Accounting 2010 Cheatsheet TEST 2 PDF

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ACCOUNTING 2010...

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Property and equipment includes physical, long-term assets—fixed or operating assets (land, equip., buildings, furniture. All prop. and equip. originally valued @ cost on balance sheet. Land is always listed at cost on balance sheet—other prop and equip is depreciated—an adjusting entry. Debit Depreciation Expense Credit Accumulated Depreciation.Depreciated assets reported on balance sheet @ book values, which represents portions of asset cost that hasn’t been depreciated Asset Cost less Accum. Depr. = Book value of Asset. Company using GAAP required to report PPE on Cost Principle (company records its transactions on basis of dollars exchanged—provides most reliable value & most conservative value) & matching principle (states that cost of producing revenues for an acc. period must be deducted from revenue earned—company allocates cost of using PPE to revenues by recording dep. expense, & reports PPE @ net book value on balance sheet (most ideal). PPE cost includes all costs company incurs to acquire asset & use. Cost includes purchase price (less purchase discounts), sales tax, transportation, insurance, installation costs & similar costs (company determines cost by reviewing source documents (invoices) used to record purchase. PPE benefits a company for more than one year—produces revenues for business. Depreciated to reflect the systematic cost of producing revenues over useful life, and reflect physical wear and tear by use, time, or damage. Calculation of depreciation—cost of asset, estimated useful life, and estimated residual value (cash company estimates will receive from sale/disposal) not calculated to estimate asset value, ensures cost of producing revenues isn’t determined in an arbitrary manner, method represents a rational means to relate the benefit of asset in any period. Straight-line method- used when likely the asset will produce equal benefits over service life(Cost-Estimated Res. Value/Est. Service Life (per year)). Accelerated method used when it’s likely the asset will produce higher benefits in early part of service life & lesser benefits in succeeding periods.(GAAP allows manager to choose double-declining balance method or sum-of-the-years digits method) Under accelerated method of depr., expense is not recorded equally over the service life. Instead, deprec. expense is higher in first half of asset’s service life & lower in subsequent years. (Double-Declining Method—residual value is ignored, computing depreciation but depreciation cannot be recorded below it= 200%/estimated service life x book value @ beginning of year) (recorded as depreciation until residual value is reached)

