ACC1701 Cheat Sheet final PDF

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Summary

Fundamental – Relevance & Faithful representation: give numbers to users need and provide fair, true neutral view 2. Enhancing – Comparability, Verifiability, Timeliness & Understandability: can compare between companies and across different years with correct numbers, updated information th...

Description

Fundamental – Relevance & Faithful representation: give numbers to users need and provide fair, true neutral view 2. Enhancing – Comparability, Verifiability, Timeliness & Understandability: can compare between companies and across different years with correct numbers, updated information that is easy to understand. 4 Major statements: 1. Statement of Financial Position (Balance Sheet/FP) à at a particular point int time (Assets, Liabilities & Equity at Dec 31 2020) 2. Statement of Comprehensive income (Income statement/ IS) à Over period of time (Sales Revenue, Expenses, Profits etc.) 3. Statement of Changes in Equity (Statement of Retained Earnings/SCE) à Share Capital, Net Income, Dividends declared etc. 4. Statement of Cash Flows (SCF)à Cash flows from Operating, Investing and Financing activities Return on Assets (ROI): Net Profits/ Average total assets How well assets been used by mgt Normal Balance is on the side where there is an increase. (Debit for Asset, Credit for Liabilities and Equity) à Under Equity, Expenses and Dividends has the normal balance on debit. Using trial balance to prepare FS: Net income from IS àInput into SCEà Ending R.E input to FPàCash input to SCF. Debt Ratio: Total Liabilities/Total Assets (high ratio, high risk) Accrual-basis ACC: recognize event when economic impact made (i.e revenue recorded once earned, expense recorded once incurred) à Matching Principle Revenue recognized when: 1. Goods delivered/ services rendered. 2. Seller’s price to buyer is fixed 3. Evidence of payment arrangement exists 4. Payment is realized/realizable. Accrued Revenue: Revenue earned before cash is received.

Area starting from Sales Revenue to other Y and loss gone, only Retained Earnings remain in post closing trial balance

Adjustments to Revenue & Expenses

Almost all require adjustments except cash Net Profit Margin: Net Profit/ Net Sales (return on sales) To close the books, you need to Dbt Sales Rev & Other income/Loss and Cr Income Summary. To close books for Expenses, Dbt Income Summary and Cr: COGS, Expenses (eg. Salary, Rent, Admin, Bad Debt, Income Tax etc) followed by closing Dbt Income Summary to Cr Retained Earnings. Current Ratio: Current Assets/Current Liabilities (high ratio, better liquidity) à too high indicate not using resources well Principles of Internal control: 1. Establish responsibilities, 2. Maintain adequate records, 3. Insure assets and bond key employees, 4. Separate recordkeeping from custody of assets, 5. Divide responsibility for related transactions, 6. Apply technological controls, 7. Perform regular and independent review. Cash Over & Short (recorded as Miscellaneous Revenue/ Expense on IS) ; Reconciliation Bank Statement Book Statement + Deposits in transit + Collections/Interest earned from bank - Outstanding checks - NSF checks/ Uncollectible items +/- Errors (withdraw correct, understate here; need to deduct more; overstate here; need to add back) Ending must be the same Day Sales Uncollected = Avg ACCReceivables/Net Sales * 365(days to collect AR); shorter = better Indicates frequency of AR collection

Receivables: Direct Write-off vs Allowance method - Allowance method only for bad debt expenses Dbt Bad Debt Expense; Cr Allowance for Doubtful Accounts then Dbt Allowance for Doubtful Accounts; Cr Accounts Receivables à writing off uncollectible accounts will not affect income statement & realizable value of ACC Receivables - Estimation =/= Actual; Over-estimation/Under-estimation of Allowance for Doubtful Accounts

1. Collect 5% instead of 10% expected. 2. Collect 15% instead of 10% excepted. Aging Analysis – Estimated % uncollectible then multiply. (Be careful of questions that tells you Debt hasn’t been paid in 90 days (need to add to the column) or (has been recognised already à need to remove ACC Receivables)

Notes Receivable: Interest Income & Interest Receivable (if note was taken near EOY, need to split into 2) à Income for existing Yr and Receivable for next WY ACC Receivables Turnover: Net Sales/ Avg ACC Receivables Remember average (Beginning AR + Ending AR) à How often converted to cash Day Sales Uncollected: 365/AR Turnover (how efficient management has been in granting credit to produce revenue) Merchandise Inventory:

