BUAD 203 - Units 1-5

Financing activities

Acquiring money to support operations; either debt financing or equity financing

Debt financing

Borrowing money from sources such as a bank by signing a note payable, or directly from investors by issuing bonds payable

Creditors

Individuals/financial institutions that lend money to companies

Equity financing

Selling shares of stock to investors; investors that purchase shares of stock buy ownership interest in the company so they can gain profit

Investing activities

Purchasing long-term resources necessary to conduct business; involves the acquisition and disposition of factories, office furniture, computer and data systems, etc that will carry out the company’s business plans

Operating activities

Day-to-day activities of producing and selling a product or providing a service; critical, because if a company cannot generate profit, it will fail

Financial accounting

Process of preparing publicly available financial statements

Managerial accounting

Generating and analyzing data needed for decision making and efficient management of the business

GAAP

Generally accepted accounting principles; determines agreed upon guidelines of accounting

The purpose of an audit

To provide assurance that an organization’s financial statements are fairly presented (accurate, reliable, in accordance with generally accepted accounting principles)

Balance sheet

The listing of a firm’s assets, liabilities, and stockholders’ equity as of a given date; depicts the accounting equation framework

Accounting equation

Assets = Liabilities + Stockholders’ equity

Income statement

Reports the results of operations for a business for a given time period, usually a quarter or a year. Lists revenues and expenses of the business

Sales revenue

Increases to a company’s resources from providing goods/services to customers; measured by the value of assets received in exchange for goods/services delivered

Expenses

Decreases in a company’s resources from generating revenue. Generally measured by value of assets used up/exchanged as a result of a business’s operating activities

Net income

Total revenue > total expenses; Total revenue - total expenses

Net loss

Total expenses > total revenue

Statement of stockholders’ equity

Reports the events causing an increase or decrease in stockholders’ equity during a given time period. Consists of contributed capital and retained earnings

Contributed capital

Measure of the capital contributed by the stockholders of a company when they purchase common stock in the company

Common stock

Ownership shares of a company

Retained earnings

Measure of the capital that is earned by the company, reinvested in the business, and not distributed to its stockholders

Statement of cash flows

Reports a business’s cash inflows and cash outflows during a given period of time

Order of preparing financial statements

1. Income statement prepared first

2. Statement of stockholders’ equity

3. Balance sheet

4. Statement of cash flows

Retained earnings, end of period =

Retained earnings, beginning of period + net income - dividends

10-K

Annual report filed with SEC; includes 4 financial statements, notes to financial statements, auditor’s report, and Management’s Discussion and Analysis

Asset accounts normal balance

Debit increases the account

Liability and stockholders’ equity normal balance

Credit (except expenses and dividends) increases the account

Trial balance

A listing of all accounts from the general ledger with their general debit/credit balance, prepared at the end of an accounting period after all transactions have been recorded

When are revenues recognized?

When goods and services are delivered to the customers; may be recognized before, after, or at the same time that cash is received

Journal entry when revenue is recognized when cash is received

Debit cash and credit sales revenue

Journal entries when revenue is recognized before cash is received

At the time of revenue: Debit accounts receivable and credit sales revenue
At the time of cash: Debit cash and credit accounts receivable

Journal entries when revenue is recognized after cash is received

At the time of cash: Debit cash, credit unearned revenue

At the time of revenue: Debit unearned revenue, credit sales revenue

Expense matching principle

Business expenses are recognized with sales revenue so they are reported on the same income statement. Expenses incurred to generate revenues must be recognized in the same period

Two journal entries for the recognition of expense

First entry, when sale occurs: Materials increase, cash decreases OR accounts payable increases

Expense when inventories are sold: Cost of goods sold expense increases, materials decreases, records cost of product sold

The purpose of adjusting journal entries

So the account balance reflects what expense/revenue is recognized, and what is unearned/prepaid/remaining. Company must review account balances and make any necessary adjustments to bring accounts to the proper balances

