MGT 45 Lecture Notes - Professor Pecore PDF

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Professor Pecore...

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Joe Pecore, [email protected] OFFICE : Otterson Hall 2E119 OFFICE HOURS : Tuesdays and Thursdays 530-630pm TA’s: -

Kathie Le - Otterson Hall 2E109, Tues/Thurs 2-3 pm Laura Lee Jason Masong

•Text - Survey of Accounting, 4th Edition, Edmonds, Olds, McNair, Tsay (2012), McGrawHill/Irwin ***3rd edition may work •Supplemental (Optional) - Finance for Non-Financial Managers, Siciliano, (2003), McGraw-Hill •Copies of each are on reserve at Geisel Library •Basic Calculator - needed for homework and exams •Staying current with Business world through many of readily available media outlets such as CNBC, Bloomberg, Wall Street Journal, Business section of local newspaper, SEC reports, Yahoo Finance, etc… –Great deal offered by WSJ - $10 for 10 weeks! **Pop quizzes ● Midterm October 29th ● hard copy homeworks turned in at the beginning of class ● Excel for homework, no handwritten

OVERVIEW: I.

Chapter 1: Counting the Beans in Supplemental Reading A. accounting is language of business B. reading financial statements → determine financial health of potential employer

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C. GAAP (Generally Accepted Accounting Principles) - standard format for recording and reporting financial transactions in a company 1. for revenue, costs, & profit recognition D. CFO: Chief Financial Officer - head of finance function 1. interacts with investors, bankers, board of directors, executives 2. usually #2 behind CEO E. Company Report Card: quarterly financial statements and reports generated by company 1. public companies publish their numbers quarterly and media reports on the largest companies 2. Jan, Apr, Jul, Oct - earnings seasons Chapter 2: Structure A. Accounting info serves diff audiences and purposes: 1. the government for taxes 2. investors for investment decisions (Financial Acct) 3. managers for internal decisions (Managerial Acct) B. Financial Statements must be accurate, relevant and timely C. General Ledger: repository for all accounting info and info is organized 1. houses all business transactions and account balances D. Monthly Close: first week of month; generate monthly financial statements E. Accounting Transaction Recorder - Generating Financial Statements 1. Balance Sheet: what you own and what you owe 2. Income Statement: report the profits and losses generated between month-ends according to GAAP 3. Cash Flow: reports the cash impact to company F. Accounting Transactions recorded in balanced way: 1. double entry bookkeeping 2. debts and credits 3. why the Balance Sheet balances G. Accounting Equation: Assets = Liabilities + Stockholders’ Equity 1. key to balance sheet 2. core of accounting transactions H. Accrual method - transactions are recorded when an economic event occurs, not when cash changes hands 1. in business, most transactions don’t involve exchanging cash; credit is extended like credit card 2. Apple & Best Buy example Chapter 3: Balance Sheet A. snapshot of financial condition at a point in time B. Current Assestts (CA) & Current Liabilities (CL) 1. CA - items owned that can be converted into cash within one year a) Accounts Receivable: what is owed to the company (assett) b) Inventory: property that can be converted into cash 2. CL - items owed or obligations due within one year

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a) Accounts Payable: what the company owes to vendors Chapter 4: AAPL Income Statement/Profit & Loss Statement A. contains the results of the actions/transactions that were intended to generate profit for the company B. most popular financial statement and most widely understood C. has the ‘top line’ & ‘bottom line’ 1. top line - revenue 2. bottom line - net income D. EPS (Earnings per Share) derived from bottom line E. key measures: revenue, cost of goods sold, gross margin, EPS, net income, etc F. sales are recognized when product ships, not necessarily when customers pay G. expenses recognized when goods or services have been received to the company H. Net Income = Revenue - Expenses I. If net income = 50 → 50 shares of stock; EPS = $1 Chapter 5,6: Cash Flow A. Income Statement has limitations because it reports on transactions that impact profit/loss, not cash B. Cash needed to finance customer purchases on credit C. Inventory normally 2nd largest consumer of cash & takes longest time to convert back to cash D. statement of cash flow analyzes the reasons that net income didn’t produce an equal increase in the bank account E. smaller company - cash is a big focus

Chapter 1 - An Introduction to Accounting I.

