ACCY 200 unit 1 class notes PDF

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Summary

Professor Peter Silhan...

Description

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Balance sheet- listing of the organization’s assets, liabilities and stockholders equity at a point in time ○ Is done at the end of one period is the balance sheet at the beginning of the next period Balance sheet equation or the accounting equation ○ Assets = Liabilities + Stockholders’ equity Assets- profitable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events ○ Sometimes tangible, can be cash, merchandise inventory, or equipment ○ Sometimes observed, a customer’s acknowledgement, or receipt of merchandise and the implied promised to pay the amount due when agreed upon- an account receivable Liabilities- profitable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events ○ Amounts owed to other entities Stockholders’ equity or owners’ equity or net assets- the ownership of the right of the stockholders of the entity in the assets that remain after deducting the liabilities Cash- cash on hand or cash in the bank Accounts receivable- represent amounts due from customers who have purchased merchandise on credit and who have agreed to pay within a specified period or when billed by a company Merchandise inventory- cost to the company of the merchandise it has acquired but not yet sold Equipment- the cost of the equipment in the store of business Accumulated depreciation- the portion of the cost of the equipment that is estimated to have been used up in the process of operating the business Depreciation- the process of spreading the cost of an asset over its useful life to the entity- it is not an attempt to recognize the economic loss in value of an asset because of its age or use Accounts payable- amounts owed to suppliers of merchandise inventory that was purchased on credit and will be paid within a specific period of time Accrued liabilities- amounts owed to various creditors, including any wages owed to employees for services provided to the company Short term debt- amounts borrowed, probably from banks, that will be repaid within one year of the balance sheet date Long term debt- amounts borrowed from banks or others that will not be repaid within one year if the balance sheet date Current assets- cash and other assets that are likely to be converted into cash or used to benefit the entity within one year Current liabilities- liabilities that are likely to be paid with cash within one year of the balance sheet date

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Cost of goods sold- total cost of merchandise removed from inventory and delivered to customers as a result of sales Gross profit- the difference between net sales and cost of goods and represents the seller’s maximum amount of cushion from which all other expenses of operating the business must be met before it is possible to have net income Income from operations-related to the assets available to the firm to obtain a useful measure of management’s performance Earnings per share of common stock outstanding- reported as a separate item at the bottom of the income statement because of its significance in evaluating the market value of a share of common stock Statement of changes in stockholders equity/ statement of changes in capital stock/ statement of changes in retained earnings- has a period of time orientation. It explains the changes that occured in the components of stockholders’ equity during the year Common stock- the number of shares authorized by the corporation’s charter, the number of shares that have been issued to stockholders, and the number of shares that held by the stockholders Retained earnings- the second principal category of stockholders’ equity, and it represents the cumulative net income of the entity that has been retained for use in the business Dividends- distributions of earnings that have been made to the stockholders, so these reduce retained earnings Deficit/ accumulated deficit- when retained earnings have a negative balance because cumulative losses and dividends have exceeded cumulative net income Statement of cash flows- purpose is to identify the sources and uses of cash during the year Depreciation expense- added back to net income, even though it was deducted as an expense in determining net income. It does not require the use of cash

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Transactions can be seen as the bricks that build financial statements and are the starting point in the accounting process that end with the preparation of financial statements Accounts are summarized in financial statements Transactions are summarized in accounts Shareholders receive shares of stock as evidence of their ownership interest in a corporation Liabilities are probable future sacrifices of economic benefits Assets are past future benefits Selling, general, and administrative expenses include: advertising expense, wages expense, depreciation expense

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Income from operations- is a subtotal on the income statement that is not affected by the firm’s tax rate or by amount of interest expense incurred. It is frequently called operating income. It is frequently called earnings from operations Income statement accounts go 1) cost of goods sold 2) gross profit 3) income from operations 4) income taxes 2 main components reported on the statement of changes in stockholders’ equity are paid in capital and retained earnings 2 main components of paid-in capital are common stock and additional paid-in capital The stated value per share of no par value stock operates in the same way as the par value per share Retained earnings is reduced by any dividends paid to stockholders. Is the cumulative net income of the entity that has been retained for business. Is increased each year by the entity’s net income Statement of cash flows ○ If a current liability account increases for the year, this will show up as an operating source (increase) in cash ○ Payment of cash dividends on common stock is a financing use (decreasing) of cash ○ The net increase in cash for the year is equal to the sum of the net cash provided/used by operating, investing, and financing activities Stockholders equity is decreased by dividends paid during the year The income earned from partnerships is taxed at the partner level A firm’s fiscal year is ○ Often the same as the calendar year ○ The annual period used for reporting purposes ○ Can be any 12-month period The income statement reports all of the following accounts: ○ Expenses ○ Gains ○ Revenues ○ Losses Net sales ○ Represents the amounts of sales of merchandise to customers less any sales returns ○ Results from selling a product or providing a service to a customer ○ Is frequently called sales revenue, or just revenue Cost of a good sold ○ Is normally shown as a separate expense because of its significance ○ Is frequently called cost of sales or cost of products sold ○ Represents the total cost of merchandise sold to customers 3 activity categories in the statement of cash flows are ○ Operating, investing and financing Liabilities

