Accounting 1 9/1/09 Accounting is analyzing and recording things for a business to show what we have, what we own and what we owe. Recording day to day business transactions Who needs this information? External users – Financial purposes - people who want to see how the company is doing – investors, government (taxes and audits)l, creditors (people you owe money) Internal users- Managerial purposes – managers We are doing financial accounting. There are other types of accounting such as auditing and financial advisers. Ethics – to distinguish between good and bad. Everything you do should be ethical. Everything has rules. Accounting is showing fact . GAAP – Generally Accepted Accounting Principles There are specific and general principles. The specific principles are based on general principles. FASB- Financial Accounting Standards Board – Pronounced Fasbi - sets up the GAAP SEC – Securities Exchange Commission The SEC sets the market. They make the rules for stock trading. Publicly traded companies are governed by the SEC. IASB – International Accounting Standards Board The IASB is trying to unify all of the accounting rules from around the world so there is only one set of rules. The IASB is currently still in the making, so we do not yet follow its rules Major Principles of Recording Transactions 1) Objectivity - This means that you do not bring your own biases into your work. Everything you pu down has to be fact, not opinions. 2) Cost – everything you put down is cost. Everything is recorded for what it was purchased for, There are some exceptions, however. 3) Going Concern – it is assumed that your company is going to continue functioning for as long as possible, unless specifically noted that you will not be. IF you are going to close, you must say
Transcript
Accounting 19/1/09Accounting is analyzing and recording things for a business to show what we have, what we own and what we owe. Recording day to day business transactions
Who needs this information?External users – Financial purposes - people who want to see how the company is doing – investors, government (taxes and audits)l, creditors (people you owe money)Internal users- Managerial purposes – managers
We are doing financial accounting. There are other types of accounting such as auditing and financial advisers.
Ethics – to distinguish between good and bad.Everything you do should be ethical. Everything has rules. Accounting is showing fact.
GAAP – Generally Accepted Accounting PrinciplesThere are specific and general principles. The specific principles are based on general principles. FASB- Financial Accounting Standards Board – Pronounced Fasbi - sets up the GAAPSEC – Securities Exchange CommissionThe SEC sets the market. They make the rules for stock trading. Publicly traded companies are governed by the SEC.
IASB – International Accounting Standards BoardThe IASB is trying to unify all of the accounting rules from around the world so there is only one set of rules. The IASB is currently still in the making, so we do not yet follow its rules
Major Principles of Recording Transactions1) Objectivity - This means that you do not bring your own biases into your work. Everything you pu down has to be fact, not opinions.2) Cost – everything you put down is cost. Everything is recorded for what it was purchased for, There are some exceptions, however.3) Going Concern – it is assumed that your company is going to continue functioning for as long as possible, unless specifically noted that you will not be. IF you are going to close, you must say it specifically.4) Monetary Units – everything you put down has to be in monetary units. This also means that your numbers don't change with inflation.5) Revenue Recognition – you record revenue AFTER you have performed the service.You can record revenue in these three conditions - a) After it has been earned – it does not matter when you received payment, only after you have given your end for the money. This is called a liability. b) Cash- if you give something and money is promised, you can record it because you have already done your end. This is called a receivable. c) Cash or value – you can write down the cash value of something you've been given in exchange for services. The value you put down is the value that the object given to you is to you.6) Business Entity – the business and owner are separate entities. a) Sole proprietorship – one owner takes responsibility for everything – unlimited liability – owner and company are the same. Only the owner pays the taxes, not the company.
b) Partnership – two or more people are responsible for the company. Unlimited liability. If one person does something wrong the other person is also responsible. Partnerships can be set up so some people do not have unlimited liability. Sometimes only part of a company has unlimited liability. The people not involved in the unlimited section are only responsible for what they put into the company. Most companies are limited liability companies. It is assumed a company is unlimited liability unless it is noted that they are not. c) Corporations are separate entities. A company is treated as if it is another person. Owners of the company are called shareholders. They have limited liability – they will not get in trouble if the company does. The company has to pay corporate income taxes Corporations sometimes have to pay double taxes – on dividend and corporate taxes. To avoid this some people set up S corporations, where taxes are only paid on personal income level, therefore avoiding double taxation.