Deferrals

The adjustment deals with an amount that has already been recorded or deferred in a balance sheet account; adjusting entry of a deferral decreases the balance sheet account (permanent account) and increases an income statement account (temporary account)

Accruals

Adjustment deals with an amount that has not been previously recorded in an account; adjusting entry increases both a balance sheet account and an income statement account

Deferred expense adjusting entry

Calculate expense over the period
Debit expense to increase it (ex. rent expense, supplies expense, depreciation), credit decreasing asset (cash, prepaid rent, office supplies, etc)

Deferred revenue (aka unearned revenue)

Allocating previously unearned revenue into revenue; when businesses receive fees for services before they are rendered

Deferred revenue adjusting entry

Initial entry: Debit cash, credit a liability called Unearned Revenue

Adjusting entry: Debit Unearned Revenue, credit fee revenue/sales revenue/etc

Accrued expense

Incurs expense before paying for them (ex. taxes, employee wages); if an accounting period does not coincide with a scheduled cash payment for accrued expenses, you have to make an adjusting entry to record the expense incurred

Accrued expense adjusting entry

When the expense is incurred/accrued: Debit the expense to increase it, credit ___ payable/liability account (your liability increases because you haven’t paid the expense yet)

When the expense is paid: Debit existing ___ payable/liability, debit the expense for the extra expense you’ve incurred between now and the last time you recorded the expense, credit cash amount that equals liability and expense (you’re paying it off)

Accrued interest

Need to record interest accrued for each accounting period to reflect interest expense for that month

Interest =

Principal amount x Annual interest rate x Time as a fraction of a year

Accrued interest adjusting entry

When the expense is accrued: Debit the expense, credit interest payable liability

When the expense is paid: Debit interest payable liability, debit more expense, and credit cash for both

Accrued revenue

A company may provide services during a period where they are not paid for or billed yet; need to adjust for revenues that have not been paid for yet

Accrued revenue adjusting entries

When the revenue is recorded: Debit accounts receivable, credit revenue (you are waiting for cash but have the revenue)

When the cash is received: Credit accounts receivable, credit more revenue you’ve earned, debit cash for both

Depreciation

Process of allocating the cost of buildings/equipment to the periods benefiting from their use; each accounting period must reflect a portion of their cost as an expense

Accumulated depreciation is a…

contra-asset; asset account does not decrease directly, just records reductions against a controlling amount so you can record original equipment cost AND the depreciation

Straight-line depreciation

Acquisition cost divided by estimated useful life in years; can then transfer cost in months

Depreciation expense adjusting entry

At the end of a period: Debit (increase) depreciation expense, and credit accumulated depreciation (increase contra-asset, aka decrease asset)

Permanent accounts

Accounts present on the balance sheet

Temporary accounts

Gather information for a particular accounting period (ex. revenue, expense, dividend accounts)

Closing process

At the end of an accounting period, temporary accounts are transferred to Retained Earnings (permanent stockholders’ equity account)

Order of closing procedures

1. Close the revenue accounts

2. Close the expense accounts

3. Close the dividends account

1. Close the revenue accounts

Debit each revenue account for an amount equal to its current credit balance, and credit the Retained Earnings account for the total amount of revenues

2. Close the expense accounts

Credit each expense account for an amount equal to its current debit balance, and debit Retained Earnings for the total amount of expenses

Close the dividends account

Credit the dividends account for an amount equal to its current debit balance, and debit Retained Earnings

Post-closing trial balance

Provides evidence that the equality of debits and credits has been maintained; general ledger is in balance to start next accounting period. No revenue and expense accounts remain because they have been closed; just the balance sheet permanent accounts appear

How assets and liabilities are grouped on a classified balance sheet

Current assets, non-current assets, current liabilities, and long-term liabilities

Multistep income statement

Presents revenues and expenses in distinct categories for financial analysis and management decision-making