Midterm Cheatsheet - Financial Accounting Chat Sheet PDF

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Financial Accounting Chat Sheet...

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Lesson 6, cont...

PERIOD

1 2 3 4

Bond interest: Two year semiannual bond w/ par value of $500 and a stated rate of 7% was priced to yield 8%. -Calc the issue price, find the pres value of both lump-sum principle pymt of $500 and the interest stream of $35 per year. - Pres val of principle = $427 - Pres val of interest stream = $64 BEGINNING INTEREST INTEREST ENDING BALANCE EXPENSE PAYMENT BALANCE - Issue price = $491

$491.00 $493.25 $495.50 $497.75

$19.75 $19.75 $19.75 $19.75

$17.50 $17.50 $17.50 $17.50

EFFECTIVE RATE = 4%

$493.25 $495.50 $497.75 $500.00

STATED RATE = 3.5%

Record first semi-annual interest payment Disc on Bonds Pyble Interest Expense Cash bal 9.00 19.75 17.50 2.25 BALANCE SHEET ASSETS = LIABILITIES + EQUITY

Interest Expense Cash Bonds Payable

-19.75

-19.75

Cash 15k

Assets = Liabilities + Equity +15,000 +15,000

Amount Asset Liability Equity Revenue Expense Amount Dividends Amount Totals Total DRs

Common Stock 15k

2,000

Assets = Liabilities + Equity +2,000 +2,000

250

Assets = Liabilities + Equity -250 -250

250

Cash 2k

Credit

Assets = Liabilities + Equity -2,000 +2,000 Assets = Liabilities + Equity -600 -600

-Contains no errors/omissions -Does not require perfect accuracy

Dividends Cash 1.5k 1.5k Unearned SVC Revenue Revenue 2k 2k Depreciation Accum Expense Deprec 600 600

Lesson 2 | Accounting Building Blocks Recording transactions accounting equation Adjusting entries Accrual Cash Recognizes economic events in the period in which they occur

R=revenue E=expense A=asset Net sales = Credit sales - Sales returns & allowances L=liability Net Book Value = Cost - Accumulated Depreciation SE=Stockhld eq

Net income = Revenue - Expenses Retained Earnings = Net Income - Dividends

ITEMS, STATEMENTS, & ACCOUNTS

IS=income statement | RE=retained earnings | BS=balance sheet

STATEMENT ACCOUNT

Retained Earnings Equipment Common Stock Unearned Revenue Sales Rent Expense Inventory

BS, RE SE A BS SE BS L BS R IS E IS A BS

Income Stmt Balance Sheet Allowance does not Percentage % of current credit of credit sales is matched with necessarily reflect the current sales revenue receivables that are sales as bad debt expense uncollectible Aging of Bad debt expense is a plug to force Accounts allowance for bad Receivable debt to the proper balance

Allowance for Bad Debts is calculated based on balance in Accounts Receivable

BALANCE SHEET ASSETS PP& E ACCUM. DEPR

Acquire PP&E +10,000 Year 1 depreciation Year 2 depreciation Year 3 depreciation Balances

2

Increase on the Credit Side Debit Side

Realized

*General Rule Recognition @ time of sale provides a uniform/reasonable test Recognition Principle: Revenue should be recorded when a resource has been earned

Receivable = Asset

D

C

Allowance method | Bad Debt Expense (BDE) Recognize BDE in the period of sale by estimating doubtful accounts -Record estimate in contra-asset acct "Allowance for Doubtful Accts"

-3,000 -3,000 -3,000

+10,000 -9,000 Double Declining Balance

-9,000

Depreciation Expense = Net Book Value * 2 Estimated Useful Life OR

Determine by taking the straight-line rate of depreciation and double it. Example: Asset w/ 4-year life = straight-line rate 25%, calc'd by 100%/4years. The straight-line rate doubled = 50%. Asset w/ a 5-year life would = 20% straight-line * 2 = 40%. Doubled rate is then multiplied by Net Book Value: Depreciation Expense = Depreciation rate * Net Book Value -DO NOT REDUCE! cost by = (Straight-line rate *2) * (Cost - Accumulated Depreciation) salvage value -STOP DEPRECIATING when salvage value is reached BALANCE SHEET ASSETS PP& E ACCUM. DEPR

INCOME STATEMENT DEPR. EXPENSE

+10,000 Acquire PP&E Year 1 depreciation Year 2 depreciation Year 3 depreciation

-6,667 -2,222 -111

-6,667 -2,222 -111

Balances

-9,000

-9,000

+10,000

Net Book Value = $1,000 Intangible Assets

Natural Resources

-As extracted the asset is depleted and transferred to inventory -As sold the expense is Xferred to income statement as COGS Exp

-Lack physical existence -Not financial instruments -Normally classified as long-term assets

Percentage of sales method

Estimate results in Bad Debt Expense

Bad debt is estimated as a % of credit sales that occured during the period -Percent is based on historical trends & company policies

-Estimate results in balance of Aging of AR method allowable account Estimate how much of the ending balance of AR is bad debt -Bad Debt Expense is a "plug" -Amount becomes ending balance of Allowance for Bad DebtBALANCE SHEET INCOME STATEMENT -Based on the age of account making up ending bal of AR ASSETS = LIABILITIES + EQUITY REVENUE - EXPENSES = NET INCOME