Sorbanes Oxley Act (SOX)This is a new term that added more security to accounting after Enron.
9/3/09The Accounting EquationAssets = Liabilities + Owner's EquityEverything you record will affect this. This equation must always be true.Assets – anything you own, resources you have, things you will use in your business to create profits.Liabilities – money you owe to creditorsOwner's Equity – money you owe to the owners of the company –Retained Earnings – the earnings you have retained in the company from doing business -revenue + expenses – net income (or if expenses are greater, net loss) -dividends -contributed capital – money you contributed to the company – common stock
Four Major Financial Statements1) Income Statements Revenue – Expenses List all of the revenues and expenses we have incurred during a period of time. Every company has to produce and annual income statement. The bottom line will be either net income or net loss2) Statement of Retained Earnings We explain to people what retained earnings is, how it has changed. You start at the beginning of the year and show the RE, then show how it changes through dividends, expenses and revenue. You would add or subtract net income/loss, subtract dividends, and show ending retained earnings. You need ending retained earnings to put on your balance sheet.3) Balance SheetAssets = Liabilities + Owner's Equities. You would show all of your assets, liabilities and owner's equities to show that the equation balances..A Balance Sheet is specifically for one day. It is a picture of one point in time. Since it is only for one day, many companies will show a comparative balance sheet, which will show balance sheets from different days. The ending Retained earnings will go under owner's equities on this sheet.4) Statement of Cash FlowsThe most overlooked, underused statements that can be one of the most important ones. It is made over a period of time rather than a snapshot like the balance sheet.This is crucial statement. It shows how cash changed n the company. This is good to show to creditors so they know they will be paid back, to see if the company is doing well, to see if where you are spending cash.
What you will see is exactly where you get your cash from. Is it from running the business, making money, or borrowing money from banks.
The ratio at the end of chapter one is Return on Assets. This ratio is Net Income over Average Total Assets. Net income is seen on your income statement, your Average Total Assets is on your Balance Sheet. To find the ATA, you add the amount of assets from last year and add it to the number from this year, then divide by two.
9/8/09Chapter 2Analyzing and Recording TransactionsTo see what is going on in a company, you look at receipts, checks, invoices, or any other company document talking about a transaction or event – source documents.A general ledger is a file where a company keeps all of their accounts, and everything that happens to your cash. Companies use several different accounts for all of the different kinds of transactions.
Some of the accounts a company uses for assets are cash (how much money they have in the comany), accounts receivable (sums people will pay you in the future), Notes receivable (official documents – signed papers that you will pay someone. These are usually for bigger or more important transactions, but not always. It usually includes interest.), prepaid expense accounts (things you pay in advance for - insurance premiums, etc), supplies, equipment, land, inventory, buildings
Some of the accounts a company uses for liabilities are accounts payable (A/P), notes payable (N/P), unearned revenue (revenue you have nit earned yet – you have not yet provided service for someone's money), accrued expenses/liabilities (any expenses the company accrues that they have not yet paid for but must record)
Owner's equity is split into two parts – contributed capital (common stock) and retained earnings. Retained earnings is revenue less expenses less dividends (things given back to the owners of the company). You keep separate accounts for every expense needed. These can vary from corporation to corporation.
A company must have a chart of accounts – a list of accounts a company uses. All of these accounts come with numbers. All accounts of the same type will start with the same number.
Debit and CreditDebit is the left side, credit is the right side. (on a T account) Debit is Dr. and credit is Cr. This is because it used to be called Debtor and Creditor, taking the first and last letter.Debits are increases and credits are decreases for Assets.Debits are decreases and credits are increases for Liabilities and Owner's Equities.Common stock – credit increaseRevenue – credit increaseExpenses – debit increaseDividend – debit increase
9/10/09Double entry accounting – every time you put in a debit, you put in a credit. Your debits have to equal your credits.
Every company has a Journal. A Journal or General Journal is where we keep a listing of very single transaction that happens in the company.
