Accounting Notes - Instructor: Keval Amin PDF

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Instructor: Keval Amin...

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1/23/2018 Intro: Buy the Online Pass Financial Accounting 8th Edition (from actual site) HWK Every Sunday (Check Syllabus for exact schedule) --Investors provide capital to companies, and companies provide capital gains to investors. To gain investors, companies have to generate information, economic performance etc. Incentivize investors. Investors elect board of directors to manage the company to assure truth and oversee the company. Assure company is doing right thing for the investors. Executive Committee (Management and direction of company) Compensation Committee (Sets wages) Audit Committee (Appoints external auditor, validate information company provides) PCAOB (Audit the Auditors) Financial Standards to prevent falsified information: U.S. GAAP Generally Accepted Accounting Principles IFRS International Financial Reporting Standards --Difference between companies and investor interests. Investors rely on imperfect set of information/system from companies. Financial accounting allows for more accurate judgements. --Internal: Financial information allows you to: Decide price to maximize income Decide which product line is most profitable How much cash is sufficient to pay shareholders If you can have pay rise.

External: Creditors find if you will you be able to pay debts on time Investors wants to know if you are earning satisfactory income Investors want to know size and profitability compares to competitors. WHAT ENRON DID: Dumped bad liabilities etc. onto SPE companies, fake companies which exist to dump bad things into to make Enron's financial statements better. M. Yass -> My Ass a SPC that enron made. Sarbanes-Oxley Act of 2002, makes it more difficult to commit fraud. Increase market trust. a. Top management must now certify the accuracy of financial information b. Penalties for fraudulent activity increased c. Independence of auditors increased. Solving and Ethical Dilemma 1. Recognize an ethical situation and the issues involved 2. Identify and analyze the principal elements in the situation. 3. Identify the alternatives, and weigh the impact of each alternatives on various stakeholders Even in non-for-profit, charities, you require auditing and financial statements. Allows people to trust the charity more because they know there will be less waste and theft.

1/25/2018 Class 2: Business Activities/Operating Activities a. Revenues - Amounts earned from the sale of products (Sales Revenue, Service Revenue, and Interest Revenue) . b. Inventory - Goods available for sale to customers. c. Accounts Receivable - Right to receive money from a customer as the result of a sale. d. Expenses - Cost of assets consumed or services used. (cost of goods sold, selling,marketing, administrative, interest, and income taxes expense). e. Liabilities arising from expenses include accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable. f. Net income - when revenues exceed expenses. g. Net loss - when expenses exceed revenues. Financing Activities 1. Borrowing money (Debt financing) a. Amounts owed are called liabilities

b. Party to whom amounts are owed are  creditors. c. Notes Payable and bonds payable are different types of liabilities. 2. Issuing (selling) shares of stock for cash. a. Payments to stockholders are called dividends. Companies prepare four financial statements from the summarized accounting data: a. Income Statement i. Reports revenues and expenses for a specific Period of Time ii. Net income - revenues exceed expenses iii. Net loss - expenses exceed revenues iv. Past net income provides information for predicting future net income. b. Retained Earnings Statement i. Net income is needed to determine the ending balance in retained earnings. ii. Retained Earnings + Net Income - Dividends = Retained Earnings iii. Statement shows amounts and causes of changes in retained earnings during the periods. iv. Time period is the same as that covered by the income statement. c. Balance Sheet i. List of company assets ii. Ending Balance in Retained Earnings is needed in preparing the Balance Sheet iii. Reports assets and claims to assets at a specifics point in time (not a period in time, its an exact day and point.) iv. Assets = Liabilities + Stockholders’ Equity 1. Everything you own is the result of whatever the shareholders gave you or whatever you borrowed/owe now. v. Lists assets first, followed by liabilities and stockholders’ equity. vi. Common Stock = How much was invested by shareholders d. Statement of Cash Flow i. Where did cash come from during the period ii. How was cash used during the period? iii. What was the change in the cash balance during the period? Other Elements of an Annual Report Always includes: a. Financial statements b. Management discussion and analysis i. Managers modify language they use depending on how the company will do. c. Notes to the financial statements i. Clarify the financial statements (What form was used, and justify what was used) ii. Provide additional detail d. Auditor’s report.

i.

