess of Par – Common

• Preferred Stock, par

• PIC in Excess of Par – Preferred

• Total Paid‑In Capital

• Retained Earnings (ending balance)

• Accumulated Other Comprehensive Income (ending balance)

• Less: Treasury Stock

allocate the transaction price between two performance obligations: the product itself and the installation fee, using the proportional method

Allocated Price= Transaction Price × Stand‑Alone Selling Price / product + installation fee

the accounting treatment of an error that occurred in a prior year

errors occurred in prior years are treated as “A Prior Period Adjustment” of the beginning balance of Retained Earnings for the current year.

compute Ending Balance of the Retained Earnings

EB of RE = BB +– Prior Period adjustments + Net Income – All Dividends declared

usefulness of the Balance Sheet

the B/S is useful for evaluating liquidity, solvency, and financial flexibility. It is not useful for evaluating profitability, but the income statement is

compute total current assets from a list of accounts

Total Current Assets = Cash + Short Term Investments + Accounts Receivable (net) + Inventory + Prepaid Expenses + Other Current Assets

compute total current liabilities from a Trial Balance

Total Current Liabilities = A/P + Accrued Liabilities + Unearned Revenue + Short-Term Notes Payable + Current Portion of LT Debt + Any Other Current Liabilities

compute Net Cash Flows from Operating Activities

NI + expenses that do not require the use of cash (depreciation & amortization expense) + decreases or – increases in current assets other than cash (A/R, Inventory, Prepaid expenses) + increases or – decreases in current liabilities (A/P, Accrued Liabilities, etc.).

where to report non-cash flow transactions

these are not reported in the body of the Statement of Cash Flows. They are reported in Note at the bottom of the SCF or in a separate note to the financial statements

compute Average Assets Turnover

Net Sales / Average Total Assets

Average Total Assets = Beginning Assets + Ending Assets / 2

compute Free Cash Flow

FCF = Cash Flow Provided by Operating Activities – Capital Expenditures – Dividends Paid

operating activities comes from operating section (selling expenses, admin expense)

capital expenditures are PPE

compute Current Ratio

Current Assets / Current liabilities

compute Return on Common Equity

Net Income / Average Common Equity

Average Common Equity = Beginning Common Equity + Ending Common Equity / 2

stuff in equity:

• Common Stock (par)

• PIC in Excess of Par – Common

• Retained Earnings

• Accumulated OCI

• Minus Treasury Stock