ACC 577 Final

accounting

identifying, measuring, communicating financial info/activity for decision-making

SEC

enforces reporting; oversees public companies

FAASB

develops GAAP for US

IRS

taxes

IASC

intl accounting standards

4 types of statements

balance , income, retained earnings, cash flows

asset

present right to an econ benefit

liability,

present obligation to transfer an economic benefit

equity

residual claim on assets after liabilities deducted

income statement equation

revenues - expenses = net income

balance sheet time

cumulative, snapshot

income statement time

periodic, resets every period

accrual accounting

follows econ activity, not just cash for realism

notes payable

amounts owed to lendors

accounts payable

amounts owed to suppliers for g/s received

cash accounting vs accrual accounting

accrual records revenue in the period it is EARNED, not received

ending retained earnings

beginning RE + net income - dividends

2 parts of revenue recognition

obligation fulfilled? good chance of receiving payment?

customers pay when service is performed

cash and revenue increase

customers pay before service

cash increases, deferred revenue increases

customers pay after service is performed

AR (asset) increase, revenue increases

if company pays early

account: prepaid expense (asset)

if customer pays early

deferred revenue (liability)

matching principle

expenses should be recorded in same period as revenues they helped generate

Journal Entries signs: Assets

+-

Journal Entries signs: Liabilities

-+

Journal Entries signs: Equity

-+

Journal Entries signs: Revenues

-+

Journal Entries signs: Expenses

+_

what account is used to track inventory

COGS

Current assets

assets that a company expects to convert to cash, sell, or use within a year

Ordering of assets on balance sheet

order of liquidity

cash equivalents

very liquid, maturities < 3 months, low-risk

short-term investments

stocks/bonds in short-term

tradeoff of liquidity vs return

keeping money accessible vs investing it for a return

bad debt expense corresponding account

income statement (bad debt expense), balance sheet (allowance for doubtful accounts)

gross AR

full amount customers owe

allowance for doubtful accounts

est amount that won’t be collectedN

Net AR

what we expect to collextN

Net AR =

gross AR - allowance

allowance credits

increases

2 parts of debt journaling

provision (bad debt expense, allowance) and write-off (allowance, AR)

write-off effect on net AR

none, gross and allowance decrease by same amountba

bad debt expense =

required ending allowance - allowance balance

existing allowance balance

beginning allowance balance - write-offs

FIFO

oldest cost first

LIFO

newest cost fir

weighted average

Average cost = Total cost available ÷ Total units available

why choose LIFO?

protects from taxes

Which inventory method leads to higher profits lower COGS

FIFO

capitalize

record something as an asset

what costs are capitalized

anything that gets the machine ready for use

straight-line depreciation

upfront cost/# years (includes portion of tax, shipping, etc)

annual depreciation through units of production

asset cost-residual value/total expected production

one period depreciation expense

depreciation/unit * units produced in perioda

accounting for change in annual depreciation

current book value - revised residual value/remaining useful life

intangible assets

assets without physical substance, like R&D

when to capitalize an intanigble benefit

when it is purchased from another company, when benefit is certain

goodwill

purchase price - (fair value of assets - fair value of liabilities)

impairment

does recorded value need to be reduced

does impairment change cash

no, contra-asset that reduces net income

sources of financing (capital structure)

lendors and investors (debt and equity)

principal repaid =

total payment - interest

interest =

principal x annual x months/12

contingent liabilities

possible obligations from events that have already happened, uncertain outcome

when should you record a contingent liability and where?

loss on net income, increase liability when probable and reasonably estimatable

sources of equity

external (investors), internal (retained earnings)

3 share accounts

authorized, issued, outstanding

authorized shares

max shares company can issue

issues shares

shares issued total

outstanding shared

issued shares held by shareholders

treasury stock

shares repuchased by company

outstanding shares =

issued shares - treasury shares

common stock =

number of shared x par value

APIC

proceeds above par value

preferred stock

priority over common stock, no voting rights

total annual dividend

shares x par value x dividend rate

dates of dividend recording

declaration and payment date

why repurchase shares?

compensaiton, financials, EPS, signaling

financial leverage =

liabilities/equity

return on equity

net income/equity

measures of growth

revenue, operating income, net income

asset turnover

revenues/assets

gross profit margin

(sales-cogs)/sales

Return on Equity

net income/total equity

ROE -

net income/total equity

when to use averages

when comparing numbers from balance and income sheets

averages DuPont

beginning+ending /2

why decompose ROE

profitability, efficiency, leverage

ROA

net income/assets

leverage

assets/equity (multiplier)

relationship between profit margin and asset turnover

high margin, low turnover

asset turnover

sales/average assets

inventory turnover

COGS/average inventory

Accounts receivable turnover

sales/average accounts receivable

converting turnover to days

365/turnover

operating cycle

DIO + DSO - DPO

DIO

how long g/s sits

DSO

time customers take to pay

DPO

how long it takes for company to pay suppliers