Financial Accounting Cheat Sheet PDF

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Financial Management Seminar 1 Business – exchange of goods, services and money that results in mutual benefit/profit for both parties Source of value creation – seller able to purchase items cheaper than buyer and thus have comparative advantage in production Owner Liability for business debts

Proprietorship 1 Personally liable

Partnership 2 or more -General partners are liable -Limited partners are not (up to individual proportion)

Corporation Many (shareholders) Shareholders are not liable

Business activities Category Financing

Stakeholders Owners Creditors

Investing

Suppliers (others)

Operating

Customers Suppliers

Business activities Owners’ investment Distribution of profits Borrowings Repayment of loans and interests Purchase/sale of long term resources Sale of goods & services Incur cost of provider goods & services

Accounting – records and measures business activities, process data into information, and communicate them to decision makers who make decision that will impact on business activities. 1. Financial accounting  External reporting (investors, creditors, govt)  Subject to regulations 2. Management accounting  Internal reporting (budget forecast for managers)  Not subject to regulations Conceptual Framework 

Coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function and limits of financial accounting and financial statements. 1. Objective of financial statement o provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity 2. Qualitative characteristics of useful financial information o Fundamental Relevance  Predictive value/confirmatory value  materiality Faithful representation  Complete  Neutral  Free from error

Enhancement Comparability Verifiability Timeliness understandability 3. Elements of financial statements o Financial position (balance sheet) Asset – resource controlled by entity because of past events and from which future economic benefits are expected to flow in (land/building/cash/accounts receivable/plant & equipment/ loans receivable) Liability – present obligation arising from past transaction and result in probable outflow of economic benefits (Accounts/salary/loans/taxes payable) Equity – residual interest in the assets of the entity after deducting all liability (contributed share capital/accumulated profits) o Financial performance (income statement) Income – increase in economic benefits during accounting period (revenue/gains) Expense – decrease in economic benefits (loss) 4. Capital maintenance concept (NOT COVERED) o

Accounting Equation Assets = Liabilities + Equity Equity = Share Capital + Retained Earnings Ending Retained Earnings = Beginning Retained Earnings + Net Income – Dividends Net income = Income – Expenses Financial Statements    

Balance sheet – reports assets/liabilities/stakeholder equity at specific date Income statement – reports results of operations Statement of changes equity – reports changes in equity Cash flow statement – reports cash receipts and payments

Seminar 2 (Double Entry System) Accounting Assumptions      

Economic entity assumption o Economic events should be separate from owners Going concern assumption o Business will continue operating long enough to carry out existing operations Time period assumption o Economic life can be divided into artificial time periods Monetary unit assumption o Only data expressed in terms of money should be included in accounting records Cost principle o Asset should be recorded at cost Full disclosure principle o Any events that affect financial statement should be disclosed

Journals and Ledgers General journal – book of original entry where all accounting events are recorded in chronological order in journal entry form General ledger – actual accounts that the business uses to record and summarize accounting events Account – record used to accumulate monetary amounts for each asset, liability, and equity Debit & Credit

Assets, dividends and expenses carry debit balances (Debit for increase, credit for decrease) Liabilities, revenue and equity carry credit balances (Credit for increase, debit for decrease) Accrual accounting – records events in period which they occur, regardless of when payment occur   

Time-period concept Revenue recognition principle (period when goods are delivered/services are o Provided) Matching principle (all resources used in earning revenue should be recorded as expenses in the same period when the corresponding revenue is reported)

Cash accounting – records only cash transaction Adjusting Entries   

Deferrals – cash received/paid in advance before revenues/expenses are earned/incurred (prepaid rent/supplies/unearned revenue) Accruals – revenues/expenses earned/incurred but yet to receive/pay cash (accrued salary/accrued revenue) Depreciation – allocation of cost of asset over estimated use for life

Seminar 3 (Accounting Cycle) - Recording Phase 1. Obtain info about external transaction from source documents 2. Analyse transaction 3. Record transaction in journal 4. Post from journal to general ledger accounts - Adjusting Phase 5. Prepare unadjusted trial balance 6. Record adjusting entries and post to general ledger accounts 7. Prepare adjusted trial balance 8. Prepare financial statement - Closing Phase 9. Close temporary accounts to retained earnings 10. Prepare post-closing trial balance Trial balance – list of all company accounts and balances taken from ledger, ensures total debits posted = total credit posted Presentation of Financial Statements (FRS 1)

(statement of financial position -balance sheet)

(statement of profit/loss and other comprehensive income)

(statement of changers in equity)

Closing the books -

To prepare the accounts for next period’s transaction Set temporary account (revenue, expense, dividend) back to zero Transfer revenue, expense, and dividend balances to retained earnings

Singapore Financial Reporting Standards (FRS)  

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Accounting Standard Council (ASC) o Prescribe financial reporting standards Companies Act o Requires companies to present financial statements o Compliance with FRS to give a true and fair view o Legally enforceable Accounting and Corporate Regulatory Authority (ACRA) o Enforce and monitor compliance with disclosure o Prescribe requirements and regulation of public accountants o Statutory audit Singapore Exchange (SGX)

Seminar 4 (Revenue) Income Increase in economic benefits Encompasses both revenue & income Income = Revenue + Gains

Revenue Arises in the course of the ordinary activities of an enterprise Referred to as sales/fees/interest/dividend/royalty/rent

Gains Represents other items that meet definition of income Normally does not involve “earning process”

Importance of revenue  

Economic engine of business No revenue = no profits = company not viable in long run

Revenue growth   

Indicates demand for company’s goods & services Indicates possible increase in future net profits Instils confidence in stakeholders = more likely to support company

Alternative ways to increase profits  

Increase other income Reduce cost

Recognize revenue Core principle 1. 2. 3. 4. 5.