Allow. for Bad Debt -4,500 Bad Debt Exp

INCOME STATEMENT DEPR. EXPENSE

-3,000 -3,000 -3,000

example

Seller has received cash or will at some point in the future (AR)

Amount the company expects to collect (GAAP Requirement)

EXAMPLES

Depreciation Expense = Asset Cost - Salvage Value Estimated Useful Life

$10k asset has salvage of $1k, use life is 3 years =(10000 - 1000)/3 = 3000 per year

-Materiality

DETAILED EXAMPLES

Receivables Net realizable value

Lower of Cost or Market

-4,500

EXAMPLES

ITEM

Assets = Liabilities + Equity D C D C D C

example

Recognizes economic events when cash has Ignores revenue recognition & matching principles been exchanged Not in conformity with GAAP

Earned

=1,000 =500

Straight-Line Depreciation

Assets = Liabilities + Equity D C D C D C

Goods/services are delivered & related obligs are complete Seller has performed duties under terms of sales agreement- title has passed to buyer w/o right of return or contingencies

=-500

When future revenue-producing ability < purch Px the inventory asset write down will reflect loss -Ensures inventory is not overvalued -Accelerates future losses to current Inc Stmt Compare historical cost (balance sheet value) to Market Value. Report the lower of the two. -Market value is cost to replace inventory today

1

-Feedback can be used to set expectations

Revenues increase Equity Expenses decrease Equity

-500

+1,000 +1,000 +500 +1,000 -500

+500

DOUBLE-ENTRY ACCOUNTING

Lesson 3 | Revenue & Receivables Revenue recognition recognized/recorded when BOTH

Balance sheet: Reports a company's resources & claims against @ a given point in time. Income Stmt: Rev & Exp over period. Stmt of RE: Shows RE over period. Stmt of Cash Flows: use of $$ HANDY FORMULAS

-500

Other inventory issues

For info to be relevant, it should have predictive or confirming value, & be material for the reporting entity.

Reliability, or faithful representation, is a necessity for individuals who neither have the time nor the expertise to evaluate the factual content of the information.

INCOME STATEMENT REVENUE - EXPENSES = NET INCOME

+1,000

-Inclusion/omission would influence judgement

-Freedom from Error

Service

BALANCE SHEET ASSETS = LIABILITIES + EQUITY

-500

DETAILED EXAMPLES

Equipment depreciation of $600 per month Depreciation Expense 600 600 Accumulated Depreciation

Accounts

ACCT for Inventory

Inventory COGS Expense Cash Sales Revenue Totals

-Confirming value

-Info cannot be manipulated; free from bias

Primary advantage is tax benefit

Inventory is valued using Inventory is valued using older lower acquisition Px current (higher) acquisition Px

SHEET

Lesson 5 | Fixed & Intangible Assets Property, Plant, a difference in a decision & Equip -Predictive value

-Neutrality

Advertising Cash Expense 250 250

BALANCE

-Predict outcomes of past, present, & future events

LIFO & FIFO

Current, higher acquisition Px Older, lower acquisition Px mtchd w/ curr, higher sales px matched w/ higher sales Px

STMT

Relevance 1Info capable of making

economic situation -Completeness

Unearned Revenue 2k

Assets = Liabilities + Equity -1,500 -1,500

2,000

--Liabilities & Equity-A/P LT Debt Equity Total

-Includes all info necessary for user to understand

Pay $1,500 in dividends Dividends Cash

Serviced pre-paid client ($2k) Unearned Revenue 2,000 Service Revenue

4

2InfoReliability strives to faithfully represent the

Total CRs

Assets = Liabilities + Equity Receivable Revenue 3.5k +3,500 +3,500 3.5k

1,500

3

Balance Sheet --Assets-Cash Inventory PPE Total

INCOME

Sole proprietors Partnerships Corporations LLC's

Capital market Product market Government Internal users - execs

Qualitative characteristics | primary qualities (TWO)

Amount Amount Amount

Do work and leave an invoice for $3,500 Accounts Receivable 3,500 Service Revenue 3,500 1,500

Beginning Cash Operating Activities Investing Activities Financing Activities Net Change in Cash Ending Cash

Trial Balance Form

Receive $2,000 for future services

Pay $250 for advertising Advertising Expense Cash

2

Debit

Issue 3000 shares of common stock for $15,000 15,000 Cash 15,000 Common stock

1

Beginning RE + Net Income Ending Retained Earnings

MY SIDE

=-19.75

Financial stmts Footnotes Auditors's report Mgmt's discussion & analysis (MD&A)

Stmt of Retained Earnings

Stmt of Cash Flows

-17.50

2,000 Cash Unearned Revenue

Income Statement Revenues -Expenses Net Income

Lesson 4 | Inventory & Payables Inventory costing methods

through

Lesson 1 | Accounting Concepts Purpose of accounting: 1) Provide financial information about 2) Reporting entities Basic financial to 3) Primary users statements (FOUR)

Record bond proceeds Cash 491.00 Bonds Payable 500.00 Disc on Bonds Pyble 9.00

INCOME STATEMENT REVENUE - EXPENSES = NET INCOME

+2.25

STUDY GUIDE

Lesson 6

Effective/stated rates -Effective = market rate, or yield -Stated = Specified on the face of the bond....