pfa midterm

CFO, CFI, or CFF: Deferred Rev

CFO

Unearned revenue is a

liability

Retained Earnings (SE) → Increase on debit or credit side?

Credit | Cr

What does SEC stand for

Securities and Exchange Commission

What does SEC do

govern the process of the issuance of publicly traded securities

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oversees the establishment of accounting rules for publicly traded firms

Who does the rule making process

FASB

What does FASB stand for

Financial Accounting Standards Board

What did SEC almost switch to

International Financial Reporting Standards

Did SEC switch

As of 2014, it has been put on hold

FIFO

First In-First Out;

costs of earliest units acquired are assigned to COGS, while most recent costs stay in inventory

LIFO

Last In-First Out;

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costs of most recently acquired units are assigned to COGS, while earliest costs remain in inventory

Who demands for financial statements

shareholders investors

employees

lenders suppliers

customers

government regulators

why is accounting info valuable

reduces uncertainty about a firm’s value

helps evaluate risks and expected returns for investing

helps price formation process

enables to evaluate quality of managers

helps evaluate ability to pay obligations

BENEFITS of a company disclosing accounting info

information = more investors

transparency

lower cost of capital

COST of a company disclosing accounting info

collection, processing & dissemination costs

proprietary info costs

litigation and political costs

Accounting **Decision usefulness** leads to

relevance

reliability

comparability

consistency

Uses of financial accounting information are

valuation of the firm

contracting

regulation

5 Mandated financial disclosures are

Form 10-K (annual report)

Form 10-Q (quarterly)

Proxy Statement

Form 8-K (Material events)

3 voluntary disclosures

corporate press releases

analyst conference calls

investor presentations

The Annual Report has TWO parts

Front-end

Back-end

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Annual Report: Front end

sales document

company overview

president’s letter & discussion of business

Annual Report: Back end

management discussion & analysis

detailed financial info

financial statements

notes

Main financial statements

balance sheet

income statement

statement of cash flows

statement of shareholders’ equity

Balance sheet reports on

A VERY SPECIFIC DATE (DEC 31,2019)

Balance Sheet formula

A = L + SE

Income Statement reports on

PERFORMANCE OVER A PERIOD

(ex between 2 balance sheets)

Income statement formula

Net Income = Rev - Expenses

Statement of Cash Flows reports on

operating activity

investing activity

financing activity

money from shareholders into the firm

contributed capital

Contributed capital is divided into:

common stock and APIC

retained earnings

what the firm earned

How are retained earnings increased

positive net income

How are retained earnings decreased

by losses

payment of dividends to shareholders

What does “issues shares” mean

selling the shares

net income is what in the balance sheet

retained earnings (SE)

What is asset? What makes something an asset?

What you have, own, control

What basis do we use to value assets?

1. acquisition or historical cost

2. current replacement cost

3. net realizable value

4. fair value

monetary asset

asset with value fixed in DOLLAR terms by statue or contract

nonmonetary asset

generally use historical cost with adjustments for usage if it’s a noncurrent asset

current asset

asset that the firm expects to convert into cash within one year or the operating cycle

Current or noncurrent asset: cash

current

Current or noncurrent asset: inventory

current

Current or noncurrent asset: accounts receivable

current

Current or noncurrent asset: marketable securities

current

Current or noncurrent asset: PP & E

noncurrent

Current or noncurrent asset: long term equity investments

noncurrent

Current or noncurrent asset: intangible asset

noncurrent

What is liability? What makes something an liability?

What you OWE

What is invoice

seller gives this to buyer to collect payment

ASSET → Increase on debit or credit side?

Debit | Dr

LIABILITY → Increase on debit or credit side?

Credit | Cr

Shareholder’s Equity → Increase on debit or credit side?

Credit | Cr

Contributed Capital (SE) → Increase on debit or credit side?

Credit | Cr

When the goods are SOLD,

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1\.

2\.

1. Rev - Exp = Net Income

2. Net income goes into SE

COGS is an

expense

Common stock formula

(par value) \* (# of shares)

APIC formula

(cash per share) \* (# of shares) - (common stock)

Journal Entry: The firm acquires on account equipment costing $20,000 and merchandise costing $35,000