Obj 1: Explain role of accounting in society A. Market: 1. Consumers - use resources 2. Conversion agents (businesses) - transform resources into desirable products; trees → furniture 3. Resource Owners - control distribution of resources to conversion agents 4. Resource owners provide resources (input) → conversion agents → (output) for consumers 5. added value created so output is worth more than materials (input) a) profit/income/earnings B. Resources Business use to Satisfy Consumer Demand 1. Financial Resources ($) a) Investors: provide $ in exchange for ownership interests

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b) Creditors: lend $; expect businesses to repay borrowed $ later (1) in a more secure position to get $ return c) Liquidation = assets are sold and sales returned to investors/creditors if business fails 2. Physical Resources a) natural resources 3. Labor Resources a) intellectual & physical labor C. Financial Accounting: needs of external users D. Managerial Accounting: needs of internal users E. FASB - Financial Accounting Standards Board 1. privately funded org with primary authority for establishing standards for US F. GAAP - Generally Accepted Accounting Principles 1. established by FASB 2. required to follow for Financial Reports, not Managerial Reports Obj 2: Components of Financial Statements: A. Financial Statements: 1. Income Statement - profit/loss a) revenue - expenses = net 2. Balance Sheet 3. Statement of Cash Flows B. Ten Elements Reported in Financial Statements: 1. Assets = the resources a business uses to produce earnings (ex: land, buildings, materials, supplies, etc) 2. Liabilities = creditor source of asset (future obligations of the enterprise) 3. Stockholder Equity = stockholder’s ownership interest (AssetsLiabilities=Equity) 4. Contributed Capital/Common Stock = receipts to acknowledge assets received from owners 5. Distributions/Withdrawals/Dividends = transfer of some assets to owners 6. Revenue = economic benefit by providing customers with goods/services 7. Expenses = assets and services consumed to generate revenue 8. Net Income/earnings/profit 9. Gains 10. Losses C. Accounting Equation → Assets = Claims (of the creditors and investors) 1. Creditor claims = liabilities (future obligations of the enterprise) 2. Investor claims = equity 3. Assets = Liabilities + Stockholder Equity 4. Claims = the source of assets (resource providers) 5. Retained Earnings = portion of assets through earning activities that is not returned as dividends (Net income - dividends) 6. Stockholders Equity = Common stock + Retained earnings

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7. Assets = Liabilities + Common Stock + Retained Earnings Obj 3-4: Recording Business Events Under The Accounting Equation A. Accounting Events = economic occurrence that changes one’s assets, liabilities or stockholders’ equity (ex: transaction) B. Asset Source Transaction - increase total assets and claims; also revenue transactions 1. Assets from owners (stockholders) - issuing common stock 2. Borrow assets from creditors 3. Earn assets through profitable operations *All transactions affect the accounting equation in at least 2 places = doubleentry bookkeeping system *Also revenue transactions because asset increase is balanced by same amount of retained earnings increase

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C. Asset Exchange Transactions - changes in composition of assets; one asset decreases while another increases → does NOT change the total # of assets D. Asset Use Transaction - decrease the total amount of assets & claims 1. expenses decrease in assets and in retained earnings 2. Ex: expenses & dividends E. Historical cost valued over current market cost because of reliability F. General Ledger = complete collection of a company’s accounts Obj 5: Preparing Financial Statements A. Income Statement - matches the expenses with the revenues that occur 1. revenues > expenses = net income 2. revenues < expenses = net loss 3. dividends not reported as expenses 4. cash is not always received or paid in the period when the revenue is earned or when the expense is incurred (accrual accounting) B. Balance Sheet - shows the balance between assets and claims 1. what is owned & owed 2. Assets listed based on their level of liquidity (how rapidly they will be converted to cash) C. Statement of Cash Flows - explains how a company obtained (inflows) and used cash (outflow) 1. Financing Activities - acquiring cash to start a business a) obtaining cash from owners b) paying cash to owners (dividends) c) borrowing cash (creditors) d) repaying the principal amount only back to creditors 2. Investing Activities - investing the money a) paying cash to purchase long-term assets b) receiving cash from selling long-term assets 3. Operating Activities a) receiving cash from revenue (customers)

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b) paying cash for expenses (suppliers) c) interest rates cash D. SEC = Securities & Exchange Commission E. The Closing Process - transferring the revenue, expenses & dividends to the Retained Earnings account 1. Revenue, Expenses & Dividends = temporary accounts 2. Revenue - Expense - Dividend = Retained Earnings 3. Assets, Liabilities & Stockholder Equity - permanent account a) year end balance becomes next year’s beginning balance b) perpetual (cumulative) Obj 6: Horizontal Financial Statements Model A. Balance Sheet → Income Statement → Cash Flows 1. OA = Operating Activities 2. IA = Investing Activities 3. FA = Financing Activities 4. NC = net change in change B. Balance Sheet = Red C. Income Statement = Blue D. Cash Flows = green

Chapter 2 - Understanding the Accounting Cycle ● ● I.

