BA 211 CH1

FRAUD TRIANGLE

opportunity

• able to commit fraud w low risk of getting caught

pressure/ incentive

rationalize

• justifies fraud

Generally Accepted Acctg Principles (GAAP)

relevant and faithful information

FASB is given the task of setting GAAP from the SEC

SEC oversees GAAP

revenue recognition principle

revenue is recognized when:

• good/ services are provided to customers

• and at the amount expected to be received from customer

expense recognition principle (matching principle)

company records expenses it incurred to generate the revenue

ex. office space

EQUITY

shareholder claim on assets it consists of:

• (+) COMMON STOCK

• (-) DIVIDENDS

• (+) REVENUES

• (-) EXPENSES

(+) COMMON STOCK

reflects inflows of cash and other net assets from shareholders in exchanges for stock

EQUITY INCREASES DUE TO OWNER INVESTMENT

(-) DIVIDENDS

outflows of cash and other assets to shareholders that REDUCE equity

(+) REVENUES

INCREASE equity from sales of product and commissions from services

(-) EXPENSES

DECREASE equity from costs providing products and services to customers

ex. insurances

income statement

revenues - expenses = net income (loss)

companys revenues and expenses and computes net income/loss over a period of time

Statement of Retained Earnings

Beginning retained earnings + net income/loss - dividends = Retained Earnings

explains changes in retained earnings from net income/ loss and any dividends over a period of time

prepare after income statement

Balance Sheet

ASSETS = LIABILITIES + EQUITY

total assets & total liabilities & equity

company financial conditon ( types and amounts of assets, liabilities, and equity at a point in time

date is the LAST in the period of income statement and balance sheet

POINT IN TIME

the four financial statements

• income statement

• statement of retained earnings

• balance sheet

• statement of cashflows

statement of cash flows

I. first section reports cash flows from operating activites

• resources, purchase, produce distribute and market porducts and service

II. reports investing activites

• buying and selling asset and like land and building

III. cash flows from financing activites

• investments from shareholders

Net Increase/decrease in cash flows

Return on Assets (ROA)

Return on Assets = net income/ average total assets

AVG TOTAL ASSETS = (beginning total assets + ending total assets)/ 2

measures a company’s profitability

the ACCTG equation

• always BALANCED

ASSETS = LIABILITIES + EQUITY

EXPANDED acctg equation

ASSETS = LIABILITIES + EQUITY

ASSETS = LIABILITIES + contributed capital + retained earnings

ASSETS = LIABILITIES + common stock - dividends + revenues - expenses

a company purchases an asset on ‘credit’

account payable

ASSET ACCOUNTS

1. cash

2. accounts receivable

3. notes receivable

4. inventory

5. prepaid accounts

   1. insurance

6. supplies

7. equipment

8. buildings

9. land

T ACCOUNT ANALYSIS

ASSETS

debit for increases I credit 4 decrease

(+) I (-)

LIABILITY ACCOUNTS

1. account payable

2. notes payable

3. accrued liability

4. unearned revenue

T ACCOUNT ANALYSIS

LIABILITIES

debit for decreases I credit 4 decrease

(-) I (+)

EQUITY

+ common stock

- dividends

+ revenues

- expenses

T ACCOUNT ANALYSIS

EQUITY

debit for decreases I credit 4 increase

(-) I (+)

T - ACCOUNT

account title

left side right side

debit credit

T ACCOUNT ANALYSIS

COMMON STOCK

debit for decreases I credit 4 increase

(-) I (+)

DIVIDENDS

debit for increases I credit 4 decrease

(+) I (-)

REVENUES

debit for decreases I credit 4 increase

(-) I (+)

EXPENSES

debit for increases I credit 4 decrease

(+) I (-)

trial balance

lists all ledger accounts and balances AT A POINT IN TIME

total debits = total credits

POINT IN TIME

• beg. balance sheet

• ending balance sheet

DEBT RATIO

evaluates the level of debt risk

DR = total liabilities/ total assets

higher ratio indicates that there is a greater probability that a company will not be able to pay its debts in the future

quarterly

4 months

accrual basis

revenues are recorded when products/ services are delivered, and records expenses when incurred

EX:

$100 of insurance expense is recognized in 2021:

1200 in 2022 & 1100 in 2023

‘earned revenues. of 42000’

DEBIT RECEIVABLES AND CREDIT REVENUE

cash basis

revenues are recorded when cash is RECEIVED and expenses are RECORDED when cash is paid

NOT acceptable in GAAP standards

• ex. ‘$42000’ received from customer

ADJUSTING ENTRIES

credit supplies for the difference

straight line depreciation

cost - salvage/ est. life