Chapters 1-4, accounting equation to bank reconciliation. PDF

Preview

Summary

Pamela Kuperstein's lecture, although the powerpoint she used is standard throughout all the 2101 sections. They cover chapters 1-4, which includes the accounting equation, statements of cash flows, the accounting cycle, bank reconciliation, and more....

Description

Financial Accounting- information for external users Assets = Liabilities + Stockholders Equity Example: You need $35k to start a company You decide to sell 1000 shares @ $25 per share. 300 shares bought by grandparents (30%) 100 shares bought by you (10%) 300 shares bought by family (30%) 300 shares bought by friend (30%) 25 thousand from stocks, 10 thousand dollar loan. Equity=25k, Liabilities=10k, Assets=35k

Profit = Revenues - Expenses Example: Cleaning services performs services of $6400 Cleaning services has expenses of $2500 Profit is $3900 Accounting: create a record of assets, liabilities, stockholders equity, dividends. Business Activities: Financing Activities: transactions the company has with investors and creditors Investing Activities: transactions buying long term investments Operating Activities: cost of doing business Primary Financial Statements: 1. Income Statement: (profit = revenues - expenses). Net loss vs net gain over a period of time 2. Statement of Stockholders Equity: common stock + retained earnings 3. Balance Sheet: Financial position of a company on a particular date (assets, liabilities, etc)

Accounts Receivable: Money owed to the firm by customers. Accounts Payable: Money you owe to creditors/firms (debt).

Statement of Cash Flows

Measures activities involving cash receipts and cash payments over an interval of time. Broken up into three sections: -Operating cash flows (revenues and expenses) -Investing cash flows (long term asset purchase and sale) -Financing cash flows (involving lenders and stockholders) Example: Business received cash from issuance of common stock (positive financing cash flow) Paid cash on accounts payable for office supplies purchased (negative operating cash flow) Performed services for a customer on account (would not hit statement of cash flow, no cash) Cash dividends were paid to stockholders (negative financing cash flow) Etc; Income Statement > Statement of Stockholders Equity > Balance Sheet > Statement of Cash Flows

Financial Accounting Info is used for Investing and Lending Decisions GAAP (Generally Accepted Accounting Principles) -used by every publicly traded company -created by the FASB (Financial Accounting Standards Board) -FASB given power by the SCC -IASB (International Accounting Standards Board), controls some companies -FASB is independent, and private GAAP needs to be independent The Accounting Cycle: During the Period 6 Steps to measuring external transactions (transactions between a firm and a separate entity) 1. 2. 3. 4. 5. 6.

Use source documents to identify accounts affected by an external transaction. Analyze the impact of the transaction on the accounting equation. Assess whether the transaction results in a debit or credit to account balances. Record in a journal using debits and credits. Post the transaction in the general ledger. Prepare a trial balance.

Account: Summary of all transactions related to a particular item over time. (every transaction will impact TWO or more accounts) What account affected by the transaction? What is another account affected by this transaction? note: selling common stock = receiving cash, not losing

Expanded Accounting Equation Expands into revenues, expenses, and dividends. When revenues go up, stockholder’s equity goes up. Cash in advance means cash goes up and liabilities go up, not revenues but a deferred revenue. Debits and Credits: T accounts: debits on left, credit on right D-ebit E-expenses A-assets Dividends DEA Dividends Expenses Assets

LOR Liabilities Owner’s Equity Revenue

Debit=Left Side in latin Journal Entry Example Debit Credit x/xx/xx Account Name ………………………………………………………………………………….... Amount Account Name …………………………………………………………………………………………….. Amount Odessa Travel Services sells common stock to investors for cash of 25k. 12/1 Cash…………………………………………………………………………………………………………….25000 Sale of Common Stock ………………………………………...…………………………………….25000 Odessa borrows cash from a bank for 10k 12/1 Cash …………………………………………………………………………………………………………...10000 Notes Payable ………………………………………………………………………………………………..10000 Odessa purchases ticketing equipment for 24000 cash 12/1 Purchase Equipment ………………………………………………………………………………...24000 Cash ……………………………………………………………………………………………………………….24000 General Ledger provides, in a single location, the list of transactions affecting each account and the account’s balance DEBIT ASSETS TO INCREASE, CREDIT TO DECREASE Preparing a Trial Balance Combines general ledger balances into one document. For use inside the firm only.