Company deducts depreciation expense from revenues as part of its calculation of net income. It also deducts depreciation expense in reporting taxable income on its income tax return. Many companies use an accelerated depreciation method acceptable under the Internal Revenue Code known as the Modified Accelerated Cost Recovery System (MACRS). Three major ways in which MACRS depreciation is different from GAAP depreciation: 1) MACRS defines the tax life of the asset 2) MACRS uses no residual value 3) MACRS specifies a depreciation percentage for each year. Capital expenditure is a cost that increases benefits the company obtain from assets (treated as an addition to asset. Depreciated over remaining useful life of asset. Operating expenditure is a cost that only maintains the benefits that the company originally expected from the asset (Expense when incurred) Impairment occurs when expected future net operating cash flows are less than the book value of the asset—company is required to asses fixed assets for impairment, company records an impairment loss to reduce the book value of the asset when it is noted Disposal of PPE Three treatments: The asset is sold for an amount equal to its book value on the date of disposal. No gain or loss is generated. The asset is sold for an amount greater or less than its book value on that date in which a gain or loss is recorded. The asset is traded for another asset. Depreciation expense is recorded until the date of disposal--When a company disposes of the asset, it removes the balances in both the specific asset account and the related accumulated depreciation account. Intangible assets (research, patents, copyrights, trademarks, franchises, computer software costs, goodwill) are long term assets that don’t have a physical substance (result from legal rights, higher degree of uncertainty for future benefits, value fluctuates, may have value only to a particular company, may have expected lives that are very difficult to determine. Certain assets, cost allocation to deprecation is recorded and title amortization, other assets are not amortized but rather assessed for impairment. Wasting assets addition to PPE, companies have natural resource assets, it’s an asset that is used up as it is extracted (oil, coal, gravel, timber) accounts for these in same manner as other categories of physical, long-term assets. A company uses the units of production method to compute depletion expense based in amount of a natural resource asset that is used up. Depletion rate= Costestimated residual value/total estimated lifetime activity level (1 year). Adjusting Journal Entries—made at end of accounting period to bring revenue and expense account balances to date, and show correct ending balances in asset/ liability accounts. Ordinarily affects both a permanent (balance sheet) and temporary (income statement) (Main purpose is to match incomes and expenses to approp. Accounting periods. Accruals —accrued expenses—example interest expense on loan accrued in current period but not yet paid. Accrued Revenues—example interest revenue that has been earned but has not been collected. Prepayments— revenues received in advance and recorded as liabilities. Expenses paid in advance and recorded as assets. Non-Cash—record non-cash items such as depreciation expense, depletion expense, allowance for doubtful debts. Depreciation, Impairment, Amortization—cash flows out before adjustment entry is made and before expense is recognized, adjusting entry is made after the cash flows out, expense is recognized after cash flows out Prepaid Assets—(supplies, prepaid rent, prepaid insurance) Debit prepaid asset, credit cash—then debit expense, credit prepaid asset. 4 Questions—what is beginning balance of account, what is amount of asset purchased, what is the ending balance of asset, and what adjustment needs to be made? Supplies adjusting entry= Beg. Balance+Purchases-End Balance=adjusting entry amount. Debit expense, credit accrued liability—debit accrued liability, credit cash. Debit wages expense, credit wages payable, debit wages payable, credit cash. Debit receivable, credit revenue—debit cash, credit receivable. Office supplies adjustment— expenses would be understated, net income would be overstated, retained earnings would be overstated. Prepaid insurance adjustment—expenses would be understated, net income would be overstated, retained earnings would be overstated. Unearned Revenue adjustment: revenues would be understated, net income would be understated, retained earnings would be understated. Dividends when a corporation distributes a portion of earnings to stockholders. Significant dates; Date of Declaration (declares that a dividend will be paid to stockholders on future date) Date of Record (only stockholders listed can receive dividend) Date of Payment (corporation distribute dividend payment) debit dividends, credit dividends payable—no journal entry for date of record, date of payment, debit dividends payable, credit cash. Temp. Account—debit retained earnings, credit Div. Calculating Retained Earnings—beginning retained earnings+net income-dividends declared=ending retained earnings. Budget—report that gives a financial description of one part of a company’s planned activities for budget period (shows how many products a company plans to sell in a year, dollar amount of sales, and when company will collect cash from sales. Budgeting improves the planning, operating, and evaluating processes by adding discipline & order to planning process, recognize & avoid potential operating problems, quantify plans, create a benchmark for evaluating company’s performance, Retail Company’s operating cycle is avg. time it take company to use cash to buy goods for sale (inventory), sell these goods to customers, and collect cash from its customers. Service Co. Operating Cycle is avg. time it takes the company to sue cash to acquire supplies and services, sell the services to customers, and collect cash from customers. (Sales budget, purchases budget, selling expenses budget, G&A expenses budget, cash budget, projected income statement, projected balance sheet. Master Budgets overall structure a company uses to organize budgeting process —shows the relationships among company goals, resources, and expected financial results. Typical sales budget includes budgeted total sales by month (unit sales x selling price) budgeted cash sales versus credit sales by month, expected cash collections by month. Determining timing and amounts inventory—out of stock; high cost of fast delivery (too low) just-in-time on customer demand (inventory on hand) ties up cash resources, high storage costs (too high) Purchases budget begins with budgeted unit sales from sales budget, adding in desired ending inventory. Approach helps minimize risks of underestimating actual sales or overestimating inventory that should be on hand. Selling Expenses Budget shows expenses and related cash payments associated with planned selling activities, includes budgeted selling expenses (salaries) advertising and depreciation on store equipment by moth, and budgeted cash payments for selling expenses by month Retail G&A general administrative expenses budget shows expenses and related cash payments associated with expected activities other than selling—includes expenses such as rent, salaries, consulting expenses, supplies, and utilities by month, budgeted cash payments for expenses by month. Retail Cash Budget—after sales, purchases, and expense budgets are completed (don’t keep too much/little cash on hand) Budgets help managers monitor and evaluate results on an interim basis and implement corrective action if necessary. Working capital- amount of current assets remaining after a company pays its current liabilities (represents the net resources managers have to work with in the company’s day-to-day operations (current assets-current liabilities = working capital) If working capital is too low, can’t fund operations, risks liquidity, unanticipated borrowings. Too high, idle resources not invested in operations. WC includes managing some important items such as cash, accounts receivable, inventory, and accounts payable. Internal Controls provide framework/company guidelines to keep business on track, safeguard assets (prevent fraud), check accuracy/reliability of accounting info, promote efficiency, encourage productiveness. Controls over Cash- company’s cash includes money on hand, deposits in checking and savings accounts, and checks/credit card invoices received from customers but not yet deposited. Cash is most likely asset for employees to steal or companies to misplace. Bank Recs- company uses bank rec to determine accuracy of balance in cash account—adding additional internal control procedure over cash accounts Petty Cash- specified amount of $ under control of one employee, used for making small cash payments, less control over expenditures. Accounts Receivable- amounts owed to a company by customers from previous credit sales (sales made on a company store account, such as home office supplies on Office Depot card) On balance sheet, company reports its accounts receivable at “net realizable value” amount expected to be collected from customers. Inventory controls selling inventory provides sources of profit and operating cash, company needs to monitor how well it turns over inventory, storing inventory is expensive, can be stolen/ become obsolete Accounts payable- amounts that company owes to its suppliers for previous credit purchases of inventory and supplies. Amount of accounts payable is listed in current liabilities section of the ending balance sheet .

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