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ACCT 2301:Final Review
return on assets
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Net income/Average total assets
measure of profitability
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debt ratio
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total liabilities/ total assets
used to assess the risk that a company will fail to pay its debts
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current ratio
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current assets/current liabilities
measure of a companies ability to pay its short term obligations
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Gross Margin Ratio
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Gross Margin Ratio = (Net Sales - Cost of Goods Sold)/Net Sales
% of dollar sales available to cover expenses and provide a profit
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Inventory turnover
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COGS / average inventory
shows how many times a company turns over its inventory during a period
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Earnings Per Share
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net income-preferred stock dividends/average common shares outstanding
measures the net income earned on each share of common stock
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External Users
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Investors
Creditors
Tax authorities
Customers
Labor unions
Regulatory agencies
Economic Planers
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Internal users
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managers who plan, organize, and run a business
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measurement principle (cost principle)
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Accounting information is based on actual cost (with a potential for subsequent adjustments to market); historical cost principle
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revenue recognition
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test to determine if revenues should be recognized/recorded in given period
must be earned and realized
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Expense Recognition (matching principle)
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companies recognize expenses not when they pay wages or make a product, but when the work/service or the product actually contributes to revenue
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Full Disclosure
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A policy that requires any information that would make a difference to financial statements users to be revealed.
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Principles of accounting
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Cost principle
Revenue recognition
Matching principle
Full disclosure
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accounting assumptions
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four account assumptions:
1. Going Concern
2. Monetary Unit
3. Time period
4. Business entity
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going concern
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business will continue operating instead of being closed or sold
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Monetary Unit
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Only items that are expressed in money are reflected
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time period
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life of a company can be divided into time periods
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business entity
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business is accounted for separately from other business entities
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Constraints of Accounting
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1. Cost-benefit (benefit>cost)
2. Materiality
(only count the things that matter)
3. Industry practice
(stay with the indsutry practice)
4. Conservatism
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materiality
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only include information that would influence the decisions of a reasonable person
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cost-benfit
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only information with benefits of disclosure greater than the costs of providing it need to be disclosed
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Conservatism
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Companies should choose the accounting method that will be least likely to overstate assets or income.
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Industry Practices
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The peculiar natures of some industries requires deviation from basic accounting and reporting theory
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ledger
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collection of accounts for an information system
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chart of accounts
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listing of accounts used by a company to record transactions.
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steps in processing transactions:
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1. analyze transactions and source documents
2. apply double entry accounting
3. record journal entry
4. post entry to ledger
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double entry accounting rules
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1. at least 2 accts are involved
2. Dr = Cr
3. A = L + E
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Trial Balance
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list of account balances, DEBITS=CREDITS
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Normal Account Balances
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-Whatever causes the accounts to increase
(DEAD) - Debit Expenses, Assets and Dividends
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accrual basis
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revenues are recognized when earned and expenses are recognized when incurred
approved by GAAP
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Cash Basis
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records revenue when cash if received
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Adjusting Accounts
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An adjusting entry is recorded to bring an asset or liability account balance to its proper amount
usually at the end of the month or accounting period
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Prepaid Expenses (Deferred Expenses)
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-company pays for an expense item in advance
-Pre-payment is recorded as an asset
-It only becomes an expense when the asset is used up
ex. Prepaid insurance, prepaid rent, supplies
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unearned revenues (deferred revenues)
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-refers to cash received in advance of providing products and services
-is a liability
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accrued expense
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an expense incurred but not yet paid in cash
ex. salaries payable, interest payable
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Accrued Revenues
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Revenues earned but not yet received in cash or recorded
ex. unbilled svcs performed, interest revenue
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temporary accounts
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(nominal)
period specific accounts.
income statement accounts: revenue and expenses
owner's equity accounts: withdrawals and dividends
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recording closing entries:
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1. close Revenue accts (to I/S)
2. close Expense accts (to I/S)
3. close Income Summary acct (to R/E)
4. close Dividends acct (to R/E)
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accounting cycle:
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1. analyze
2. journalize
3. post
4. prepare unadj trial bal.
