Reviewer-IN-FAR - Lecture notes financial accounting and reporting 1-10 PDF

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Summary

The Adjusting Entries Process-made before the preparation of financial statements-AJE assigns revenues to the period in which they are earned, and expenses to the period in which they are incurred-necessary so that asset, liability, revenue and expense account balances are correctly recorded-without...

Description

The Adjusting Entries Process -made before the preparation of financial statements -AJE assigns revenues to the period in which they are earned, and expenses to the period in which they are incurred -necessary so that asset, liability, revenue and expense account balances are correctly recorded -without AJE financial statements may not fairly show the solvency of the entity in the balance sheet and the profitability in the income statement Accrual Basis -SFP and SCI are prepared on the accrual basis of accounting in order to meet their objectives -recognized when they occur and not as cash is received or paid -inform users not only of past transactions but also the obligation to pay cash in the future, and of resources that represent cash to be received in the future ‘an expense already incurred but unpaid’ -(accrued expense) ‘revenue earned but uncollected’ -(accrued income) -increases both balance sheet and income statement

Expense Method-recognition of expenses that are incurred/used rather than unused or not yet occur THE TWO METHODS IN RECORDING DEFERRED INCOME Liability Method- recorded when the amount is collected. The common accounts used are: Unearned Revenue, Deferred Income, and Advances from Customers Income Method- recognized when the amount has been earned regardless when it was collected Matching Principle 

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The matching principle directs a company to report an expense on its income statement in the same period as the related revenues. The matching principle is associated with the accrual method of accounting and adjusting entries The matching principle requires that revenues and any related expenses be recognized together in the same period.

Accounting Cycle Cash Basis -does not recorded until the cash is paid or received -cash receipts treated as revenues -cash payments as expenses -no adjustments are made for prepaid, unearned, and accrued items Deferral ‘an expense already paid but not yet incurred’ -(prepaid expenses) ‘revenue already collected but not yet earned’ -(unearned income)

THE TWO METHODS IN RECORDING PREPAID ACCOUNTS

1) Analyzation and Identification of events to be recorded 2) Transactions are recorded in the Journal 3) Journal Entries are posted to the ledger 4) Preparation of Trial Balance 5) Preparation of the Worksheet including AJE 6) Preparation of the Financial Statements 7) Adjusting Journal entries are Journalized and Posted 8) Closing Journal Entries are Journalized and Posted 9) Preparation of a Post-Closing Trial Balance 10) Reversing Journal Entries are Journalized and Posted

Asset Method- a prepaid expense account (an asset) is recorded when the amount is paid.

* AS OF are used in Financial Position

Prepaid expense accounts include: Office Supplies, Prepaid Rent, Prepaid Insurance, and others.

* FOR THE MONTH ENDED are used for Income Statement and SCOE

EFFECTS OF OMITTING ADJUSTMENTS  Failure to do something especially a moral/ legal obligation  When accountant failed to include the proper adjusting entries, the resulting financial statements will not accurately reflect the financial position and the performance of the entity STATEMENT OF CASH FLOWS  Provides information about the cash receipts and cash payments of an entity during the period  Shows the net increase or decrease in cash during the period and the cash balance at the end of the period  Helps project the net cash flows of the entity OPERATING ACTIVITIES -involves providing services, producing and delivering goods -inflow/ outflow of cash from acquiring, selling, and delivering goods E.G., Inflow- from sale of goods and performance of services, royalties, fees, commissions and other revenues Outflow-payments to suppliers of goods and services, employees, taxes, interest expense, and etc. INVESTING ACTIVITIES - -include cash activities related to noncurrent assets. Noncurrent assets include: long-term investments; property, plant, and equipment; the principal amount of loans made to other entities. For example, cash generated from the sale of land and cash paid for an investment in another company are included in this category. *note that interest received from loans is included in operating activities

Inflow-from sale of property and equipment, investments in debt or equity securities, collections to notes receivables Outflow- to acquire property and equipment, acquiring debt/equity securities, to make loans to others generally in the form of notes receivables FINANCING ACTIVITIES -obtaining resources from owners and creditors -generally long term liability and equity Inflows-from investment by owners, issuance of debt (bond and notes) Outflows- payments to owners in the form of withdrawals, and to settle notes payable Direct Method  The entity’s net cash provided by operating activities is obtained by adding the individual operating cash inflows and then subtracting the individual operating cash outflows Indirect Method  Derives the net cash provided by operating activities by adjusting profit for incomes and expense items not resulting from cash transactions  The adjustments begins with profit followed by the addition of expense and charges PROFIT PXXX ADJUSTMENTS FOR: NON CASH EXPENSE (DEP’N) XXX INCREASE IN ASSET (XXX) DECREASE IN LIABILITY (XXX) DECREASE IN ASSET XXX INCREASE IN LIABILITY XXX CASH FLOWS FROM OA PXXX...