When promised goods/services are transferred to customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods/services Identify contract with customer Identify separatee performance obligations in contract Determine transaction price Allocate transaction price to separate performance obligations Recognize revenue when each performance is satisfied

Sales on credit – allows customers to pay at later date Sales discount (eg. 2/10,n/30) % of discount if payment made within discount period Number of days in discount period Otherwise, full sales amount is due Days credit period (payment due after date of sale) Sales paid by credit card Reasons: increase sales/avoid providing credit directly to customers/avoid losses due to bad debts/receive payment quicker

Sales with Right of Return

Collections on behalf of 3rd Parties (eg. GST)

Revenue recorded should exclude collected on behalf of 3 rd parties Principal Performance obligation for entity to provide specified goods/services Controls specified goods/services before transfer to customer

Agent Arrange another party to provide goods/services

Seminar 5(Accounts Receivable) Asset – resource controlled by enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise -

Eg. Property, Plant & Equipment/investment property/inventories/Marketable securities investment/intangible assets/accounts or trade receivable

Receivables 

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Monetary claims against others account receivable (selling goods/service) o amount collected from customers o classified as current assets o general ledger (total due) vs subsidiary ledger (individual customer) o recognition – when sales transaction on credit has been recognised o valuation – recorded in balance sheet as net realisable value notes receivable(Lending money)

Risk of not collecting Benefits on selling on credit Customer with not cash can purchase on credit Sales/profit increases

Cost of selling on credit Cannot collect from some customers “impairment loss of account receivable” “uncollectible account expense” “doubtful-account expense” “bad debt expense”

Business strategy   

credit sales sales discount tight credit policies o limits credit days o limits maximum outstanding amount o limits loss o loss of customer

Methods to account for impairment 

Allowance method o Records collection losses based on company’s collection experience  Does not wait to see which customer does not pay  Uses estimated lifetime expected credit losses o Use of allowance for impairment of AR accounts  Shows amount of receivables expected not to be collected o Writing off uncollectible amount  When its clear a specific customer’s account receivable will be uncollectible, amounts owed should be removed from accounts receivable and charged to allowance for impairment

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Direct write off method (inferior method) o Waits until specific account is uncollectible o Receivables always reported at full amount

Management may have incentives to overstate A/R by understating allowance for impairment in order to present higher asset balance (balance sheet) and higher net income figure (income statement) Receivables turnover ratio = net credit sales/average accounts receivable Shows number of times during period that average A/R is collected (higher no. preferred) Average collection period = 365/receivables turnover ratio Number of days average A/R balance is outstanding (lower no. preferred) Currency Functional currency – primary currency used to measure transaction Foreign currency – any other currency Spot exchange rate on date of transaction should be used (journal entry) Closing exchange rate (balance sheet) – monetary assets

Seminar 6 (Inventories & COGS) Inventories (recognized year-end)   

Goods held for sale (finished goods) In process of production for sales (work in progress) Materials and supplies (raw materials)

Goods on consignment -

Transfer physical possession of goods but not ownership to 3 rd party Only recognized when consignee sells goods to customer

Goods on transit -

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Determined by shipping terms FOB shipping point o Title change hands at shipping point and buyer pays for shipping FOB destination o Title changes at destination point and sellers pay for shipping

Goods available for sale = beginning inventory + purchase = Ending inventory + COGS Inventories costing methods 

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Specific identification method - Time/effort needed to track all purchase cost of each item - Only used for custom-made/expensive items First in first out - Assumes items which are purcheds first are sold first - Cogs will include oldest cost and ending inventory will include recent cost Weighted average - Determines cost of each item using weighted average cost of similar items for each period - Periodic basis  at end of each accounting period - Perpetual basis  as each shipment of goods received

Inventory Recording

Efficiency in inventory management Gross profit margin = gross profit/net sales (higher ratio, higher markup) Inventory turnover = COGS/avg inventory (higher ratio, greater efficiency in inventory management) Measures how frequently inventory is sold Avg holding period = 365/inventory turnover

Seminar 7 (PPE) PPE -

Tangible, long-term and expected to be used for more than one accounting period (non-current asset) Held for use in business

Recognition 1. Future economic benefits associated with the item will flow to the entity 2. Cost of the item can be measured reliably Measurement 