Recognition = formally reporting an economic item or event in financial statements Realization = collecting money, generally from the sale of products or services Obj 1: Understand & Record Basic Accrual & Deferral Events A. Accrual - records revenues when value is delivered & expenses when incurred before cash exchange, regardless of when cash is exchanged 1. accrual = individual transaction recording revenue/expenses in absence of cash 2. an estimate used for revenue earned or expenses incurred before actual money changes hands B. Deferral - revenue or expense event recognized after cash has been exchanged recorded as a “lump” and then spread 1. something already been entered in records, but the amount needs to be divided up between 2+ accounting periods to recognize the transaction in the financial statements correctly 2. ex: an “advance” C. Accounts Receivable - the amount of cash the company expects to collect in the future (“I owe yous”) 1. amount goes in Accounts Receivable & in Retained Earnings 2. affects Income Statement as Revenue but NOT cash flow 3. When cash is received as partial/full settlement of its accounts receivable: a) Cash asset increases & Accounts Receivable decreases → asset exchange transaction b) shown in cash flow but not income statement bc revenue was

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recognized earlier D. Contracts for work expected to be completed do not appear in any of the financial statements E. Accrued Expenses = expenses that are recognized before cash is paid 1. Adjusting Entry = account to recognize the accrued expense 2. Ex: Recording unpaid salary expense and salary liability a) decreases Retained Earnings & increases a liability (I owe you) account called Salaries Payable (the amount of cash the company is obligated to pay in the future) 3. Claims Exchange Transaction: claims of creditors (liabilities) increase and the claims of stockholders (retained earnings) decreases a) counts as an expense b) net income goes down 4. **Liabilities are NOT expenses → they are obligations Obj 2: Summary of Events & General Ledger A. Balance Sheet - Red B. Cash Flow - Green C. Income Statement - Blue Obj 3/5: Vertical Statement Model - Financial Statements Based on Accrual Accounting A. Income Statement 1. reflects accrual accounting 2. expenses = decrease in assets OR increase in liabilities resulting from operating activities undertaken to generate revenue B. Statement of Changes in Stockholder’s Equity C. Balance Sheet 1. assets, liabilities & stockholders’ equity 2. Assets - liabilities = equity D. Statement of Cash Flows E. Comparing Cash Flow from Operating Activities with Net Income 1. Net Income from accrual accounting DIFFERS from cash flow from OA a) Company may recognize revenue/expense in Accrual w/o a corresponding cash collection/payment in the same accounting period Obj 4: Closing Process, Accounting Cycle & Matching Concept A. Closing Process 1. Revenue, Expenses & Dividends - temporary accounts until closing a) Transferred to retained earnings B. Steps in Accounting Cycle: 1. Record Transactions 2. Adjust Accounts (Record Accrual) 3. Close Temporary Accounts (annually) 4. Prepare Statements C. The Matching Concept - match expenses w/ revenues is primary goal of accrual 1. Cash basis accounting can distort measurement of net income bc it

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sometimes fails to properly match revenue w/ expenses D. Conservatism Principle 1. with a recognition dilemma → select the alternative that produces the lowest amount of net income Obj 5: How Business Events Affects Financial Statements Over 1+ Accounting Cycles A. Second Accounting Cycle 1. Revenue, Expenses, Dividends - start at 0 2. Liabilities, Assets, & Equity - continue from FIRST accounting cycle

Chapter 3 - Accounting for Merchandising Business *Merchandising Businesses generate revenue by selling goods (Walmart) - Retail companies = sell goods to the final customer - Wholesale companies = companies that sell to other businesses *Merchandise Inventory = goods purchased for resale I.

Obj 1: Perpetual Inventory System A. Administrative Costs 1. Product Costs a) Costs that are included in inventory on balance sheet b) Relates to the goods sold c) expensed when inventory is SOLD regardless of when 2. Selling & Administrative Costs a) Costs that are not included in inventory (1) advertising (2) admin salaries (3) insurance (4) interest b) Sometimes called period costs c) Ex: salaries, etc d) reduces cash, retained earnings, expense & cash flow B. Allocating Inventory between Assets & Expense Accounts 1. Beginning Inventory Balance (Merchandise Inventory) + Inventory Purchased During the period (Cost of Goods Sold) = Cost of Goods Available for Sale 2. Cost of Goods Available for Sale → Merchandise Inventory (B/S) & Cost of Goods Sold (Income Statement) C. Gross Margin/Profit = Sales Revenue - Cost of Goods Sold 1. Gross Margin % = how much of every $ of sales does the company make before subtracting Operating Expenses 2. Gross Margin - Period Costs = Net Income D. Perpetual Inventory System - inventory account is adjusted perpetually (continually) throughout the accounting period 1. inventory increased for each item purchased

