ACC 7800 Prep Deck

Balance sheet equation

Assets equals Liabilities plus Equity; must stay balanced after every transaction.

Uses of funds

Assets represent what the company turned its money into.

Sources of funds

Liabilities and Equity represent where the money came from.

Assets

Money and other items the company owns.

Liabilities

Borrowing from non-owners, such as banks and suppliers.

Equity

Funding from owners: Paid-In Capital plus Retained Earnings.

Solve for Equity

Calculated as Assets minus Liabilities.

Solve for Liabilities

Calculated as Assets minus Equity.

Double-entry requirement

Every transaction changes at least two accounts so the equation stays balanced.

Borrow from a bank (effect)

Cash up, Debt up; both sides of the equation rise.

Issue stock (effect)

Cash up, Paid-In Capital up.

Buy supplies on credit (effect)

Inventory up, Accounts Payable up.

Buy supplies for cash (effect)

Inventory up, Cash down; nets to zero within assets.

Buy equipment for cash (effect)

PP&E up, Cash down; nets to zero within assets.

Pay money owed to a supplier (effect)

Cash down, Accounts Payable down; this is NOT an asset swap.

Receive payment from a customer (effect)

Cash up, Accounts Receivable down; an asset swap, no profit recorded.

Sell product (effect)

Cash up by sale price, Inventory down by historical cost, Retained Earnings up by the difference.

Asset swap entry format

Positive amount in the top asset row, negative in the bottom asset row, netting to zero.

Units conversion trap

Changes quoted in dollars while the statement is in thousands; e.g., $500,000 becomes 500.

Standard asset order

Cash, Accounts Receivable, Inventory, PP&E, Other Assets, ordered by liquidity.

Standard liability order

Accounts Payable, Debt, Other Liabilities.

Standard equity order

Paid-In Capital, then Retained Earnings.

Accounts Receivable

Amount that customers owe the company.

Accounts Payable

Amount the company owes for goods and services.

Inventory

Completed products, partially-completed products, and product supplies.

Debt

Amount the company has borrowed, primarily from banks.

Paid-In Capital

Money received in exchange for ownership shares in the company.

Retained Earnings

Company earnings kept in the company rather than returned as dividends.

Historical cost principle

The balance sheet records original purchase price, not current market value.

Accounts Payable versus Debt

Supplies bought on credit go to Accounts Payable; bank borrowing goes to Debt.

Other Assets placement

Listed last, after PP&E; not grouped with current assets.

Gross Income

Revenue minus Cost of Goods Sold; gross profit and gross margin are synonyms.

EBIT

Earnings Before Interest and Taxes; Gross Income minus SG&A, depreciation, and other expenses.

Pre-Tax Income

EBIT minus interest.

Net Income

Pre-Tax Income minus income taxes; profit and net earnings are synonyms.

Cost of Goods Sold (COGS)

Direct material and labor costs of producing products, plus indirect manufacturing costs.

SG&A

Overhead non-manufacturing costs: sales, marketing, finance, accounting, human resources.

Depreciation Expense

Portion of an asset's original cost consumed during the period.

Revenue

Value of goods and services delivered.

Income statement line order

Revenue, COGS, Gross Income, SG&A, Depreciation, Other Expenses, EBIT, Interest, Pre-Tax Income, Income Taxes, Net Income.

Income taxes calculation

Pre-Tax Income times the tax rate, rounded to the nearest integer.

Net income versus cash flow

Not the same; depreciation reduces profit without moving any cash.

Three sections of the cash flow statement

Operating, Investing, Financing.

Net Cash Flow

Operating plus Investing plus Financing.

Depreciation on the cash flow statement

Always added back as a positive; it is a non-cash expense.

Accounts Receivable increases (cash effect)

Negative; cash is tied up in unpaid invoices.

Accounts Receivable decreases (cash effect)

Positive; customers paid you.

Inventory increases (cash effect)

Negative; cash was spent on stock.

Inventory decreases (cash effect)

Positive; stock was sold without being replaced.

Accounts Payable increases (cash effect)

Positive; you delayed paying suppliers and kept the cash.

Accounts Payable decreases (cash effect)

Negative; you spent cash paying suppliers down.

Purchase of PP&E (cash effect)

Negative, in Investing activities.

Sale of equipment (cash effect)

Positive, in Investing activities.