5. adjust
6. prep adj trial bal
7. prepare statements
8. close
9. prep post-closing trial balance
10. reverse (optional)
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Credit Terms:
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-Customer bought something 2/10, N/30
-2% discount if you pay w/i 10 days, otherwise the net is due in 30 days
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FOB shipping point
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buyer pays
xfer ownership at dock
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FOB destination point
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seller pays
xfer of ownership when shipment arrives at destination
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Inventory Systems
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1. Perpetual: continuous count of inflows and outflows
2. Periodic: Continuous count of inflows; once-a-period count of remainder
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(beg inv) + (net purchases)
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Cost of goods available for sale (COGAS)
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Contra-revenue accounts
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Sales discounts, returns, and allowances (provide a way to reduce revenue indirectly)
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buy inventory for$100, 2/10 n/30
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Dr Inventory 100
Cr Acct Pay 100
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buy inventory for$100, 2/10 n/30
pay within discount period
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Dr Acct Pay 100
Cr Inv 2
Cr Cash 98
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buy inventory for$100, 2/10 n/30
dont pay within discount period
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Dr Acct Pay 100
Cr Cash 100
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buy inventory for$100, 2/10 n/30
pay shipping charges (freight in) $10
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Dr Inv 10
Cr Cash 10
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buy inventory for$100, 2/10 n/30
return merchandise to supplier
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Dr Acct Pay 100
Cr Inv 100
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buy inventory for$100, 2/10 n/30
receive a credit memo on damaged merchandise
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Dr Acct Pay 100
Cr Inv 100
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sell inventory for $100 (cost $75), 2/10 n/30
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Dr Acct Rec 100
Cr Sales 100
Dr COGS 75
Cr Inv 75
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sell inventory for $100 (cost $75), 2/10 n/30
receive payment within discount period
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Dr Cash 98
Dr Discount 2
Cr Acct Rec 100
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sell inventory for $100 (cost $75), 2/10 n/30
dont receive payment within the discount period
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Dr Cash 100
Cr Acct Rec 100
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sell inventory for $100 (cost $75), 2/10 n/30
receive returned merchandise from customer
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Dr Sales Ret&Allow 100
Cr Acct Rec 100
Dr Inventory 75
Cr COGS 75
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sell inventory for $100 (cost $75), 2/10 n/30
issue a credit memo on damaged merchandise
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Dr Sales Ret&Allow 100
Cr Acct Rec 100
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sell inventory for $100 (cost $75), 2/10 n/30
pay shipping charges (freight out) $10
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Dr Shipping Exp 10
Cr Cash 10
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sell inventory for $100 (cost $75), 2/10 n/30
adjusting for shrinkage:
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Dr. COGS $$$
Cr. Inv $$$
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Merchandise Inventory includes:
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all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted
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goods in transit
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Goods in the process of being transported to the buyer; ownership is based on freight terms
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goods on consignment
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consignor's (owner) not consignee (holder)
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damaged or obsolete items
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-if they cannot be sold, should be removed from inventory
-if they can be sold at a reduced price, record them at Net Realizable Value(NRV)
-NRV = sales price minus cost of making the sale
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determining inventory cost
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include all expenditures necessary to bring an item to a salable condition and location
invoice cost - any discount + any incidental costs necessary to put it in a place and condition for sale
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Inventory "Cost Flow" Assumptions
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- FIFO
- LIFO
- Average Cost
- Specific Identification
|
FIFO:
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- lowest costs to COGS
- result in higher NI and Inventory
- EI approximates current replacement cost
|
LIFO:
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- assigns highest to COGS, lower NI (lower taxes), lower inventory on B/S
- matches the current costs in COGS with revenue
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Lower of cost or market rule
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if market value of inventory is lower than cost, reduce amount recorded for inventory for market value
COGS xxx
Inventory XXX
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income statement effects of inventory errors
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understate beginning inventory: COGS understated Net Income overstated
overstate beginning inventory: COGS overstated Net Income understated
understate ending inventory: COGS overstated Net Income understated
overstate ending inventory: COGS understated Net Income overstated
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what is the purpose of internal control
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1. safeguard assets
2. enhance accuracy and reliability of financial reporting
3. improve efficiency of operations
4. ensure compliance with laws and regulations
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Triple threat of fraud:
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Opportunity—refers to internal control deficiencies in the workplace.
Pressure—refers to financial, family, society, and other stresses to succeed
Rationalization—refers to employees justifying fraudulent behavior
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Journal entry to replenish petty cash (cash shortage)
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expenses xx
cash over or short xx
cash xx
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Journal entry to replenish petty cash (overage)
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Expenses xx
cash over or short xx
cash xx
|
bank reconciliations
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reconcile accounting records (books) to bank records (bank)
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bank reconciliation outstanding checks
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recorded in the books but not yet on the bank statement
no entry required
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bank reconciliation: deposits in transit (outstanding deposit)
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recorded in the books but not yet on the bank statement
no entry required
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bank reconciliation: deduction for NSF, bank fees
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deducted from bank statement but not from books
adjust the books
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bank reconciliation: collections from EFT, interest
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added to bank account but not recorded in the books
deduct from the books
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bank reconciliation: errors
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journal entry required for book entries
no journal entry for bank errors
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book balance
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add: interest revenue
add: collects notes receivable
less: service charges
less: NSF check
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credit card sales
bank has a credit card sale of $500 to a customer. bank charges a processing fee of 2%. cash is received immediately
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Dr Cash 490
Dr CC Exp 10
Cr Sales 500
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credit card sales
Barton has a credit card sale of $500. Credit card company charges a processing fee of 2%. Barton remits the CC sale to the credit card company and waits for the payment that is rec'd later.
