Week 2 - Lecture notes 2 PDF

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The following information is from the video lecture and powerpoint for Accounting 110. The yellow highlights are what I think are important. The highlights of different colors are to make it easier to find definitions that came out previously.
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Accounting 110 The following information is from the video lecture and powerpoint for Accounting 110. They ellow highlights are what I think are important. The highlights of different colors are to make it easier to find definitions that came out previously.

Accounting 110 Week 2 Accounting for Accruals and Deferrals Cash Basis vs. Accrual Accounting - Recognition -

Formally recording an Economic item or event in the financial statements Recognizing something has happened

- Realization -

Collecting cash, generally from the sale of products or services Physically collecting cash

Show how Accruals Affect Financial Statements -

Show how receivables affect financial statements 1. Cato consultants was started on January 2014 when it acquired $5,000 cash through issuing common stock a. Increased assets, which is cash b. Increase stockholders’ equity, because the cash  was received by issuing stocks c. Asset source transaction

d. 2. During 2014, Cato Consultants provided $84,000 of consulting services to its clients but no cash has been collected a. Increase assets, but it’s in account receivable since cash hasn’t been collected, but eventually will b. Increase stockholders’ equity (retained earnings) where the cash will go c. Asset source transaction

d. 3. Cato collected $60,000 cash from customers in partial settlement of its accounts receivable a. Increase assets, in cash, and this would be the uncollected cash from the consulting  services i. This would also be put as Revenue b. Decrease assets (accounts  receivable) because it’s from the uncollected cash from the services

c. This would be an asset exchange transaction

d. 4. Cato paid an instructor $10,000 cash for teaching courses (salary expense). a. Decrease cash (assets), because they paid in cash to the instructor i. This would also be put as an Expense b. Decrease stockholders’ equity (retained  earning), because the cash is from the retained earnings c. This would be an asset use transaction

d. 5. Cato paid $2,000 for advertising costs. Advertisements appeared in 2014 a. Decrease of assets (cash), because they used cash  to pay for the ads i. This would also be put as an Expense b. Decrease in stockholders’ equity (retained  earnings) because the cash is from the retained earnings c. This is another asset  use transaction

d. 6. Cato signed contracts for $42,000 of consulting services to be performed in 2015 a. THIS WOULD NOT BE RECOGNIZED IN 2014 FINANCIAL STATEMENTS i. The are signing contracts for something that will be happening IN 2015 so none of it would have any bearings on 2014

b.

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Show how payables affect financial statements 1. At the end of 2014 Cato recorded accrued salary of $6,000 (the salary expense is for the instructor in 2014 that Cato will pay for in 2015) a. Increase liabilities (salaries payable) i. This would be put  as an expense b. Decrease stockholders’ equity (retained  earnings). c. This is a Claims  Exchange Transaction i. Has no bearing on the assets  ii. Has no  bearing on cash  flow because no cash has been received.

d. 2. Comparing Cash Flow from Operating Activities with Net Income

a. b. Accrual Accounting vs Cash Flow i. Accrual is the amount  possible to have ii. Cash Flow is the money  actually received iii. So the $84,000 is the amount of money they are able to receive from the consulting iv. The $60,000 is the amount of money they so far had received 3. Matching Concept a. Cash basis accounting can distort  the measurement of net income  to properly match revenues with because it sometimes fails expenses i. The problem is that cash  is not always received or paid in the period when the revenue is earned or when the expense is incurred ii. Objective of accrual accounting is the improve matching of revenues with expenses 1. Cash Flow would be the actual  movement of cash

Show How Deferrals Affect Financial Statements -

Show how supplies affect financial statements 1. Cato purchased $800 of supplies on account a. They DIDN’T use cash for this b. Increase assets (supplies) c. Increase liabilities (accounts payable), because they didn’t use cash to buy it d. This is asset source transaction

e. -

Show how prepaid items affect financial statements 1. On March 1, Cato signed a one-year lease agreement and paid $12,000 cash in advance to rent office space. The one-year lease term begins March 1 a. Decrease assets (cash), because this was paid for in cash b. Increase in assets (prepaid  rent) c. This is an asset exchange transaction

d. -

Show how unearned revenues affect financial statements 1. Cato received $18,000 cash in advance from Westberry Company for consulting services to be performed over a one-year period  beginning June 1 a. Increase assets (cash), because they received it in cash b. Increase liabilities (unearned  revenue), because it hasn’t been done yet; the consulting services start June 1 c. Asset Source Transaction

d. 2. Cato provided $96,400 of consulting services on account a. Increase of assets (accounts receivable), because Cato is expecting these payments

b. Increase stockholders’ equity (retained earnings) c. Asset Source Transaction d. Accrual accounting requires companies to recognize revenue in the period in which the work is done regardless of when the cash is collected

e. 3. Cato collected $105,000 cash from customers in partial settlement of its accounts receivable a. Increase assets (cash), because they are receiving the cash from the customers b. Decrease assets (accounts  receivable) because it’s lowering the amount of money that the customers are required to pay c. Asset exchange transaction

d. 4. Cato paid $32,000 cash for salary expenses a. Decrease cash (assets) because it’s paid in cash b. Decrease stockholders’ equity (retained earnings) because the cash is from the retained earnings c. Asset use transaction

d. 5. Cato incurred $21,000 of other operating expenses on account a. Increase liabilities (accounts  payable) b. Decrease stockholders’ equity (retained  earnings) c. Claims exchange transaction

d.

6. Cato paid $18,200 cash in partial settlement of accounts payable a. This is what Cato  owes someone else b. Decrease assets (cash) because Cato is paying someone in cash c. Decrease liabilities (accounts payable) d. Asset use transaction

e. 7. Cato paid $79,500 for land it planned to use in the future as a building site for its home office. a. Decrease assets (cash) because the land is paid for in cash b. Increase assets (land) because the land is now Cato’s c. Asset exchange transaction

d. 8. Cato paid $21,000 in cash dividends to its stockholders a. Decrease assets (cash) because the dividends is in cash b. Decrease stockholders’ equity (retained earnings) because the cash is from the retained earnings c. Asset use transaction

d. 9. Cato acquired $2,000 cash from issuing additional shares of common stock a. Increase assets (cash) because they are receiving cash for common stock b. Increase stockholders’ equity (common stock) because there’s more common stock c. Asset source transaction

d.

10. Cato recognized rent expense for the office space used during the accounting period a. Decrease assets (prepaid  rent) b. Decrease stockholders’ equity (retained  earnings) c. Asset use transaction

d. 11. Cato recognized the portion of the unearned revenue ($10,500) it earned during the accounting period a. Decrease liabilities (unearned  revenue) because they recognize that they  will be earning this, but haven’t gotten it yet b. Increase stockholders’ equity (retained earnings) c. Claims exchange transaction

d.

Types of Transactions -

Asset source - Increase assets, increase claims on assets Asset use - Decrease assets, decrease claims on assets Asset exchange - Increase one asset, decrease another asset Claims exchange - Increase one claims account, decrease another...