Auditor's Opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles.

SIDE NOTE: A=L+SE Dividends A  RE NOT an expense in income statements. Dividends ARE an expense in retained earnings balance. Parenthesis is a minus e.g. (5) = -5 vs 5 = 5

Cash Activity

Classification Financing/Operating/Investing

Inflow or Outflow

Cash paid for repayment of debt

Financing Activity

Outflow

Cash received from issuance of common stock

Financing Activity

Outflow

Cash received from issuance of long term debt

Financing Activity

Inflow (Payable)

Cash received from customers

Operating Activity

Inflow

Cash paid for property and equipment

Investing Activity

Outflow

Cash paid for dividends

Financing Activity

Outflow

Cash paid for repurchase of common stock

Financing Activity

Outflow

Cash paid for goods and services

Operating Activity

Outflow

--1/30/2018 [email protected] Assets - Something the company owns that can be converted to cash/liquidated in long term. Liability - Something owed. Will consume assets in near future or long term. Stockholders Equity - What the investors invest in the company, and retained earnings. Asset = Liability + Stockholders Equity

Equation means that All assets come from either liabilities (loans) or something from retained profits or stockholders. Income Statement Rev - Expenses = Net Income Balance Sheet Assets -> Total Assets Liab. + SE -> Total L+SE Total Assets = Total L+SE Retained Earnings Statement B.B. Retained Earnings + Net Income - Dividends = E.B. Retained Earnings Cash Flow Statement (Shows change in cash in a period) Operating CF +/- Investing +/- Financing +/- = Change in Cash --Current Assets - Assets that a company expects to convert to cash or use within one year or the operating cycle, whichever is longer. - Operating cycle is the time it takes from the purchase of inventory to the collection of cash from customer. - Common Types of current assets are (1) cash, (2) investments, (3) receivables, (4) inventories, and (5) prepaid expenses. Long-Term Investments - Investments in stocks and bonds of other corporations that are held for more than one year. - Long-term assets such as land or buildings that a company is not currently using in its operating activities - Long-term notes receivable. Property, Plant, and Equipment - Sometimes called fixed assets or plant assets. - Used in operations - Includes land, buildings, equipment, delivery vehicles, and furniture - Depreciation - allocating the cost of assets to a number of years. - Accumulated depreciation - total amount of depreciation expensed thus far in the asset’s life.

EX: A Truck is an asset worth $50,000 with a life of 10 years. - The depreciation expense is $5,000 per year after the first year. - The initial purchase is NOT recognized as an expense. - If there is an accident, it counts as a LOSS. On Balance Sheet it will show: Assets Prop. P.E. $5,000 Accumulated Dep. (5,000) Net Value 45,000 Year 2 (10,000 accumulated depreciation) Prop. P.E. $5,000 Accumulated Dep. (10,000) Net Value 45,000 Intangible Assets - Assets that do not have physical substance - Includes goodwill, patents, copyrights, and trademarks or trade names. Current Liabilities - Obligations the company is to pay within the next year or operating cycle, whichever is longer - Common examples are accounts payable, salaries and wages payable, notes payable, and income taxes payable. - Also included as current liabilities are current maturities of long-term obligations payments to be made within the next year on long-term obligations. Long-term Liabilities - Obligations a company expects to pay after one year - Include bonds payable, long-term notes payable, Mortgages payable. Stockholders’ Equity - Common Stock - investments of assets into the business by the stockholders. - Retained Earnings - income retained Unearned Service Revenue A current liability where you have not provided the service yet that people have paid you for, you haven’t earned it yet. Expense & Liabilities Expense is when you pay for something and don’t have an obligation e.g. spending money on merchandise. Can be an expense but not a liability.

Liabilities is when you promise to pay for something and have an obligation e.g. purchasing merchandise on an account. --2/6/2018 Assets = Liabilities + SE Assets - Current Assets a. Cash b. STI (Inventory / Prepaid Expenses) c. A/R - Long Term Assets a. PPE (property) b. Intangibles Liabilities - Current Liabilities a. Accounts Payable (anything payable - Long Term Liabilities a. Mortgage Stockholders Equity - Retained Earnings - CS Ratios Earnings per share (EPS) measures the net income earned on each share of common stock. Net Income - Preferred Stock Dividends / Shares outstanding NI - PD/SO Balance in retained earnings is not affected by issuance of common stock. Liquidity - the ability to pay obligations expected to become due within the next year or operating cycle. Working Capital = Current Assets - Current Liabilities Working Capital is the difference between the amounts of current assets and current liabilities (essentially what you have to work with in short term) Liquidity Ratios measure the short-term ability to pay maturing obligations and to meet unexpected needs for cash.