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Amounts owed to other entities Are present obligations to transfer assets or provide services to other organizations ○ Are claims against the firm by its creditors Net worth is a misleading term because assets and liabilities are generally “worth” the amounts reported on the balance sheet Stockholders equity is the ownership right of the stockholders in the assets that remain after subtracting the liabilities of the corporation Link between last year’s balance sheet and this year’s balance sheet is the income statement Paid-in capital represents the total amount invested in the entity by the owners—in this case, the stockholders. When the stock issued to the owners has a par value (see Business in Practice—Par Value), there will usually be two categories of paid-in capital: common stock and additional paid-in capital. Assets include ○ Cash ○ Accounts receivable ○ Equipment ○ Merchandise inventory Net sales ○ Frequently called sales revenue, or just revenue ○ Represents the amount of sales of merchandise to customers less any sales returns ○ Results from selling a product or providing a service to a customer Assets = liabilities + stockholders equity Under accrual accounting, year end adjustments are made to ○ To ensure that expenses are recognized in the year in which they are incurred ○ Because the cash receipt from the revenue may occur before or after the event that causes revenue recognition The report format of the balance sheet presents assets above liabilities and stockholders equity items Expense and loss accounts ○ Normally have a debit balance ○ Are increased with debits ○ Are decreased with credits General format of the journal entry ○ Date is recorded to provide cross reference to the transaction ○ The credit accounts and amounts are listed after the debit accounts and amounts shown to the right ○ The debit accounts and amounts are listed before the credit accounts and amounts shown to the left

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Using the horizontal model for a transaction that affects both the balance sheet and the income statement, the balance sheet will balance between the income statement effect on stockholders’ equity is considered Accruals—Transactions for which cash has not yet been received or paid, but the effect of which must be recorded in the accounts (at the end of the accounting period) to accomplish a matching of revenues and expenses and accurate financial statements. Reclassifications—The initial recording of a transaction, although a true reflection of the transaction at the time, does not result in assigning revenues to the period in which they were earned or expenses to the period in which they were incurred. As a result, an amount must be reclassified from one account to another (at the end of the accounting period) to reflect the appropriate balance in each account. If debits = credits then the company’s balance sheet equation will be in balance The account format of the balance sheet presents assets on the left, while liabilities and stockholders’ equity items are shown on the right Revenue and gain accounts ○ Are increased with credits ○ Are decreased with debits ○ Normally have a credit balance Horizontal model, the arrow from net income to stockholders’ equity indicates that net income affects retained earnings, which is a component of stockholders’ equity In the horizontal model, a minus sign in the expenses column means that net income is lower as a result of expenses being higher Debits increase expense and loss accounts, and decrease revenue and gain accounts Assets = liabilities + paid in capital + retained earnings + beginning + revenues expenses After transactions have been recorded in a journal, they are posted to a ledger A chart of accounts serves as an index to a company’s ledger When a bank credits your account for interest earned during the month, what they are really communicating is that they are credits the liability recorded in their accounting records to represent your account from their perspective Credits decrease asset accounts, and increase liability and stockholders’ equity accounts Merchants who send you a notice that they have charged your account are really communicating that they have debited your account in their accounting records increase your account balance, which is shown as an asset from their perspective, since you owe them money Asset accounts are ○ Are decreased w credits ○ Are increased w debits ○ Normally have a debit balance Stockholders’ equity accounts ○ Are increased w credits ○ Normally have a credit balance

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○ Are decreased w debits Liability accounts ○ Are decreased w debits ○ Normally have credit balance ○ Are increased w credits Normal account balances are on the debit side for asset accounts, and on the credit side for liability and stockholders’ equity accounts Accounts would be closing during the year end closing process are ○ Wages expense ○ Loss on the sale of building ○ Dividends ○ Sales ○ Rent expense ○ Service revenue ○ Gain on the sale of land ○ Loss on the sale of equipment ○ Insurance ○ Expenses ○ Income statement accounts (revenues, expenses, gains, and losses) ○ Cost of goods sold Closing process, all expense and loss accounts, as well as dividends, are credited for amounts equal to their year end debit balance Transaction analysis 5 questions (41253) ○ What’s going on? ○ What accounts are affected? ○ How are they affected? ○ Does the balance sheet balance? ○ Does my analysis make sense? Does the balance sheet balance = do the debits equal the credits What accounts are affected = where you identify the specific accounts affected by the transaction Does my analysis make sense = ensures that the entry you recorded is consistent to your understanding of what’s going on Closing process

On the balance sheet, _________ would reflect charges on a billing statement received by your firm from a consulting firm. ○ Unearned revenue ○ Accounts receivable ○ Prepaid expense ○ Accounts payable

