COMM 217 MIDTERM

Statement of financial position

* reports assets, liabilities and shareholders equity
* ASSETS= LIABILITIES + SHAREHOLDERS EQUITY
* in a specific point in time

Statement of earnings (Income statement)

* Reports revenues, expenses and net income
* in a time specific time period

Statement of changes in equity

* Reports all changes to shareholder accounts
* in a specific time period

Cash Flow statement

Reports inflows and outflows related to operating, investing and financing activities

Operating activities

Directly related to generating earnings

Investing activities

Acquisitions or sales of the company’s fixed assets or investments

Financing activities

Directly related to financing of the company including payments and collections from investors or creditors

Accounting info characteristics

Relevance, faithful representation, comparability, verifiability, timeliness, understandability and the cost of constraint

Relevance

* Information is considered relevant if it can influence a decision
* material amounts
* if a transaction involves an amount that is significantly low then it is not relevant
* only material amounts affect decisions

Faithful representation

* Information provided in the financial statement must reflect the actual condition of the business not was is legally visible
* information must be complete, neutral and free from material error

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Comparability

The financial statement must be comparable to previous year statements and statements of other companies

Verifiability

Information presented is verifiable if independant accounts agree

Timeliness

Information should be available to decision makers in time to be considered otherwise it’s irrelevant

Understandibility

the quality of the information that enables users to comprehend meaning

Cost constraint

Cost of producing the financial information should be less than the benefit it will contribute too

The seperate entry assumption

activities of the business should be accounted for separately

Unit of measure assumption

Assumption states that accounting information is reported in the national currency

Continuity assumption

Assumption that a business is assumed to continue to operate for the foreseeable future

Historical cost principle

Assets are required to be reported in the books at the original cost that was paid

Assets

Anything that the company owns

Liabilities

Anything that the company owes

Shareholders equity

The company’s net worth

Current assets

Liquidated within 12 months

Non-Current assets

Liquidated in more than 12 months

Asset categories

Cash, receivables, inventories, prepaid expenses, property, plant and equipement

Shareholder’s equity

Contributes capital + retained earnings

Contributed capital

* Money contributed in the company
* also called a share

Retained earnings

* profits reinvested into the company

dividends

Decreased from retained earnings and paid to shareholders

Measure of income in steps

1. gross profit
2. operating income
3. earnings before tax
4. net income
5. earnings per share

Gross profit

Sales Revenue - COGS = gross profit

Operating income

Income earned from primary operations of the business

Earnings before tax

Income earned from both operating and non-operating activities

Net income:

total after income taxes

Earnings per share

net income divided by average shares

Operating revenue

Sales revenue and service revenue

Non-operating revenue

Interest revenue, rent revenue, dividend revenue

Contra-Revenues

Sales discount and sales returns and allowances

Operating expenses

Salary expense, supplies expense, rent expense, depreciation expense, marketing expense

Non-operating expense

Interest expense, income tax expense

Net income

Revenues - expenses = net income

Income tax expense

Income before tax X tax rate = income tax expense

Earnings per share

Net income / average outstanding common shares

5 categories of accounts

Assets, Liabilities, Expenses, Revenues and Shareholder’s Equity

Asset Accounts

Cash, short-term investment, accounts receivable, notes receivable, inventory, supplies, prepayments, equipement, land, building and intangibles

Liabilities

Accounts payable, accrued liabilities,salaries payable, interest payable, unearned revenue, notes and bonds payable

Shareholder’s equity

Contributed capital, common shares, retained earnings

Natural debits: Accounts that increase with debits and decrease with credits

Dividend declared

Expenses

Assets

Losses

Natural credits: Accounts that increase with credits and decrease with debits

Gains

Income

Revenue

Liabilities

Shareholder’s quity

Are assets a natural credit or debit

Natural Debit: Debit + Credit -

Are Liabilities a natural credit or debit

Natural credit: Debit - Credit +

Are Expenses a natural credit or debit

Natural debit: Debit + Credit -

Are revenues a natural credit or debit

Natural credit: Debit - Credit +

Are Shareholder’s equity a natural debit or credit

Natural credit: Debit - Credit +

Accural based accounting

* Recognizes revenues when they are earned
* recognizes expensed when they are used

Accured Revenue

* Revenue not paid or collected
* debit receivable and credit revenue

Deferred revenue

* Revenue already paid
* Debit unearned revenue and Credit revenue

Accrued expense

* Expense not paid for
* Debit expense and credit payable

Deferred expense

* Expense already paid for
* Debit expense and credit asset or contra- asset

Contra-Asset

* Related to and substracted from another asset
* Accumulated depriciation
* allowance for doubtful accounts

Accumulated depreciation

Decreases the value of a long-term fixed asset

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Allowance for doubtful accounts

Decreases the value of accounts receivable

Temporary accounts

Income statements and dividends that must be set back to 0 at the end of the accounting period. Includes revenues, expenses and dividends

Permanent accounts

Accounts that are carried over to the next period. Includes assets, liabilities and shareholder’s equity