Consignment: belong to the consigner; ownership never change (X sell Y’s inventory in Y’s store) Inventory Costs: Insurance + Import Duties + Freight & Storage Fees + Invoice – Discounts/Allowances Perpetual – Updated frequently; Periodic – updated at end of ACC period Goods sold: Account for Sales Rev and COGS 2/15,n/60 à Disc if paid w/thin 15 days; all due in 60 days (Dbt ACC Payable, Cr MI for Disc & Cash) Purchases Returns (Dbt ACC Payable, Cr MI) Ending Inventory à SFP (AT) while COGS à IS (FY) Ratios Liquidity & E: Turnovers(AR/AP) , Current/ Acid-test ratio, Days (Sales unc) Solvency: Debt, Equity, Debt to Equity, Times interest earn D-E: what portion of assets are contributed by creditors. larger debt-to-equity ratio implies less opportunity to expand through use of debt financing Profitability: Profit margin, return on total asset, EPS, Market prospect: P-E Ratio, dividend yield Div yield =

Sales (R&A) Returns & Allowances; R: return after a sale; A: reductions in selling price of merch sold to customers (X returns Y’s goods after buying) à Dbt Sales Returns & Allowances; Cr ACC Rec and Dbt MI and CR COGS to return goods to invent. Net Sales: Sales – Discounts – R&A (high R&A indicate defective merchandise or “roundtripping”: (sell and buy back later) “channel stuffing”: (sell more than needed, return to Company in later period or reduce future sales) Shrinkage: eg. MI balance 8.25K but physical count only 8K exists à ACC for Dbt COGS; Cr MI Gross Margin Ratio: (Net Sales-COGS)/Net Sales (% of dollar sales available to cover expenses & provide a profit) Acid Test Ratio: Quick Assets/ Current Liabilities; (Cash + ST Investments/fin assets + Current Receivables)/ Current Liabilities (Value at least 1 avoid liquidity problem in future) à not always true. CA excluding inv/prepaid that is difficult to convert to cash Inventory Cost Flow Assumptions: 1. Specific Identification à Tell you from what inventory etc. 2. First-In, First-Out (FIFO) 3. Weighted Average Cost [WAC] (COGS Available for sale/ Units on hand at date of sale) Advantages: WAC smoothes out price changes; FIFO – ending inventory approximates current replacement cost Inventory must be reported at Net Realizable Value (NRV) when NRV is lower than cost Record inventory impairment: Db COGS/ Impairment Expense, Cr MI for goods that dropped in value IT: How often company turn over inventory; show how well management controls inventory available.

Inventory Turnover: COGS/ Average Inventory Day Sales in Inventory: Ending Inventory/COGS * 365 (How much inventory available ITO no. of day sales) Include Treasury: if 1 for 1 or 2 for 1 split: (3363) -> (6726)

Current vs Long-Term (LT) Liabilities: Current – paid within 1 year or company operating cycle; LT – not expected to pay within 1 yr or company op. cycle Liabilities: ACC, GST, Short-term Notes payable, Unearned Rev, Payroll Liabilities; Transfer from LT Debt to Current Maturity Warranties: Dbt Warranty Expense, Cr Warranty Liability; when claiming: Dbt Warranty Liability, Cr Cash/ Inventory When Selling Warranty; Dbt Cash, CR Sales Rev & Unearned W

Once its earned; Dbt Unearned Warranty Revenue & CR Warranty Income Dbt Repair Expense, Cr Cash Provision is a present obligation where outflow is probable and able to measure. Contingent liability is a possible/ present obligation where outflow is not probable and may be unable to measure. (Legal claim is recorded if amount can be reliable estimated & payment is likely) (Debt Guarantees: guarantor will disclose guarantee, If likely debtor will default, guarantor should record and report guarantee as liability) Times Interest earned: (Profits before interest expense & income tax)/ Interest expense. (protection 2 creditor) (Profit before interest & Tax varies greatly from Y2Y, fixed interest charges can increase risk that an owner will not earn +ve return & unable to pay interest charges)

SalesRev– COGS = Profit – Expenses = Operating income +- Other G/L +- Recurring event = Net Y

Current Assets: Cash/ Cash equivalent; held with purpose of trading; realised within 12 months after reporting period PPE: tangible items held for use in production of goods/ services/ rental; expected to use for at least 1 ACC period Cost of PPE includes: purchase price (taxes & net discounts), any other costs necessary to use & estimate of any costs in dismantling item at end of its life. Cost allocation by Proportion; similar to Bundling. Capital: extends life of asset; overhaul/ partial replacement vs Revenue: do not extend life nor increase productivity Depreciation: Consider Cost, Salvage Value & Useful Life Methods: Straight-line, Units of production/ Declining Balance

