Comprehensive Accounting Principles and Financial Statement Components

Accounting: sequence of components

Identify economic transactions → Record entries → Communicate financial reports

Major services provided by CPAs

Auditing, Taxation, Management consulting

GAAP

Generally Accepted Accounting Principles; standards for reporting economic events

Monetary Unit Assumption

Only include transactions that can be expressed in money

Economic Entity Assumption

Keep activities of a business separate from owner or other entities

Basic Accounting Equation

Assets = Liabilities + Owner's Equity

Income Statement

Reports revenues and expenses for a specific period of time

Owner's Equity Statement

Reports changes in owner's equity for the same period as the income statement

Balance Sheet

Reports assets, liabilities, and owner's equity at a specific point in time

Statement of Cash Flows

Reports cash receipts and payments for a specific period

Journal

Book of original entry; transactions recorded chronologically

Contributions of Journal

Discloses complete effects of a transaction, provides chronological record, helps locate errors

Posting

Transferring journal entries to ledger accounts

Trial Balance

List of accounts and balances at a specific point; total debits = total credits

Revenue Recognition Principle

Recognize revenue when the performance obligation is satisfied

Expense Recognition / Matching Principle

Record expenses in the same period as the revenue they help generate

Accrual-basis accounting

Record revenues when earned and expenses when incurred

Purpose of Adjusting Entries

Ensure revenues and expenses are recorded correctly; update trial balance

Deferral

Revenue or expense recognized after cash is exchanged (prepaid expenses, unearned revenue)

Accrual

Revenue or expense recognized before cash is exchanged (accrued expenses, accrued revenues)

Adjusting Entry for Prepaid Expense

Debit Expense, Credit Asset

Adjusting Entry for Unearned Revenue

Debit Liability, Credit Revenue

Adjusting Entry for Accrued Expense

Debit Expense, Credit Liability

Current Asset

Asset expected to be used or converted to cash within 1 year

Steps in Closing Cycle

1. Close revenues → Income Summary; 2. Close expenses → Income Summary; 3. Close Income Summary → Capital; 4. Close Withdrawals → Capital

Difference between Multi-step and Single-step income statements

Multi-step separates operating and non-operating items; single-step does not

Gross Profit

Sales - COGS

Gross Profit Rate

Gross Profit ÷ Sales

FOB Destination vs FOB Shipping Point

Destination → seller owns until delivered; Shipping Point → buyer owns in transit

Cost of Goods Sold

Beginning Inventory + Purchases - Ending Inventory

Inventory Costing Methods

FIFO, LIFO, Average Cost, Specific Identification

Inventory Presentation

Lower of Cost or Market

Control Account vs Subsidiary Ledger

Control = total balance; Subsidiary = detailed transactions

Purpose of Special Journals

Record frequently repeated transactions efficiently

Objectives of Internal Controls

Safeguard assets, ensure accurate records, promote efficiency

6 Principles of Internal Control

1. Establish responsibility; 2. Maintain adequate records; 3. Insure assets & bond employees; 4. Separate recordkeeping from custody; 5. Divide responsibility for related transactions; 6. Apply technological controls

Purpose of Bank Reconciliation

Calculate adjusted cash balance

Allowance Method for Bad Debts

Estimates uncollectible accounts; Debit Bad Debt Expense, Credit Allowance

Write-off Procedure

Debit Allowance, Credit Accounts Receivable

Percentage-of-Receivables Basis

Estimate uncollectibles as a percentage of accounts receivable

GAAP Requirement for AR and NRV

A/R and N/R presented at Net Realizable Value

Average Collection Period

365 ÷ Receivables Turnover

Straight-Line Depreciation

(Cost - Salvage) ÷ Useful Life

Gain/Loss on Equipment Disposal

Sale Price - (Cost - Accumulated Depreciation)

Amortization of Intangibles

Limited-life intangibles (patents, licenses) → amortize; Indefinite-life intangibles (trademarks, goodwill) → no amortization

Depreciable Cost

Purchase price + freight + installation/prep costs

Current Ratio

Current Assets ÷ Current Liabilities

Working Capital

Current Assets - Current Liabilities

Payroll Taxes

FICA 7.65%, FUTA 0.6%, SUTA 5.4%

Post-Retirement Benefits

Health/life insurance, pensions; expense recorded during employee service

Characteristics of a Partnership

Association of individuals, mutual agency, limited life, unlimited liability

Admission of New Partner

Adjust capital accounts based on fair value

Division of Net Income

1. Apply salary allowances; 2. Apply interest on capital; 3. Split remaining income

Partnership Liquidation Steps

1. Sell non-cash assets; 2. Allocate gain/loss; 3. Pay liabilities; 4. Distribute remaining cash to partners