Chapter 3: Accounting at the End of the Period “Closing out the books at the year/quarter/month end” Accrual-Basis Accounting: Measuring and reporting expenses in a way that reflects the company's’ ways to make money for owners -Ignore cash (treat accounts receivable as cash) Example: December 12: Provide travel service to customers for cash >record in december December 17: Provide travel services to customers on account >record in december December 23: Receive cash in advance for future services >record when they use the services -Expenses are reported in the same period as the revenues they help to generate -Expenses are recorded when they are used to help produce revenue Accrual Basis vs Cash Basis Accrual basis logs revenues when goods and services are provided (recognized by GAAP) Cash basis logs revenues when cash is received The Accounting Cycle During the period, record and post external transactions At the end of the period, adjust entries, prepare financial statements. Prepayments/Deferrals Prepaid expenses: pay cash in advance for something -initially recorded as assets because they provide future benefits -expense these costs in future periods as the assets are used Deferred revenues: receive cash in the current period that will be recorded as revenue later on -initially recorded as a liability -recorded as a revenue later on Accruals Accrued expenses: record an expense in the current period that will be paid in cash in the future -recorded as an expense, amount owed is recorded as a liability -example: wage expenses for earned wages that have yet to be paid, interest payments Accrued revenues: record a revenue in the current period that will be collected in cash later on

Book Value: the cost of an asset, less the amount of depreciation Interest is always computed for parts of a year. I=R*P*T

Adjusted Trial Balance: A list of all accounts and their balances at a particular date Closing Entries -Transfer balances of temporary accounts to retained earnings -Reduce balances of these temporary accounts to zero Cash and Internal Controls (chapter 4) Internal controls: methods to prevent fraud and mistakes in financial statements -errors are accidental -fraud is on purpose Accounting Scandals SOX: (Sarbanes-Oxley Act) set of laws to regulate against accounting scandals (for public companies) -Enron: avoided reporting millions of dollars of debt and losses in financial statements -Worldcom: classified expenses as assets -Tyco: CEO and CFO were stealing from company and falsifying assets SOX adds a separate requirement on internal controls. -COSO triangle -control activities are the specific internal controls Internal Controls: Separation of duties Physical controls Proper authorization Employee management E-commerce controls Detective Controls: Preventative measures that happen after reports Reconciliations Performance reviews Internal audits External audits Problems: Collusion, top level employees

Cash & Cash Equivalent: Cash is the most likely thing to be misappropriated Short term investment, maturity date no longer than 3 months Controls over cash receipts include: -an employee should open mail and list checks every day -a different employee should deposit the cash and checks -then, a separate employee should record cash receipts in accounting records Controls over cash disbursements:

-don’t use physical money -authorizing employee shouldn’t prepare checks -serially number checks, and require two signatures for large amounts -compare debit and credit statements to purchase receipts -set purchase limits and separate cash disbursements and cash receipts Reconcile a Bank Statement: Bank reconciliation: -The balance of cash in the company’s records may not equal the balance of cash in the bank’s records Look at ending balance of bank statement, and then look at ending balance of the company’s books. Three step process for the above 1. Look at bank statement, identify cash transactions recorded by the company but not the bank 2. Reconcile the cash balance, transactions recorded by the bank but not the company 3. Update the company’s cash account NSF Check: -Bad check written to the company, cash you think you have but you don’t -Recorded as a debit to accounts receivable, credit to cash Don’t update cash accounts for deposits outstanding, checks outstanding, or a bank error. Review:

Types of business activities: -operating activities (selling, buying, etc) -investing activities (purchasing land, equipment, etc) -financing activities (issuing stock, dividends) Ex. Selling shares of common stock: financing, cash is involved, inflow Ex. Borrow money from bank: financing, cash is involved, inflow Ex. Purchase equipment: investing, cash is involved, outflow Ex. Paying rent in advanced: operating, cash involved, outflow NSF Checks: We have recorded that we have received cash, but we haven’t actually received cash....