Review Monday April 17th 2023 Review of 1st 8 weeks of class Business Organization Forms 1 Sole proprietorship Owned by an individual and is personally liable for all business 2 Partnership Owned by two or more people with each partner liable for all debts of the 3 Corporation separate legal entity Owners Stockholders not personally liable for debts debts business of the businesses Financial Accounting Goal communicate information to discussion makers outside of the company Balance sheet income statement statement of retained earnings and cash flow The balance sheet is a SNAPSHOT Managerial Accounting Goal communicate information to decisions makers inside the company The Accounting Equation 1 Assets Claims The Basic Accounting Equation ALOE assets liabilities owners equity Assset Economic resource used to produce revenue that is expected to provide a future benefit to the business Liabilities obligations of a business to relinquish assets provide services or accept obligations Stockholder s Equity the portion of assets that stockholders own Dividends are NOT an expense Retained Earnings Earned Captial Represents a company s accumulated undistributed net income or net loss Revenue Expenses Net Income Retain and use to generate additional assets for the benefit of stockholders Distribute all or potion back to stockholders dividend Net Income Revenue expenses net income Revenue sales of goods or services Expenses costs necessary to earn revenue ie wages utilities advertising etc Matching principle Expenses should be reported in the same period in which the corresponding revenue is earned Think of being a student at IU The fiscal period would be when we are here because that Fiscal Periods is when we are students Basic Accounting Vocabulary Make sure to go over all of the basic vocab Know them front and back Make sure to review the ALL INCLUDED questions on chapter homework Balance Sheet Reports a company s assets and the corresponding claims liabilities and equity on those assets as of a specific date The balance sheet is the LAST thing recorded snapshot Net income is the FIRST thing recorded INVESTOPEDIA Importance of Ethics 1 Opportunity 2 Pressure 3 Rationalization The accounting profession requires trust and credibility The accountant must be trustworthy for information to be valuable Fraud Triangle Three elements typically present when fraud occurs GASB generally accounting standards board GAAP generally accepted accounting principles Financial Audit Materiality No guarantee that the financial statements are absolutely correct just materially correct Anything that would influence the decision of the investor It is different for each organization and does not have to be a dollar amount Audit Opinions 1 Unqualified best 2 Adverse mid 3 Qualified L Cash Basis vs Accrued Basis Accounting 1 Accrual GAAP 2 Cash Basis NOT GAAP Accrual vs Defferal 1 Accrual a revenue or expense that is recognized before cash is exchanged 2 Deferral a revenue or expense that is recognized after cash has been exchanged Revenue Recognition Principle When we earn it Expense Recognition Principle Always record the period incurred Prepaid Expense An expense incurred in one period that will be used in the future Ex the company pays annually for software licensing or for office rent Review Wednesday April 19th 2023 Review of 2nd 8 weeks of class GO OVER Product Costs vs Selling General and Administrative Costs Allocating Inventory Cosst Between Asset and Expense Accounts COGS Merchandise inventory balance sheet Cost of goods sold income statement Perpetual Inventory System Updates inventory every time inventory is bought sold and returned FORMULAS Revenue COGS Gross Margin Gross Margin SG A expense Net Income Transportation costs FOB Shipping point Loading Seller Responsibility In transport buyer is responsible FOB Destination Loading Seller Responsibility Unloading Buyer Responsible GO OVER Tangible VS Intangible Assets Depreciation for tangible Recognizes the expense of a tangible asset over the lifecycle of the asset Determining Cost of Asset Make sure to include everything to get the asset into its needed use Salvage Value the book value of an asset after all depreciation has been fully expensed Straight Line Depreciation the most commonly used and straightforward depreciation method for allocating the cost of a capital asset It is calculated by simply dividing the cost of an asset less its salvage value by the asset s useful life GO OVER Current and Long Term Assets vs Current and Long Term Liabilities Accounting for Sales Tax Most states require retail companies to collect sales tax on items sold to customers Indiana s sales tax is 7 Ex calculating sales tax for merchandise to a customer for 2000 20000 0 06 120 Cash collection is 2 120 ret Earnings only 2000 sales tax payable is 120 You only hold on to the 120 to give to the government which decreases from cash Contingent Liability a potential obligation arising from a past event The amount of existence of the obligation depends on some future event GO OVER Product Cost in Manufacturing Companies Pepsi Natural in class example go over product or period for each Cost behavior 1 Variable 2 Fixed a Total dollars change in proportion w output more output more cost b Cost per unit unchanged in relation to output a Total Dollars unchanged in relation to output b Cost per unit Change inversely with output more output lower cost per unit Contribution Margin Price per unit variable cost per unit P VC It is what is left over to cover fixed costs and then add operating profit GO OVER Overhead Allocation Ex TJAXX