Four closing entries

1. Debit revenues, credit Contra-revenues and plug in income summary( revenue - contra revenue)
2. Debit income summary( sum of expenses), credit expenses
3. Income summary debit (Same amount), retained earnings credit
4. Retained earnings credit(same amount as dividends), Credit dividends

Income statement components

Company Name

Income statement

For the year ended Dec 2023

In ($)


1. Revenue: Sales revenue, service revenue, less sales discount, less sales return and allowances = net sales. Net sales - COGS = Gross profit
2. Operating expenses: Marketing, rent, supplies, bad dept etc
3. Operation income: Gross profit - Total operating expense
4. Other revenues and expenses: Interest expense, rent revenue
5. Income before tax: Operation income + Other revenues or expenses
6. Income tax expense: Income before tax X tax rate
7. Net income: Income before tax - tax expense
8. Earnings per share: Net income/ Average shares

* Must make journal entry for income tax expense and do t account
* double line under EPS

Statement of financial position components

Company name

Statement of financial position

As at DATE

in ($)


1. Assets


1. Current assets: Cash, short-term invs, accounts reveibale less afda, prepaid rent, inventory, suppleis= total current assets
2. non-current assets: land furniture - accumulated depriciation, building= total non-current assets
3. = TOTAL ASSETS
2. Liabilities and shareholders equity


1. Liabilities


1. Current liabilities: Payables, income tax payable= total current liabilities
2. non current liabilities: long-term payables = total non-current liabilities
3. TOTAL LIABILITIES
2. Shareholders equity:


1. Contributed capital
2. Retained earnings: Beg RE + net income - dividends
3. TOTAL SHAREHOLDERS EQUITY
3. Total liabilities + total shareholders equity

FOB Destination

* transaction recorded when goods reach buyer
* seller pays shipping
* Shipping expense

FOB Shipping point

* Transaction recorded when goods leave seller
* Buyer pays shipping
* Inventory

Contra revenues

* Natural debits : debit +, credit -
* credit card discount
* sales discount
* sales returns and allowances

Bad debt

* contra asset to accounts receivable
* accounts receivable - afda = net accounts receivable
* debit bad dept expense, credit afda

Write-off

* definitely not collectable accounts
* debit afda, credit accounts receivable

Recoveries

* correction for previously written off accounts
* debit accounts receivable, credit afda
* debit cash, credit accounts receivable

Bad debt expense

1. sales made on account - discounts - returns = net sales
2. net sales x bad debt rate = bad debt expense

Allowance for doubtful accounts

Accounts receivable x uncollectible rate = allowance for doubtful accounts

Estimating bad debt expense

IN AFDA

Debit: Write offs, unadjusted debit balance

Credit: Beginning balance, recoveries, unadjusted credit balance and ending balance

Adjusting bank statement and book balance

bank statement balance

* deposits in transit
* - outstanding checks
* -/+ bank errors
* = correct cash balance

Book balance

* + deposits by bank
* - service charges
* - nsf cheques
* +/- book errors
* = correct cash balance

CASH BALANCES MUST BE EQUAL And followed by jounal enteries for book balance (always one cash entry)

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Perpetual inventory

recorded whenever event affects inventory and cost of goods

Merchandising company

Buys and sells finished goods, inventory account is merchandise inventory

Manufacturing company

Produces and sells finished goods. Inventory account: raw materials, work in progress and finished goods inventory

Recording inventory sale

1. Debit accounts receivable, credit sales revenue
2. debit cost of goods sold, credit inventory

recording inventory purchase

Debit inventory, credit accounts payable

Recording purchase return

Debit accounts payable, credit inventory

recording purchase discount

debit Accounts payable, credit inventory

Recording cost of shipping purchased inventory

Debit inventory, credit cash

periodic

inventory and COGS adjusted at the end of the period

Journal entry end or period

Debit COGS, INVENTORY ENDING

Credit Purchases and beginning inventory

FIFO

First in first out

weighted average cost

beginning inventory $ + purchases $/ units of beginning inventory + units or purchases

Finding weighted average in periodic inventory

1) Weighted average cost:beginning inventory $ + purchases $/ units of beginning inventory + units or purchases

2) COGS= units sold x WAC

3) Ending inventory: Unites left x WAC

Net profit margin ratio

* Net income / net sales
* if its high efficient management of sales and expenses

Gross profit margin

* gross proft/ net sales
* high means efficient management of COGS

Current ration

* current assets/ current liabilities
* high means strong liquidity

Debt to equity

* Total liabilities/ total shareholder’s equity
* higher than one, company relies on debt
* lower than one relies on equity

Total asset turnover

* Sales revenue / (Beg assets + end assets / 2)
* Efficient asset management

Return on equity

* Net income/ average shareholders equity
* higher means higher earnings for shareholders and higher stock price

Return on assets

Net income + interest expense(1-tax rate)/ average total assets

higher ration = efficiently using assets

Inventory turnover ratio

COGS/ AVERAGE INVENTORY

higher = stronger liquidity

Average days to sell

365/ inventory turnover ratio

Receivables turnover ratio

net credit sales/ average net accounts receivable