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2. inventory decreased for each item sold Obj 2: Effects of Inventory Transactions on Financial Statements Obj 3: Transportation Costs, Purchase Returns & Allowances & Cash Discounts A. Purchase return (return inventory) = decreases assets (merchandise inventory) & liabilities (accounts payable) → no income statement/CB effect B. Purchase Allowances (cost reductions) = SAME as purchase return 1. volume discount C. Cash Discounts = 2/10, n/30 (two-ten, net thirty) → the seller will allow a 2% cash discount if purchaser pays cash within 10 days from the date of purchase. The amount not paid within the first 10 days is due after 30 days from the purchase 1. companies like to have cash sooner D. Purchase Discounts (Cash Discounts)= decrease the cost of the inventory and the associated account payable on the balance sheet 1. doesn’t affect income or cash flow 2. if company pays the accounts payable AFTER the 10 days, there would be no purchase discount E. The Cost of Financing Inventory 1. Have the net days to pay off the inventory cost → sometimes have to forgo the 2% to be able to finance the cost 2. Financing for only 20 days (30-day full credit term - 10 day discount term) 3. Discount in Annual Terms: ● Annual Rate = Discount Rate x (365 days/term of the loan) ● Annual Rate = 2% x (365/20) ● Annual Discount Rate = 36.5% F. Transportation Costs 1. FOB (Freight on Board) shipping point - buyer is responsible for the freight cost a) freight cost = ‘transportation in’ = Merchandise Inventory b) decreases cash and increases inventory c) income not affected bc transportation in costs are expensed as part of ‘cost of goods sold’ when inventory is sold 2. FOB destination - seller is responsible if goods are delivered a) seller responsible = ‘transportation-out’ b) recorded as an operating expense when delivered c) decrease in cash & retained earnings d) goes on income statement as an expense 3. Cost of Good Sold - When goods are sold: a) Product Cost (including transportation-in, purchase returns and allowances) transferred from Inventory → Expense Account b) Decreases Inventory & Retained Earnings c) Decreases Income but cash flow NOT affected

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Obj 4: Recognizing Gains and Losses A. Gain = difference between sales price and the cost of land when company sells land for more than it cost 1. gross margin = difference between sales and cost of goods sold when merchandise inventory is sold 2. gain - profit resulting from transactions that are not likely to regularly recur bc JPS’s primary business is selling inventory, NOT land 3. decrease in land, increase in cash & difference increase in retained earnings & gain (revenue) B. Loss = difference between sales price and cost of land if the land was sold for less than cost (also not normal, recurring operating activity) Obj 5: Multi Step Income Statement A. Operating Income = Gross Margin - Operating Expenses 1. amount of income that is generated from the normal recurring operation 2. Operating Income - (items not expected to recur regularly) = net income 3. Interest often reported as non-operating activity even though issue requires it to be stated as operating activity → inconsistency B. Multi step Income Statements = income statements that show the above additional relationships C. Single-Step Income Statements = income statements that display a single comparison of all revenues minus expenses Obj 6: Lost, Damaged or Stolen Inventory A. Writeoffs - you have less than the records indicate 1. Asset Use Transaction 2. Decrease Inventory & Decrease Retained Earnings B. Writeups - you actually have more than the records indicate C. Shrinkage = decrease in inventory for reasons other than sales to customers 1. stolen, damaged, lost, misplaced 2. physical count at the end of a period → match with inventory account → determine shrinkage a) if shrinkage, Inventory account decreases and Expense for amount shrinkage is recognized b) added to cost of goods sold for external reporting purposes Events Affecting Sales A. Sales discount = price reductions offered by sellers to encourage buyers to pay promptly 1. sale increases cash/accounts receivable and retained earnings 2. revenue recognized B. Returned Inventory = decreases accounts receivable/cash and retained earnings 1. revenue & net income decreases C. Net Sales = Gross amount of Sales - Sales Returns & Allowances - Sales Discounts

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Obj 7: Common Size Financial Statements A. display information in percentages as well as absolute dollar amounts B. enables meaningful comparisons C. use net sales as BASE - 100%

Revenue -COst of goods sold _____________ gross margin -opEX _______ operating income -initial income/expe __________ pre pa...