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Initial cost - Purchased asset a) Purchase price includes import duties and tax after deducting discounts and rebates b) Any costs directly attributable to bringing the asset to the location  Employee benefits  Site preparation cost  Initial delivery & handling cost  Installation & assembly cost  Testing cost Subsequent cost - Cost incurred after initial recognition of asset - Cost expenditure  increases capacity/extends life/improves quality(cost adde to asset) - Expense  day to day servicing

Depreciation -

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Systematic allocation of the cost of an asset over its useful life. - Not a valuation process or a fund to replace assets Calculate depreciation 1. Cost 2. Estimated useful life  Expected usage of asset  Expected physical wear and tear  Technical/commercial obsolescence  Legal/similar limits 3. Estimated residual value  Estimated amount that an entity would currently obtain from disposal of the asset (scrap/salvage value)

Depreciable amount = asset cost – residual value Depreciation Methods 

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Straight line method (for assets that are used evenly) o Constant allocation o Depreciation = (cost – residual value)/useful life Units of production (for assets that wear out because of use) Declining balance (assets that generate more benefit in earlier part)

Partial year depreciation = full year depreciation + fraction of year asset held Measurement models  

Cost model o Carried at cost less any accumulated depreciation and accumulated impairment losses Revaluation model

o

Carried at a revalued amount less subsequent accumulated depreciation & subsequent accumulated impairment losses

-

When there is evidence of lack or recoverability of carrying amount of an asset (carrying amount>recoverable value)

Impairment

Management incentives: -

No impairment  higher profit/asset value

Derecognition -

Removing PPE from company’s book when asset no longer needed o Fully depreciated asset written off o Scrapping PPE before its fully depreciated o Sale/disposal of PPE

• Earnings problems • Decreased cash flow • Too much debt • Inability to collect receivables • Buildup of inventories • Trend of sales, inventory and receivables

Ratio Net income/total assets  measures company’s ability to turn asset into profit Revenue/avg fixed assets  measures how efficiently an entity generates sales from each dollar of fixed asset Seminar 7b(Intangible Asset) Intangible asset - Identifiable non-monetary asset without physical substance 1. Identifiability  Separate from entity and can be sold  Arises from contractual/legal rights 2. Control over a resource  Obtain future economic benefits flowing from underlying resource  Restrict access of others to those benefits 3. Existence of future economic benefits  Revenue from sale of products or services/cost savings/other benefits resulting from use of asset by entity Recognition criteria  

Probable that future economic benefits that are attributable to the asset will flow to the entity Cost of the asset can be measured reliably

Types of Intangible Assets    

Patents - Exclusive right granted by govt to inventor to sell his invention for specific period Copyright - Exclusive right to reproduce and sell something Trademarks/trade names - Brand names and symbols that identify a product/service Franchise & Licenses - Privilege granted by company to sell product

Modes of Acquisition 

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Purchased o Purchased goodwill - Excess paid for purchasing company over sum of fair value of assets less liabilities o negative goodwill - payment made is less than fair value of net asset Internally generated o Internally generated goodwill

o

o

- Unidentifiable - Should not be recognised as an asset Brand, mast heads - Identifiable but cost incurred cannot be distinguished from cost of developing the business as a whole - Should not be recognized as intangible asset Research and development - Research cost to be expensed - Development cost can be capitalized

Cost of Intangible Asset = Purchase Price + any necessary cost incurred Amortisation of IA (similar to depreciation) -IA with finite useful life is amortised on systematic basis -IA with indefinite useful life is not amortised

Seminar 8 (Investment Activities) Financial assets   

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Cash Equity instrument of another entity (shares/stock) Contractual right to o Receive cash/other financial asset from another entity o Potentially favourable exchange of financial assets/liabilities with another entity Contract to be settled in entity’s own equity instrument -Eg. Investment in bonds, shares, derivatives/ loans & receivables/ cash

Classifications 

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Debt instrument (bonds/loans receivable) o Amortised cost – held to collect contractual cashflows that are solely payment of principal and interest o FVOCI – held to collect contractual cashflows that are solely payment of principal and interest, and to sell o FVPL – fail to meet amortised/FVOCI criteria Equity Instruments (investment in shares) o Fair Value through Profit/Loss (FVPL) - irrevocable o Fair Value through Other Comprehensive Income (FVOCI) Derivatives (futures/options)

Loan Receivable – non-derivative assets with fixed/determinable payments that are not quoted in an active market Eg. Loans given to 3rd parties/account receivables Measurement Upon recognition – fair value + transaction cost At B/S date – amortised cost = original value + interest – instalments Measure FVPL Upon recognition – at fair value, transaction cost to be expense At B/S date – mark to market price, unrealised gain/loss to P or L On disposal – realised gain/loss to P or L Measure FVOCI Upon recognition – fair value + transaction costs At B/S date – mark to market price, unrealised holding gain/loss to Fair Value Reserve On disposal – realised gain/loss to Fair Value Reserve, FVR balance closed to retained earnings FV reserve -part of owner’s equity -accumulates increase/decrease in value when FVOCI is mark to market -when FVOCI is sold, balance in reserve is transferred to retained earnings -can have debit/credit balance...