Current Ratio = Current Assets / Current Liabilities Having a lot of current assets sitting around is bad, you don’t want current ratio to be too high, should be around industry. You should be utilizing as much capital as possible to grow. Also having too much inventory results in outdated inventory, obsolescence. Debt to assets ratio measures the percentage of total financing provided by creditors rather than stockholders Debt Ratio = Total Liabilities / Total Assets Free Cash Flow is a measurement to provide additional insight regarding a company’s cash-generating ability. Free Cash Flow = Cash Provided by Operations - Capital Expenditures - Cash Dividends Generally Accepted Accounting Principles (GAAP) - A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes Standard-setting bodies determine these guidelines: - Securities and Exchange Commission (SEC) - Financial Accounting Standards Board (FASB) - International Accounting Standards Board (IASB) - Public Company Accounting Oversight Board (PCAOB) FASB, useful information should possess two fundamental qualities, Relevance  and faithful  representation - Relevance - Faithful representation (Depicts what actually happened) Qualities of Useful Information - Comparability - Verifiability - Understandability - Consistency - Timeliness Assumptions in Financial Reporting (2-48 / Chap 2 Slide 48) - Periodicity (Assumes company will exist forever) - Going Concern (A statement by auditor that says the company will go bankrupt and not exist forever) (Going Concern states that the company will continue to operate) 2/8/2018 Accounting Information Systems

Transactions are economic events that require recording in the financial statements - Not all activities = transactions - Assets, liabilities, or stockholders’ equity items change as a result of some economic event - Dual effect on the accounting equation. (In order to get something, you have to give something) Analyzing Transactions The process of identifying the specific effects of economic events on the accounting equation. Basic Accounting Equation Assets = Liabilities + Stockholders Equity Or A = L + (RE + REV - EXP - DIV) + CS Assets = Liabilities + Retained Earnings + Revenue - Expenses - Dividends + Common Stock Unearned Service Revenue is a Liability. (A cash advance) this is because the service has not been provided yet. When you perform the service etc. You then deduct the unearned service revenue and add to revenue. (Get rid of liability, add to revenue) Paying Dividends: add to div and subtract cash since you’re paying back the investment of investors. If you want Assets increase, its debt and if assets decrease, its credit If you want Liabilities/SE to increase, credit, if decrease, its debt. If it has a subtraction sign then its same as assets. It is debit if you increase expenses, assets and dividends. It is credit if you decrease expenses assets and dividends. For everything else, its the opposite. Increase them is credit and decrease is debit. D.E.A.D. Debit Expense Assets Dividends --Debit and Credit Procedures Debits Must Equal Credits Debt = LEFT SIDE OF T CHART Credit = RIGHT SIDE OF T CHART

Debt increases assets and decreases liabilities 2/13/2018 Source Documents (allow for tracking and prove evidence): - Sales slip - Check - Bill - Cash register tape The Journal - Book of Original Entry (Very first point of recording) - Transactions recorded in chronological order - Contributions to the recording process a. Discloses the complete effects of a transaction b. Provides a chronological record of transactions c. Helps to prevent or locate errors because the debit and credit amounts can be easily compared. The Ledger A recording process that comprises of the entire group of accounts maintained by a company. E.g. Cash ledger, equipment ledger, etc. shows specific changes on each area using T accounts. Typically have references in ledger that refers to the Journal. Ledger typically only shows cash flow (transfers in cash), journal shows why it happened . Chart of Accounts (listing of accounts used by a company to record transactions. (Shows exactly what accounts are used) Posting - Transferring journal entry amounts to ledger amounts - Reference number refers to the ledger or journal that it comes from. E.g. One transaction is shown on journal page J1 so on the ledger acct. 101 its reference is J1, and on Journal the reference for transaction is ref. 101. - Posting occurs when you transfer Journal entries to ledger accounts. Recording Process 1. Determine what type of account is involved 2. Determine what items increased or decreased and by how much 3. Translate the increases and decreases into debits and credits.