Declining Balance: x2 Straight line rate and * carrying amt. Take into residual value later Partial Yrs Depreciation: Double straight-line rate and * carrying amt * Do monthly for y1 *Acc for disposal thru discard/ selling 1. ACC for Present depreciation (Check, is there accumulated depreciation? If yes, add on to it) 2. For Gain or Loss, when you sell the eqpt, Dbt Cash + ACC Depreciation & Cr Eqpt + Gain/Loss à Subtract the diff to find the gain/ loss on sale of eqpt. Impairment: only record if persist LT; may be combined with depreciation Intangible Assets: Goodwill, Finite Useful Life etc. Total Asset Turnover: Net Sales/ Average Total Assets à Provide info about company’s efficiency in using its assets to gen sales Rmb beg assets + ending assets/2 Free cash flows = Net cash from operating activities – Capital expenditures. à cash that co. is able to generate after setting $$ aside to maintain/ expand asset base. In journal entry B.D counter agst existin Allowance bad debt in SOF: Use Higher amount Separate A.D and Depre Exp for the year

Ordinary Shares: 1 share 1 vote, entitled to receive dividends (divd) declared; not redeemable & rank behind preference shares in dividends & liquidation Preferences Shares: Priority over Ordinary, no voting rights; senior to ordinary on divd payment; fixed rate Divid Dates: Declaration, Record & Payment; to calculate dividends: Par value * No of Shares * % declared Preference shares divds: 1) No guarantee 2) Cumulative preference shares (divd in arrears) vs non-cumulative preference shares 3) Participating preference shares Share buybacks subjected to rules (should not be

Cash & its equivalents: $$, Short-term bank deposits (mature within 3 months), Money market funds; Operating Activities: Cash from (inflows) sale of goods & services, royalties, fees, commissions; (outflows) cash payments to suppliers for goods & services, employees. Investing Activities: Cash receipts from (inflows) sale of PPE, intangibles, equity, debt instruments, repayment of advances & loans; (outflows) acquire PPE, intangibles, equity, debt instruments, cash advances & loans made to other parties; Financing Activities: cash from (inflows) issuing shares, loans, notes, bonds, mortgages; (outflows) payments to acquire entity’s shares, repayment of amounts borrowed & Dividends as well. Assume all are Operating cash flows except dividends paid; treated as financing cash flow

excessive and avoid buying at open/close

Treasury shares – Shares bought back; can cancel/ reissue etc. (if Reissue at higher price, there’s a Cr account for - Premium on Treasury shares (POTS)(eqty) if reissued at lower price, debit retained earnings [IF THERE IS NO POTS]) Cancel account: Debit Share capital; Credit cash; record a note for Repurchase & Cancellation No JE for stock split/ bonus issue; no of shares double, price half. Purpose of Statement of Profit/Loss & Other Compre Income: Shows all non-owners changes in equity and oth compre income. (eg. Changes in Revaluation surplus) Purpose of Changes in Equity: All owner changes in equity, including changes in ACC policies & correction of prior period errors. Earnings Per Share (EPS): (Net profit – Preference divd)/ (Weighted Avg ordinary shares outstanding) Price-Earnings Ratio: Price (Market) of share/ EPS (higher the better à more opp for growth) Dividend Yield: Annual Cash dividends per share/Market value per share: return on ord shares Book Value Per Ordinary Share: Shareholders’ equity applicable to ordinary shares/ No. of ordinary shares outstanding. Working Capital = current assets – current liabilities. Liquidity figure that represents current assets financed from long-term capital sources that do not require near-term repayment à higher figure suggest stronger liquidity position and ability to meet current obligationsAccounts Payable Turnover = cost of goods sold / average accounts payable Short term liquidity measure used to quantify the rate at which company pays off its suppliersDay’s Purchases in Accounts Payable = accounts payable / cost of goods sold * 365 Efficiency ratio that evaluates how long business takes to pay its credit suppliersCash Conversion Cycle = days’ sales uncollected + days’ sales in inventory – days’ purchases in accounts payable Represents the no. of days a firm’s cash remains tied up within operations of business Lower the better Debt-to-Equity Ratio = Total Liabilities / Total Equity (measures portion of company assets contributed by creditors)Return on Ordinary Shareholders’ Equity = (net profit – preference dividends) / average ordinary shareholders’ equity: how well company employs the shareholders’ equity to earn net profit

No difference in reporting cash flow from investing & financing activities for Direct & indirect; only Operating activities diff Divid Income on Financial Assets: Cash divid received since no divid receivable acc on balance sheet (assume Op cash flow)

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Cash Flow on Total Assets: (Net cash from operating activities)/Average Total Assets à used along w profit-based ratios to assess company performance...