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On the balance sheet, ________ would reflect cash from customers is received before income recognition. ○ Unearned revenue On the balance sheet, _________ would reflect premiums paid to an insurance company for an insurance policy. ○ Prepaid expense On the balance sheet, ________ would reflect cash from customers received after income recognition ○ Accounts receivabke The time frame associated with a balance sheet is: ○ A one-year past period of time

The going concern concept refers to a presumption that: ○ the entity will continue to operate in the foreseeable future. A fiscal year: ○ is frequently selected based on the firm's operating cycle. The balance sheet equation can be represented by: ○ Assets = Liabilities + Stockholders' Equity

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○ Assets – Liabilities = Stockholders' Equity ○ Net Assets = Stockholders' Equity Which of the following accounting methods accomplishes much of the matching of revenues and expenses? ○ Accrual accounting Expenses are: ○ decreases in net assets resulting from usual operating activities. When a firm purchases supplies for use in its business, and the cost of the supplies purchased is recorded as an asset, the following adjustment to recognize the cost of supplies used will probably be required: ○ Dr: supplies expense Cr: supplies The effect of an adjustment is: ○ to increase the accuracy of the financial statements. The effect of an adjustment on the financial statements is usually to: ○ increase the accuracy of both the balance sheet and income statement. When a firm purchases supplies for its business: ○ an adjustment will probably be required as supplies are used. A debit entry will: ○ increase the balance of an expense account. The balance sheet might also be called: ○ Statement of Financial Position. Expenses are: ○ decreases in net assets resulting from usual operating activities. Retained Earnings represents: ○ cumulative net income that has not been distributed to stockholders as dividends.

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An agreement by the borrower to supply financial statements to the lender or to refrain from paying dividends until the note is paid, are both examples of provisions known as covenants Deposits in transit are added to the bank’s balance The impact on the financial statements of the year end adjustment for bad debts usually includes ○ Increase to contra asset account ○ Decrease to total debts ○ Decrease in the net realizable value of accounts receivable ○ Increase to expenses Financial controls are related to the concept of separation duties The impact on the financial statements of a write off an account receivable includes: ○ A decrease to a contra asset account ○ Decrease to an asset account In bank reconciliation:

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NSF checks are subtracted from the company’s book balance Outstanding checks are subtracted from the bank’s balance Service charges are subtracted from the company’s book balance Interest earned is added to the company’s book balance Deposits in transit are added to the bank’s balance Errors are either added or subtracted from the bank’s balance or the company’s book balance → done to bring back reported balance and the cash account balance into agreement The impact on the financial statements of a write off of an account receivable includes a decrease to an asset account The cash amount reported as an asset on the balance sheet includes ○ Demand deposit balances ○ Undeposited receipts ○ Petty cash fund balances Operating cycle ○ Cash → inventory → accounts receivable → back to cash The net realizable value of accounts receivable is not affected by the write off of an account receivable because the decrease to an asset account is offset by a decrease to contra asset account The entry to accrue interest on notes receivable is Dr. Interest Receivable xx Cr. Interest Income xx Petty cash is used to make small payments of cash

If business were really simple, accountants would simply count cash flows. However, most businesses are not so simple. Accrual accounting attempts to match revenues with expenses and recognize the fact that that various events take place over an extended period of time. In CH 5, for example, we have an important accrual, accrued bad debt expense, that demonstrates these objectives very well. For example, suppose Best Buy sells on account a TV for the super bowl on Sunday. Its customers would probably use a credit card. Should its accountants "accrue" some amount of bad debt expense? Say, 2% of sales value. To match this expected future event with the current event, it would accrue such an expense. CH 5 discusses this key accrual. Please study this transaction carefully.

This week we continue with CH 5 by covering FIFO/LIFO/Weighted Avg costing. For accounting purposes, the cost flow assumption does not have to match the physical flow of goods. For example, ADM could use LIFO even though corn flows FIFO with gravity through the grain elevators. Grocery stores could use FIFO even though customers may select the freshest milk per LIFO. If we have changing prices these differences could affect the cost of goods sold. As a very simple example, say you have 1 unit of goods that cost $10 at beginning of period. You purchase 1 unit at $20 during period and sell 1 unit during the period. What cost would you have in ending in INV? What would the cost of goods sold be? It all depends on whether you use FIFO/LIFO/weighted average. Under FIFO cost of goods sold = $10. Under LIFO = $20. Under weighted average = $15. During inflation, LIFO would result in lower earnings (higher cost of goods sold). Why would companies want this? Answer = lower taxes where this option exists. See video.

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The beginning inventory for X ltd consisted of 20 units at $4 each. During march, 40 more units of inventory were purchased for $5 each and during may an additional 40 units were purchased for $6 each. A total of 70 units of inventory were sold during the year. Under the weighted-average cost flow assumption: ○ Ending inventory = 30 units x $5.20 per unit = $156 The cost of an inventory item is released to the income s...