Borrowing new debt (cash effect)

Positive, in Financing activities.

Repaying debt principal (cash effect)

Negative, in Financing activities.

Dividends paid (cash effect)

Always negative, in Financing activities.

Straight-line depreciation (MBA Math form)

Investment divided by useful life in years.

Year 2 and later depreciation trap

Depreciation continues even with no new purchases; only the investing outflow goes to zero.

Other Adjustments lines

Given with their sign already attached; enter them exactly as stated.

Equity bridge

Ending Equity equals Beginning Equity plus Net Income minus Dividends.

Retained Earnings bridge

Ending RE equals Beginning RE plus Net Income minus Dividends.

Cash bridge

Ending Cash equals Beginning Cash plus Net Cash Flow.

PP&E bridge

Ending Net PP&E equals Beginning Net PP&E plus CapEx minus Depreciation Expense.

Net PP&E

Gross PP&E minus Accumulated Depreciation.

Hidden depreciation formula

Ending Accumulated Depreciation minus Beginning Accumulated Depreciation.

Reverse-sign trap: parentheses

An asset shown in parentheses on the cash flow statement increased; ADD it to the balance sheet.

Reverse-sign trap: positive number

An asset shown as a positive on the cash flow statement decreased; SUBTRACT it from the balance sheet.

Liabilities from cash flow statement to balance sheet

Move in the same direction as the cash flow number; no sign flip.

Parentheses = Planted it, Positive = Pulled it

Memory trick for translating cash flow statement asset lines back onto a balance sheet.

Reverse-solve Net Income

Ending Equity minus Beginning Equity plus Dividends.

Reverse-solve Net Cash Flow

Ending Cash minus Beginning Cash.

Solve for a missing asset

Total Liabilities and Equity minus all known assets.

Net income cross-check

Compare Net Income to the change in Retained Earnings; the gap should equal dividends paid.

The Golden Link

Net Income pushes Equity up, Dividends push it down; CapEx pushes Net PP&E up, Depreciation pushes it down.

DEAD

Dividends, Expenses, Assets; accounts that increase with a Debit.

CLIC

Capital/Equity, Liabilities, Income/Revenue; accounts that increase with a Credit.

Debit

The left side of an account.

Credit

The right side of an account.

Normal balance of assets and expenses

Debit.

Normal balance of liabilities, equity, and revenue

Credit.

Demand for financial statements

Comes from outsiders without access to internal records: investors, creditors, customers, suppliers, community, regulators.

Tax authorities and GAAP

Tax authorities do not rely on GAAP or IFRS statements; they require a separate return under each country's tax code.

SEC

Securities and Exchange Commission; US capital markets regulator that delegates rule-making to FASB.

FASB

Financial Accounting Standards Board; issues US GAAP.

GAAP

Generally Accepted Accounting Principles; the US accounting rulebook.

IASB

International Accounting Standards Board; issues IFRS.

IFRS

International Financial Reporting Standards; the international accounting rulebook.

The two audit opinions

That statements present fairly in conformity with GAAP or IFRS, and that internal controls over financial reporting are effective.

Who prepares versus who opines

Management prepares the statements and controls; auditors give only their opinion on them.

Balance sheet (ACC7800 framing)

A snapshot at a point in time; the master statement; the others are sub-schedules of it.

Income statement (ACC7800 framing)

Covers a period of time and feeds Retained Earnings inside stockholders' equity.

Statement of cash flows (ACC7800 framing)

Covers a period and explains the change in the Cash account on the balance sheet.

US GAAP versus IFRS ordering

GAAP lists the most liquid item first; IFRS lists the least liquid item first.

Treasury Stock

Cost of shares the company bought back; shown as a negative contra amount within equity.

AOCI

Accumulated Other Comprehensive Income; unrealized paper gains and losses not yet run through net income.

Comprehensive Income

Net Income plus Other Comprehensive Income.

Reclassification adjustment

Moves a gain from OCI into net income when the item is sold, so it is not double-counted.

Executory contract

A signed agreement with no journal entry until cash or performance occurs. Leases, hiring, credit lines.

Capitalization rule

All costs to get an asset delivered, installed, and ready for use are added to its cost rather than expensed.

Prepaid expense

Cash paid today for a future benefit, creating a prepaid asset that becomes an expense as the period elapses.