Account = Customer Notes = Loan/b2b trades. Trial Balance - A list of accounts and their balances at a given time. - Accounts are listed in the order in which they appear in the ledger 1. Assets 2. Liabilities 3. Stockholders’ equity 4. Revenues 5. Expenses - Purpose is to prove that debits equal credits - May also uncover errors in journalizing and posting. - Useful in the preparation of financial statements. 2/15/2018 CHAPTER 4: Accrual Accounting Concepts Periodicity Assumption - Assumes a time period and then deducts how well the company did in that period.

Revenue Recognition Principle - The most important part is if the obligation is satisfied, did you provide the service or the product? It’s not when the customer pays in cash, but when you perform the service and actually earn it (may it be prepaid or something to be paid later/accounts receivable) If a customer has yet to pay for a good/service, it is debited to accounts receivable and credited to service revenue (to balance) Then when you finally get the cash, you debit cash (add) and credit accounts receivable (removing it, and transferring balance from accounts to actual cash) Expense Recognition Principle Match expenses with revenues in the period when the company makes efforts to generate those revenues. “Let expenses follow revenues” Accrual vs. Cash Basis of Accounting Accrual-Basis accounting - Transactions recorded in the periods in which the events occur - Revenues are recognized when services performed, even if cash was not received. - Expenses are recognized when incurred, even if cash was not paid. (Allows for you to track exactly what happened when in a certain time frame, doesn’t leave) Cash Basis accounting (worse) - Revenues are not recognized only when cash is received - Expenses are recognized only when cash is paid - Prohibited under GAAP. (Difficult to track, since cash flow spreads over different time frames) Adjusting entries - Ensure that the revenue recognition and expense recognition principles are followed - Are required every time a company prepared financial statements - Never include cash Deferrals: 1. Prepaid Expenses: expenses paid in cash and recorded as assets before used or consumed 2. Unearned Revenues : Cash received before service is performed Accruals: 1. Accrued Revenues : Revenues for services performed but not yet received in cash are recorded 2. Accrued Expenses : Expense recorded before it is paid for. (Liability)

Prepaid Expenses are things that are recorded as assets as a service or benefit will be received in the future. Prepayment Examples: - Insurance - Rent - Supplies - Equipment - Advertising - Buildings (Once you finish it or its done, e.g. done renting an apartment or a pencil breaks or is done, it is then recognized as an expense. Before that, it still have value so it is a prepayment) Depreciation (Another prepaid expense) - Buildings, Equipment Motor Vehicles, etc. are originally listed as assets rather than expenses - Companies report a portion of the cost of a long-lived asset as an expense (depreciation) during each period of the asset’s useful life. - Depreciation does not attempt to report the actual change in the value of the asset. Do not credit equipment during depreciation expenses, credit the “Accumulated Depreciation Equipment” which is an asset and Debit “Depreciation Expense” Contra Asset Account (If they have a normal credit account and are an asset its called this) E.g. “Accumulated Depreciation accounts” which count as assets. Adjusting Entries for “Unearned Revenues Unearned revenues often occur in regard to: - Rent - Magazine Subscriptions - Airline Tickets - Customer Deposits Unearned Service Revenue -> (earned) Service Revenue Gift Cards Unearned revenue is in Gift Cards 2/20/2018 We use trial balances recognize revenue when it’s EARNED. Or used. Recognize Expenses + Revenues in proper periods.

4 types of adjustment entries (WRITE ON CHEAT SHEET) -

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-

-

Prepaid Expenses - Before adjustment - Assets overstated - Expenses understated - Adjusting Entry - Dr. Expenses - Cr. Assets Unearned Revenues - Before adjustment - Liabilities overstated - Revenues understated - Adjusting Entry - Dr. Liabilities - Cr. Revenues Accrued Revenues - Before adjustment - Assets understated - Revenues understated - Adjusting Entry - Dr. Assets - Cr. Revenues Accrued Expenses - Before adjustment - Expenses understated - Liabilities understated - Adjusting Entry - Dr. Expenses - Cr. Liabilities

Journal = journalized by transaction Ledger = Formaliz...