Accounting Chapter 8-12 PDF

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Lecture Notes taken on chapters 8-12 Financial Accounting textbook...

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Chapter 8: Accounts receivable- customers owe x amount of money to be paid within 30-60 days after purchasing of goods or service Notes receivable- written promise for accounts receivable, pay within 30-60 days (contract) Other receivables- non-trade receivables such as interest, loans, advances to employment and income taxes Must- recognize accounts, value accounts, and dispose of accounts receivable (pay off) Examples: RECOGNIZEXxx company $1,000 2/10 N aka if they pay within 10 days they will receive a 2 percent discount Jul 1st Accounts receivable … 1,000 Sales Revenue… 1,000 Xxx company returns $100 worth of products Jul 5th Sales and Returns Allowances … 100 Accounts receivable … 100 VALUEDirect write-off method is not used unless allowed by management Allowance Method Bad Debt Expense - dr Allowance for Doubtful Accounts- dr Sales Revenue - cr Accounts Receivable dr/cr Notes receivable - to the Payee, the promissory note is a note receivable - To the Maker, the promissory note is a note payable Cash Notes receivable Interest revenue COMPUTING INTEREST equation: Face value of note x annual interest rate x time in terms of one year (x/12 months) = interest Maturity date - last day allowed to pay off notes receivable Chapter 9: → Plant assets are critical to a company’s success.

Determining the cost of plant assets. Historical cost principle requires that companies record plant assets at cost. → LAND - All costs incurred in making the land ready for its intended use increase (debit) the land account. - Ex: purchasing cash, closing costs, real estate agent cost, property taxes, etc. - Cost of land will be seen on balance sheet - HISTORICAL COST PRINCIPLE: land will be listed at price it was purchased for, not what the current real estate value shows Land improvements: - Structural additions made to land will be recorded under “Land” →BUILDINGS: - Includes all costs related to purchase or construction - Remodeling, replacing parts, etc. all recorded under cost of “building” →EQUIPMENT: Includes all costs for incurred purchases of acquiring equipment and preparing(fixing) it for use. - Cash purchase price - Sales taxes - Freight charges - Insurance during transit paid by the purchaser - Expenditures required in assembling, installing, and testing the unit Q. “Lenard…” Equipment … 23,820 License ex … 80 Prepaid insurance … xxx Cash … xxx →Expenditures during useful life… Ordinary repairs are expenditures during useful life. - These can be debited to Repairs Expense or Maintenance - Referred to as revenue expenditures. →Additions and Improvements: - These occur in order to better proficiency, etc. - These are referred to capital expenditures. →DEPRECIATION: - Process of cost allocation and no asset valuation Methods: Straight-line, units-of-activity method, declining-balance method - Companies are free to choose their preferred method, but must stick to this during business, if Changed it must be reported - The straight-line method is used most frequently Q. Straight line method: expense is the same amount for each year - Depreciation cost = cost less salvage value

COST - SALVAGE VALUE = DEPRECIABLE COST → DEPRECIABLE COST / USEFUL LIFE IN YEARS = ANNUAL DEPRECIATION EXPENSE Example: 2019

Depreciation expense Accumulated depreciation

1,800 1,800

Purchased for 50,000 10 year life with $2,000 salvage value December 31, 2019 journal entry: ⤷ Dec. 31 Depreciation expense Accumulated depreciation

4,800 4,800

→ solution: 50,000 - 2,000 = 48,000/ 10yr = 4,800 over 10 years (see journal entry above) UNITS OF ACTIVITY METHOD: -

Estimate total units of activity to calculate depreciation cost per unit Expense varies based on units of activity Depreciable cost is cost less than salvage value

A.k.a. units-of-production method Equation: depreciable cost (x - salvage value) / total units of activity = depreciable cost per unit → depreciable cost per unit x Units of activity during the year = annual depreciation cost Depreciation Methods cont. Declining balance methodAccelerated method Decreasing annual depreciation expense over assets useful life Twice straight line rate with double declining balance Rate applied to book value equation : book value at beginning of year x declining balance rate = annual depreciation expense Revising Periodic depreciation Chapter 10: A liability is a debt that is planned to be paid in one year, or the operating cycle whichever is longer. This can include notes payable, accounts payable, unearned revenues, accrued liabilities such as taxes payable, salaries and wages and interest payable.

Q. D- whichever cycle is longer is when the liability is scheduled to be paid off Notes Payable Written note promising payment by a certain time Frequently issued to meet short-term financing needs Requires the borrower to pay interest Issued for varying periods Notes payable exampleEntry for lending someone 100,000 plus 12% interest Cash… Notes Payable …

100,000 100,000

Interest Expense … Interest Payable …

4,000 4,000

Maturity date journal entry: Notes payable … Interest Payable … Cash…

100,000 4,000 104,000

Current Liabilities Unearned Revenue - Revenues received before completing service or providing goods - If Jane Doe is going to pay a company 5k out of 25k the 5k is considered to be a current liability, while The 20k remaining amount is considered to be a long-term liability. Borrow 50,000 with 12% interest over 6 months, what will the interest be on December 31st? 50,000 x .12 = 6,000 = 1,000 in interest for each month so by dec 31 Interest = $4,000 Bonds -

Form of interest-bearing notes payable Types include: secure bonds, unsecured bonds, convertible bonds

