CHAPTER 1 Introduction to Financial Statements Key Inclusions on Financial Statements ASSETS anything owned equipment etc LIABILITIES anything owed o Cash investments receivables inventory prepaid expenses property plant o ANYTHING payable accounts payable etc dividends accrued liabilities Business Activities The Accounting Information System Financing Investing Operating o Loans common stock dividends o Property plant equipment Financial Statements By order of preparation Income Statement o Revenues Expenses Net Income Retained Earnings Statement o Revenues and Expenses COGS Inventory Accounts Receivable Accounts Payable o Initial Retained Earnings Net Income Dividends END Retained Earnings Balance Sheet o Assets Liabilities Stockholders Equity Stockholders Equity common stock retained earnings Statement of Cash Flows o Cash from Operating Cash from Investing Cash from Financing Net change in cash CHAPTER 2 Further Look at Financial Statements The Classified Balance Sheet ASSETS are broken up into cycle o Current assets assets expected to convert to cash or use up within a year or operating o Long term assets assets expected to convert to cash outside a year or operating cycle o Property plant equipment land equipment less depreciation etc o Intangible assets patents copyrights etc LIABILTIES are broken up into o Current liabilities obligations to be paid within the year or operating cycle o Long term liabilities obligations to be paid outside a year or operating cycle CHAPTER 3 The Accounting Information System The T Account and Debits Credits Name of Account DEBIT DR CREDIT CR For EACH TRANSACTION there must be EQUALING debits and credits ASSETS LIABILITIES STOCKHOLDERS EQUITY Assets Liabilities Common Stock Retained Earnings Assets Liabilities Common Stock Net Income Dividends Assets Liabilities Common Stock Revenues Expenses Dividends Because for ASSETS o Debits are o Credits are o Debits are o Credits are o Debits are o Credits are The rest must equal this therefore making both LIABILITIES and STOCKHOLDERS EQUITY DIVIDENDS and EXPENSES subtract from Equity and therefore do the opposite as Equity where Posting Entries to the Ledger Transactions are posted to record them taking place and make sure DEBITS CREDITS For every DEBIT transaction there must also be an equal CREDIT transaction And vice versa Example Common Stock is issued for 10 000 cash Both cash and common stock increase cash increases in form of Debit while common stock in Credit Journal Entry o DATE Cash Common Stock 10 000 10 000 o an entry is made in the individual Cash Account a cash T account o an entry is made in the individual Common Stock account a common stock T account Posting TRIAL BALANCE Lists EACH T ACCOUNT name and its ending balance whether it be a debit or credit simply adds all Credits and Debits together to confirm they EQUAL each other CHAPTER 4 Accrual Accounting Concepts Types of ADJUSTING ENTRIES Prepaid Expenses DEBIT expenses CREDIT assets o Supplies Expenses o Insurance Expenses o DEPRECIATION expense Contra asset it takes away from the asset that the cost of depreciation is allocated Book value cost of asset depreciation on it Unearned Revenue DEBIT liabilities CREDIT revenues o mainly unearned service revenue recorded but not yet earned Accrued Revenue DEBIT assets CREDIT revenues o Revenue earned but not yet recorded Accrued Expenses DEBIT expenses CREDIT liabilities o Accrued interest o Accrued Salaries These adjusted entries are added onto the Balance Sheet to make an ADJUSTED TRIAL BALANCE CLOSING THE BOOKS ASSETS Liabilities Stockholders Equity These are the only permanent account Revenue Expenses and Dividends are all TEMPORARY and must be transferred to their permanent account This process is recorded in the general ledger and the T Accounts the same as any other transaction Revenues and Expenses are subtracted the totals of each are added to Income summary Both Income Summary and Dividends are subtracted the totals of each are added to Retained Earnings For example CHAPTER 5 Merchandising Operations and the Multi Step Income Statement SALES revenue COGS gross profit Gross profit operating expenses Net Income Recording PURCHASES of Merchandise Adds to Merchandise Inventory account and adds to Accounts Payable or decreases cash if paid in cash FREIGHT COSTS o FOB Destination means free for the buy therefore the Seller pays for the shipping o FOB Shipping Point means free for the seller therefore the buyer pays the shipping Freight Cost incurred by Buyer recorded as part of the cost of Merchandise Inventory Freight Cost incurred by Seller recorded as a separate expense account freight out delivery expense shipping expense whatever you want to call it o UNDO the entry for the purchase therefore take away from inventory and take away PURCHASE RETURNS ALLOWANCES from accounts payable PURCHASE DISCOUNTS o Credit Terms Example 2 10 n 30 means 2 discount if received within 10 days otherwise the amount is due in 30 days The first number is the discount the second number is the Discount Period the third number is the overall period in which the amount must be paid o The Discount amount if paid within the discount period is RECORDED as Merchandise o Example Inventory discount is worth 70 Assuming the amount owed is 3500 paid within the discount period Recording SALES of Merchandise Recording the sale of merchandise REQUIRES TWO ENTRIES to be made Entry ONE Accounts Receivables or cash and Sales Revenue increase by the amount it was sold for Entry TWO EXAMPLE COGS increases while Merchandise Inventory decreases by the amount that the merchandise sold originally costed SALES RETURNS ALLOWANCES The entry is the REVERSE of the entry for recording Sales Sales Returns and Allowances is debited instead of Sales Revenue because it is a contra revenue account SALES DISCOUNTS Works the same as Purchase Discounts as far as the Credit Terms Cash and Sales Discounts increase while Accounts Receivable decrease CHAPER 6 Reporting and Analyzing Inventory Cost Flow Methods Ending Inventory depends on the method of how cost is allocated to COGS available for sale Ending Inventory Total Cost of Inventory COGS FIRST in FIRST out FIFO The earliest goods purchased are the first to be sold Meaning if 300 units are sold the cost of those 300 units is whatever the cost was of the FIRST 300 units that added to your inventory LAST in FIRST out LIFO The latest goods purchased are the first to be sold Meaning if 300
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