Review

What is included in the income statement?

revenues, gains, expenses and losses

Income from Continuing operations

Income after applicable incomes taxes but excluding the results of discontinued operations, the cumulative effect of accounting changes, translation adjustments, purchasing power gains and losses on monetary items, and increases and decreases in the current cost or lower recoverable amount of nonmonetary assets and liabilities

Single- step income statement format

revenues and gains less expenses and losses

multiple-step income statement format

includes subtotals: gross profit and operating income

How are operating and non-operating items reported in the single-step format?

No distinctions between operating and nonoperating items

How are operating and non-operating items reported in the multiple-step format?

Operating and nonoperating items reported separately

operating items

revenues and expenses of a company’s primary or major operations

sales

main source of revenue, reported net of discounts, returns, and allowances

Cost of goods sold

direct cost of goods sold in generating revenues

selling expenses

expenses incurred by the company in its efforts to generate revenue

selling expenses examples include:

marketing expense, delivery expense, promotional materials expense, vehicle expense, advertising expense, sales commission expense

general and administrative expenses

expenses incurred by the company to maintain its operations that are not directly related to production of goods and services

examples of general and administrative expenses include

Administrative salaries expense, bonus expense, insurance expense, depreciation on corporate office, legal expense, utilities expense

other operating expenses

items management feels are important to identify separately such as the following examples: restructuring costs, research and development costs and amortization of intangible assets

Nonoperating items

• revenue and expense items not arising from a company’s primary or major operations

• gains and losses or changes in equity resulting from peripheral transactions of entity

examples of nonoperating items are

interest revenue, interest expense, dividend revenue, royalty revenue, gain (loss) from sale of investments, gain (loss) on litigation settlement

How are unusual and/or infrequent items reported in the income statement?

Report separately in income from continuing operations or disclose in notes to financial statements

Two categories of income from discontinued operations result when a business component is sold as of the financial statement date

1. Results of operations for the discontinued business component, net of tax

2. Gain or loss from the disposal of the business component, net of tax

Two categories of income from discontinued operation result when a business component is sold after the reporting period

1. Results of operations for the discontinued business component during the reporting period, net of tax

2. When applicable, impairment loss for the net of the component’s carrying value over its fair value less costs to sell, net of tax

Paid in capital

refers to the amount of money that shareholders have invested in a corporation in exchange for shares of stock

What are the components of stockholder’s equity?

• paid-in capital (common stock, preferred stock, additional paid-in capital)

• retained earnings

• accumulated OCI

How does net income affect retained earnings?

Increase

How does dividends affect retained earnings?

decreases

Report segment separately if it meets any one of these quantitative thresholds:

• revenue test

• operating profit test

• identifiable asset test

Revenue test

segment revenue >= 10% of total combined revenue

operating profit test

absolute value of segment profit or loss >= 10% of combined profits or combined losses

identifiable assets test

segment assets >= 10% of total combined assets

combined revenue test

combined operating segment revenues > 75% of total external company revenue

Operating Cash Inflows- Cash received from:

• customers for goods or services

• refunds from suppliers

• dividends from investments

• interest on receivables

Operating Cash Outflows-Cash Paid for:

• Purchase of goods for resale

• Salaries and other operating expenses

• Income taxes, duties, and fines

• Interest on liabilities

Investing Cash Inflows-Cash Received from:

• sale of property, plant, and equipment

• sale of debt and equity investments in other companies

• collection of a loan (excluding interest, which is an operating activity)

• sale of patents or other intangible assets

Investing Cash Outflows- Cash Paid for:

• Purchase of property, plant, and equipment

• Investments in debt and equity investments in other companies

• Loans to other entities

• Purchase of patents or other intangible assets

Finance Cash Inflows- Cash Received from:

• Issuance of a company’s own stock

• Sale of treasury stock: stock previously issued that had been re-purchased

• issuance of bonds and borrowing from a bank (short-term and long-term nontrade debt)

Financing Cash Outflows- Cash Paid for:

• Dividends and other cash distributions to owners

• Reacquiring previously issued capital stock

• Principal payments on loans or payments to retire bonds or other debt

Total Assets=

Total Shareholder’s Equity + Total Liabilities

Assets=

Cash + Noncash Assets

Equity=

Net Income + Equity (Excluding net income)

Stockholders Equity=

Common stock +Paid in Capital + Retained Earnings+ Accumulated OCI

Percentage complete (cost-to-cost method) =

Total costs incurred to date (excluding inefficiencies) / Most recent estimate of total project costs

Recognize revenue (cost-to cost method)=

Percentage complete * Total contract revenue

current assets

Cash, cash equivalents, restricted cash, short-term investments, accounts receivable, nontrade receivables, notes receivable, inventories, prepaid expenses

non current assets

long-term investments, PP&E (fixed assets), operating lease assets (Operating right-of-use assets), intangible assets and goodwill, other assets

current liabilities

accounts payable, short-term notes payable, current maturities of long-term debt and lease liabilities, callable obligations, deferred revenue, accrued liabilities

noncurrent liability classification

long-term debt, operating lease liabilities, other long-term liabilities

Working Capital

current assets - current laibilities

With the indirect method, when assets increase

cash decreases

With the indirect method, when liabilities increase

cash increases

With the indirect method, when shareholder’s equity increases

cash increases

cash paid for dividends

dividends declared + decrease in dividends payable

Cash flow from operating activities indirect method

Net income

+Noncash expenses and losses

-Noncash revenues and gains

-Increase in current operating assets (other than cash)