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dt of sale:
Dr A/R - CC Co. 490
Dr CC Exp 10
Cr Sales 500
dt of payment:
Dr Cash 490
Cr A/R - CC Co 490
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interest compensation
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principal x APR x time (expressed in fraction of yrs) = Interest
P times APR times time = Int
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Recognizing Notes Receivable
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Dr notes receivable
Cr sales
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Percent Sales Method
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The estimated amount for bad debt expense becomes the balance for bad debt expense
BDE = current period credit sales * bad debt %
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percent of accounts receivable method
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used to compute the desired ending balance of the allowance for doubtful acct (AFDA)
BDE = est. adj. bal. in AFDA minus Unadj year end bal in AFDA
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aging of accounts receivable method
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1. each receivable is grouped by how long it is past due
2. each age group is multiplied by its estimated bad debt %
3. est. bad debt for each group are totaled
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Depreciation Methods
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1. Straight Line
2. Units of Production: (cost-residual) * (actual prod/estimated total prod)
3. Declining Balance: (cost-accum depreciation) * (2/useful life). Note: accelerating
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Ordinary repairs
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Repair work that is necessary to maintain an asset in normal operating condition
Dr Repairs Exp XXX
Cr Cash XXX
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Extraordinary repairs
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Extends an assets useful life beyond its original estimate
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Accounting for Disposal of Plant Assets
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1. Record depreciation up to date of disposal (update accum depr.)
2. Record removal of disposed assets account balance (inc. accum depr.)
3. Record any cash received or paid in the disposal
4. Record gain or loss (compare book value w/ market value)
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Disposal of Plant Assets
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1. record cash rec'd (debit)
2. remove Acc Depr (debit)
3. remove asset cost (credit)
4. record gain/loss (cash > BV = credit, cash < BV = debit, cash = BV, no gain/loss)
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sales tax payable
Max hardware sold bldg materials for $7500 that are subject to 6% sales tax
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Dr Cash 7950
Cr Sales 7500
Cr Sales Tax 450
7500*6% = $450
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bond par value
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maturity value, face value
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Maturity Date
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the date the face value must be paid to the bondholder
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contract rate
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coupon rate, stated rate
used to compute interest payments
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market rate
|
effective rate, yield rate
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bond discount or premium
|
contract rate > mkt rate = premium
contract rate = mkt rate = par
contract rate < mkt rate = discount
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Secured bond
|
a bond issued with some form of collateral (i.e. real estate)
|
unsecured bond
|
bonds that are NOT supported by collateral, MOST bonds
|
term bond
|
are scheduled for maturity on one specified date
|
Serial bond
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Mature in installments over a period of years.
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registered bond
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bond is issued in the name of the owner
(no one else could collect the money but the name on the bond)
|
Unregistered bonds
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bonds payable to whoever holds the bonds
|
Convertible Bond
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A debt security that can be converted into a firm's stock at a prespecified price
|
callable bond
|
means the issuing firm has the right to repurchase the bonds prior to maturity at a specified price.
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capital stock
|
voting rights/ownership %
pre-emptive right
right to propotionate share of assets upon dissolution
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common stock is
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authorized, issued, and outstanding
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declaration date
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the date on which the board of directors officially approves a dividend
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Date of Record
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(cut off date) On this date only investors listed as stockholders of the corp. (the stockholders of record) can participate in the dividend
|
Payment date
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Date on which a cash dividend is paid to the shareholders of record
|
small stock dividend
|
less than 25% of company's outstanding stock
*use market value
|
Stock dividend (large)
|
greater than 25% of outstanding shares
recorded at par value
|
preferred stock
|
1. no ownership
2. dividends expressed as % of par value
|
treasury stock
|
reacquired stock of a firm
not an asset and does not receive dividends
|
inflows of operating activities
|
-cash received from sale of good or service
-interest and dividends from investments
|
Operating Activities - Cash Outflows
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1. To suppliers for inventory
2. To employees for services
3. To government for taxes
4. To lenders for interest
5. For other expenses
|
inflows from investing activities
|
-sale of long-live assets
-sale of investment securities
-collection of a non trade receivable
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Outflows from Investing Activities
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-purchase of long-lived assets
-purchase of investment securities (stocks and bonds)
- loans to other entities
|
Financing activities: cash inflows from
|
-*sale of capital stock (or owner investment)
-* issuance of debt (bonds and notes)
|
Outflows from Financing Activities
|
1. Cash paid for repayment of principal to creditors.
2. Cash paid for repurchasing stock from owners.
3. Cash paid for dividends to owners.
|
Indirect Method
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1- add back any non-cash expenses
2- remove gains and losses from investing activities
3- adjust for changes in current assets and liabilities
|
direct method
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cash effect of each operating activity is reported directly in the statement
|
technology and internal controls
|
1. reduces processing errors
2. limits evidence of processing
3. increase e-commerce
4. seperation of duties becomes difficult
5. allows more extensive testing of records
|
Accounts Receivable Turnover
|
Net Sales/ Average Accounts Receivable
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Cost of Land
|
purchase price
sales taxes
title search and transfer doc costs
realtor's and attorney's fees
costs of removal of old buildings
grading costs
|
bond retirement
|
retire bonds at maturity: no gain/loss
retire bond before maturity: show gain/loss
retire bonds by conversion: no gain/loss, record at BV of bonds
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