Dr. Equipment (+A) 20,000

Dr. Merch (+A) 35,000

Cr. A/P (+L) 55,000

The firm issues a 90-day, $20,000 loan to the bank

Dr. Cash (+A) 20,000

Cr. Notes Payable (+L) 20,000

The firm pays $22,000 to the suppliers

Dr. A/P (-L) 20,000

Cr. Cash (-A) 20,000

Balance Sheet bullet points

• Company name

• at a SPECIFIC date

• Asset

  • Current Assets

  • Noncurrent assets

• Total assets

• Liability

  • Current liabilities

  • Noncurrent liabilities

  • Total liabilities

• Shareholders’ Equity

  • Common Stock

  • APIC

  • Retained Earnings

• Total SE

• Total Liabilities + SE

Income Statement bullet points

• revenues

• costs and expenses

• operating income

• interest

• income before income taxes

• consolidated net income

accountants define income by

reference to specific identifiable events that result in measurable elements of revenues and expenses

financial reports are prepared

at the end of a period (quarter or year)

income statement measures

flow of net assets

balance sheet measures

the level of net assets

cash basis of accounting

revenues are recognized when cash is received and when cash is paid

accrual basis of accounting

revenues and expenses are recognized on a economic basis without regard for the actual cash flow

change in retained earnings equals

net income - dividends

Revenues/ Gains → Increase on debit or credit side?

Credit | Cr

Dividends → Increase on debit or credit side?

Debit | Dr

Prepaid Expense is an

ASSET

Expenses/Losses → Increase on debit or credit side?

Debit | Dr

Closing the accounts

revenues and expenses are reset to zero (cleared) for a new accounting period. their balances flow into retained earnings

Balance sheet accounts & Income statement accounts => temporary or permanent ?

Balance sheet → permanent

Income statement → temporary

Closing entry Example

• The ENDING BALANCES of Revenue & Expenses get flipped to the OPPOSITE side of Journal Entry

Ex: Dr. Expense 600 → Cr. Expense 600

• [Retained Earnings (in journal entry form) goes at the end of closing entry ]

Ex: Cr. Retained Earnings 200 = Net Income

Revenues are measured by

the cash or equivalent that a firm expects after selling

Uncollectible accounts have _____ and are ________ included in ______

no value, are not, revenue

Sales discounts and allowances are

reductions in price and not included in revenue

Sales returns are a ___________ of the sales and ____________ in revenue

reversal, are not included

The cost of making a product IS NOT ________ until _______

AN EXPENSE UNTIL the product is sold

Closing entries are _____ and are not

ZERO-ING OUT, ADJUSTING ENTRIES

Unadjusted Trial Balance

• 2 columns : Debit and Credit

• Find total amount of Debit or Credit from the info you recorded on Journal entry

• Total debit and credits at the end must equal each other

Income statement example

• For the period XX

• Revenues

• MINUS COGS

• = Gross Profit

  • MINUS Operating Expense

  • MINUS DEPRECIATION EXPENSE

• = Operating Income

  • MINUS Interest Expense

• plus or minus Other Items

• Pretax Income

• Income tax Expense

• = Net Income

Revenue is when _______ and recognized _____

company delivers goods and receives cash/credit and recognized the month it ALL OCCURS

How much revenue is recognized in December? → Tyco collects $300,000 cash in December for toy sales made in October

revenue would’ve been recognized in October

Expense incurred means

MONEY that your business OWES when receiving goods or services

Deferrals

cash was received or paid in the past

Accruals

cash will be received or paid in the future

**Adjusting Entries** for DEFERRED REVENUE / UNEARNED REVENUE

Early transaction:

• Dr. Cash (+A)

• Cr. Unearned Revenue (+L)

Now adjusting entry:

• Dr. Unearned Revenue (-L)

• Cr. Revenue (+R, +SE)

**Adjusting Entries** for DEFERRED EXPENSE

The early cash transaction:

• Dr. Prepaid Asset (+A)

  • Cr. Cash (-A)

Now adjusting entry:

• Dr. Expense (+E, -SE)

  • Cr. Prepaid Asset (-A)

Deferred Expense

prepaid expense

**Adjusting Entries** for ACCRUED REVENUE

Now adjusting entry:

• Dr. Accounts Receivable (+A)

  • Cr. Revenue (+ R, +SE)

Future cash transaction:

• Dr. Cash (+A)

  • Cr. Accounts Receivable (-A)

ACCRUED REVENUE

 **revenue that has been earned but cash not yet received**

ACCRUED EXPENSE is a

current liability

**Adjusting Entries** for ACCRUED EXPENSE

Now adjusting entry:

• Dr. Expense (+E, -SE)

  • Cr. Payable (+ L)

Future cash transaction:

• Dr. Payable (-L)

  • Cr. Cash (-A)

Depreciation is an

expense

Depreciation → Increase on debit or credit side?

Debit | Dr

When we record depreciation, we

credit accumulated depreciation

Adjusting Entries for DEPRECIATION EXPENSE

Early cash transaction:

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Dr. PPE (+A) xxx

Cr. Cash (-A) xxx

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Future cash transaction:

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Dr. Depreciation Expense (+E, -SE) xxx

Cr. Accumulated Depreciation (-A, + XA) xxx