→ IN CLASS PROBLEMS (10-11) 1. False- the long-term liability does not have to be paid, the small amount that is paid off would be considered current liability 2. False- current liability 3. False- par value is most original price of stock, it does not always equal the same amount as market value 4. False- dividend is not a liability it belongs to stockholders equity account, only record dividend of declaration date and xxx date

MC QUESTIONS 1. C. A lawsuit…not determined, we do not know the outcome of the lawsuit therefore we do not Know whether or not we will be owing any money. 2. B. Cash, Notes Payable. This note was made before interest accrued, so we only record the cash. 3. A. Interest expense, interest payable - not hit maturity date, but we have accrued interest, Recording the interest payable and interest expense 300,000 x .06 (6%) x 6/12 = $9,000 4. B. Interest payable, notes payable, cash- maturity date recording 200,000 x 6% x 6/12 = $6,000 Of interest 5. B. credit to common stock for 80,000 - par value times number of shares ($8 x 10,000 shares) Debit stock dividend $150,000 ($15/share x 10,000 shares) Credit common stock dividend distributable $80,000(par value $8/share x 10,00 Credit Paid-in Capital in Excess of Par $70,000 (150K-80K) 6. A. Cash … 13,200 Common stock w/ no par value… 13,200 Quiz #3 Review: 90/100 - $0.48 x forgot to subtract 4,000 - $0.44 ✓ must subtract the salvage value from the original cost Chapter 12: Discussing the usefulness and format of the statement of cash flows -entity’s ability to generate future cash flow -entity's ability to pay dividends and meet obligations Classification: 1- operating activities; income statement items 2- investing activities; changes in investment and long-term assets 3- financing activities; changes in long-term liabilities and stockholders equity 1- Operating activities Cash inflows: from sale of goods or services, from interest received and dividends received Cash outflows: suppliers for inventory, employee for wages, government for taxes, lenders for interest, others For expenses 2-investing activities Inflow: sale of assets, sale of investments in debt or equity securities of other entities Collection of principal on loans/ other entities Outflow: Purchase property, plant, equipment Purchase investments in debt or equity securities of other entities Xxx 3-Financing activities Inflow: sale of common stock, issuance of debt (bonds and notes) Outflow: stockholders as dividends, redeem long-term debt or reacquire

Significant noncash activities 1. 2. 3. 4.

Direct issuance of common stock to purchase assets Conversion of bonds into common stock Issuance of debt to purchase assets Exchanges of plant assets

- Separate schedule or separate note Net income differs from cash flow 1. Direct method/indirect method (Boldface used more often) Q. 1. 2. 3. 4. 5.

Financing - inflow financing - inflow Investing - outflow Operating - outflow Operating - inflow

Prepare statement of cash flow using the indirect method (most commonly used, easiest to use) Three sources of information 1. Comparative balance sheets: analyzing of current years income statement, and comparative balance Sheets and selected additional data 2. Analyzing changes in noncurrent asset and liability accounts and record as investing and financing Activities, and analyzing comp. Balance sheet and other info for effects on cash Indirect - most frequently used in companies Sales rev- when the goods or services are provided cash(debit cash credit sales revenue), credit (debit accounts receivable, credit sales rev) COGS- some paid in cash some may be on credit, must be adjusted to see what we owe Operating expenses- rent, depreciation, etc Net op ex- interest expense Loss on disposal of plant asset- affects net income not cash, do not have to pay x company in cash add in loss when net income is calculated to cash Interest expenseOnly make adjustments for anything that will affect one of the two (net income vs cash) WHICH ITEM AFFECTS CASH AND WHICH DOES NOT????? Calculating changes in each account to find cash from investing and operating activities Assets: Current Cash acc rec Inventory Prepaid expense (rent) Long term

Plant Buildings Depreciation Equipment, etc. Liabilities and stockholders equity Format of Cash FlowX X X X X Indirect method Step 1: Operating Activities - start at net income, find net income and adjust to net cash - Add back non-cash expenses (depreciation expense, and amortization expense) - Deduct gains and add losses. Add losses and subtract gains in order to find cash received fro operating activities - Analyze changes in non-cash current asset and current liability account (changes do not affec decrease in acct. rec. will increase cash (think: one pocket to the other pocket). Net income … 145,000 Adjustments Adjustment 1: depreciation expense … 9,000 Net cash provided by operating activities … 154,000 - new net income by adding 9K Adjustment 2: Loss on disposal of plant asset … 3,000 Net income… 157,000 Changes to noncurrent asset: Accounts receivable balance changes from 20 to 30k Adjustment 3: add decrease in acct rec … 10,000 Net income: 167,000 Adjustment 4: Increase in inventory … (5,000) Net income: 162,000 Increase one account - decrease cash balance Decrease one account - increase cash balance… in order to create the balance sheet See 15 of 24 slide for summary Step 2: Investing and financing Q. The additional information explains that the equipment increase resulted from two transactions: (1) a purchase of equipment of $25,000, and (2) the sale for $4,000 of equipment costing $8,000 (with accumulated depreciation of $1,000) Journal Entry: Cash … 4,000

Accumulated Depreciation … 1,000 Loss on disposal of plant assets … 3,000 Equipment … 8,000 Book value = 8,000 (cost) - 1,000 (accumulated depreciation) = 7,000 Loss on disposal bc the item was sold for 4,000 not 7,000; creating a loss of 3,000. Journal entries that occur from Q. above Purchase of equipment… (25,000) Sale of equipment… 4,000 Issuance of common stock… 20,000 Payment of cash dividends… (29,000)...