+Decrease in current operating assets (other than cash)

-Decrease in current operating liabilities

+Increase in current operating liabilities

Retained earnings formula

Total Assets - (Total liabilities + Common Stock + Paid-in Capital in Excess of Par)

Ending Retained Earnings

= Beginning Retained Earnings + Net Income - Dividends Declared

Selling Price Ratio

= Total Standalone Selling Price / Performance Obligation Standalone Selling Price

Allocated Transaction Price

= Selling Price Ratio * Transaction Price

Asset (Cost to fulfill a contract):

1. Relate direct to contract

2. Used to satisfy performance obligations

3. Recoverable

Asset (Cost to obtain a contract):

1. Incremental

2. Recoverable

Percent complete

= Total costs incurred to date (excluding inefficiencies) / Most recent estimate of total project costs

Recognize revenue

= Percent complete * Total contract revenue

What is the journal entry for costs incurred under revenue recognized over time?

Dr. Construction in Process

Cr. Cash/Payables

Construction in process (CIP) is a

asset

Billings on Contracts is a

Contra asset to CIP

Cost of Construction is an

expense

Recognize a net current asset when CIP

>Billings

Recognize a net current liability when CIP

< Billings

How do you record progress billings under revenue recognized over time?

Dr. Accounts receivable

Cr. Bllings

How is revenue recognized over time using the cost-to-cost method?

Dr. Expense for actual costs incurred.

Cr. Revenue recognized

Difference is debited to CIP

What happens upon project completion in revenue recognized over time?

• CIP equals Billings.

• Both accounts are closed.

What happens upon project completion in revenue recognized at a point in time?

• Accumulated Billings on Contracts is recognized as revenue.

• Accounts are closed.

Current period revenue

= (Percent complete * Total contract revenue) - Revenue Recognized in prior periods

Construction in Process (CIP):

• Represents the costs incurred on a project to date, including direct materials, labor, and allocated overhead

• Can also include the recognized profit if the percentage-of-completion method is used,

• Recorded as an asset on the balance sheer

Billings on Contracts

• Represents the amount invoiced to the customer for work completed to date.

• Recorded as a contra-asset account that reduces CIP (or a liability if Billings exceed CIP)

Gross Method

• Record receivables at the gross amount

• Cash discount is only recognized if the customer pays within the discount period

Net Method

• Record receivables at the net amount

• Sales discount forfeitures are only recorded if the customer fails to pay within the discount period

Sales Discount

Dr. Balance

Sales Discount Forfeited

Cr. balance

What journal entry is made to adjust the Allowance for Doubtful Accounts (AFDA) at the end of the period?

• Dr. Bad Debt Expense

• Cr. AFDA

What journal entry is made to reduce AFDA for specific account write-offs after the period ends?

Dr. AFDA

Cr. Accounts Receivable

What journal entries are made to reinstate receivables for unexpected collections after the period ends?

Dr. Accounts Receivable

Cr. AFDA

Dr. Cash

Cr. Accounts Receivable

What is the formula for estimating AFDA using an aging schedule?

Age category × Expected credit loss rate = Estimated AFDA

F.O.B Destination

legal title passes when buyer receives goods from carrier

F.OB. shipping

legal title passes when goods are released to carrier

What are the temporary accounts used until physical count under the periodic method?

• Purchases (Dr.)

• Freight-in (Dr.)

• Purchase Discounts (Cr.)

• Purchase Returns and Allowances (Cr.)

Purchases, net

= Purchases + Freight-in -Purchase discounts - Purchase returns and allowances

Cost of Goods Sold

= Beginning Inventory + Purchases,net - Ending Inventory

LIFO Inventory Reserve

Inventory at FIFO, Average Cost, or Standard Cost - Inventory at LIFO

Steps in Dollar Value LIFO

1. Restate ending inventory at base year dollars

2. Arrange restated inventory balance into layers

3. Match layers to the appropriate price indices

4. Restate layers of inventory into current year dollars

Adjustment to LIFO Reserve

LIFO Reserve - Prior Year LIFO Reserve

What accounts are used to adjust inventory to LIFO basis?

• Cost of Goods Sold (Dr.)

• Allowance to Reduce FIFO Inventory to LIFO Basis (Cr.)

What inventory measurement approaches is used when a LIFO or Retail Inventory method?

Lower-of-Cost-or-Market

What inventory measurement approach is used when the inventory method ia all other inventory methods, including FIFO, average cost?

Lower-of-Cost-or-Net Realizable Value

Net realizable value

Estimated selling price less reasonably predictable costs of completion, disposal, and transportation

Ceiling=

Net realizable value

Floor=

Net realizable value less gross profit margin

Market value

is the middle value of replacement cost, ceiling & floor

Gross profit as a percentage of sales

=Gross profit as a percentage of cost / (1+ Gross profit as a percentage of cost)

COGS estimate

=Sales * (1-Gross profit as a percentage of sales)

Ending Inventory

= Cost of goods available for sale - COGS

Which PP&E costs are not capitalized, but rather expensed as incurred?

• training costs

• annual property/tax/insurance costs

• costs of ordinary repairs

Excavation costs are capitalized to

buildings

Discount on Note Payable

• contra liability account

• recognize as interest expense over the life of the note