Sample Journal
1/1/09 Cash 1000 (credit) Common Stock 1000 (debit)
investment by owner1/2/09 Equipment 500 (credit)
Cash 500 (cash)
Posting – every piece of information on the journal is transferred to the Ledger. This is done with the push of a button on computer systems. On your journal, each transaction will have a PR (posting reference) that will correspond to the PR on your ledger.This is on p.56 of the book.
1) Investment by owner - debit cash, credit CS (cash is assets, CS is owner's equity) cash and CS will show up on your balance sheet.2) Purchase supplies for cash – debit supplies, credit cash (both asset accounts) these will both show up on the balance sheet, and the statement of cash flow.3) Purchase equipment for cash – debit equipment, credit cash (equipment is assets, cash is assets) 4) Purchase supplies on credit – debit supplies, credit A/P (supplies asset,, A/P liability)5) Provide service for cash – debit cash, credit revenue (cash asset, revenue owners equity) the revenue will sho up on your income statement, which will eventually affect balance sheet through retained earnings. The cash will show up on your balance sheet.6) Payment of expense with cash) expense debited, cash credited (cash asset, expense owners equity) expense is debited because we are paying it out. Expenses will show up on the income statement, which will eventually affect the balance sheet with retained earnings. Cash will show up on the balance sheet and statement of cash flow.7) Provide service on credit – a/r (account receivable) debited, revenue credited (a/r asset, revenue is owners equity) the revenue will show on the income statement (later balance sheet) and the a/r will be on the balance sheet8) Payment on a/r – cash debited, a/r credited (a/r and cash assets), both show up on balance sheet9) Pay off a/p – a/p debit (decreasing liability), cash credit (a/p liability, cash asset) both show on balance sheet10) Pay cash dividend - dividend debit, cash credit (dividend O/E, cash asset) cash affects balance sheet,11) Receive cash from customer for future service – cash debited, liability credited(Cash asset) liability shows on balance sheet12) Pay cash for future insurance plan. - prepaid insurance debit, cash credit. Will affect balance sheet and cash flow statement
After journalizing and posting, you set up a trial balance. In a trial balance, you make a list of all of the accounts in your company
ABC CoTrial Balance
12/31/09Cash – debitA/R – debit
A/P – creditC.S. - CreditRevenue – CreditExpenses – DebitDividend – DebitThere will be a credit and debit column, and you put the numbers into the market columns above.
You do a trial balance just to make sure your total debits and credits balance out. After you make a trial balance, you can set up your Income statement, Retained Earnings statement, Balance sheet, and cash flow statement.First you set up your income statement, which covers a long period of time, giving you your net income. Then you can make your statement of Retained earnings, where you put your net income, then decrease it by the amount of dividends you payed out. This is the only place you will see dividends. You will get your ending retained earnings now, which you put on your balance sheet. You list all of your assets, liabilities and owners equity (including retained earnings). Then you put anything from your trial balance on to the balance sheet in their respective categories. Your balance sheet only covers one point in time. p. 66 in the book shows a nice balance sheet. The Debt Ratio is the total liabilities divided by the total assets. The purpose of this number is so you can see that the company has more assets than liabilities.
9/15/09Time Period Principle – an organization's activities can be divided into time periodsCalendar year – January to DecemberFiscal year – any 12 month period Natural Business year – 12 month fiscal period which ends when the business's activity level is lowest (so biggest revenues are recorded)
Adjustmentsthings you change at the end of he year in the journal to make sure that everything that happened in the company is recorded. - fixing up your info to make sure we have recorded as much as possibleAccrual basis – GAAP says that you must use this system. In this system, you record information as it happens (example – three year insurance period prepaid, slowly record pieces as you use it)Cash basis – another system for adjustments that some companies use as well as the accrual system. In this system, you immediately record any time money changes hands. (example – three year insurance prepaid, record entire transaction)
Adjusting entries are always going to affect both the balance sheet and the income statement. You NEVER adjust an account called cash.
MatchingThis principle is the reason for accrual accounting. The Matching principle says that you must show the expenses needed to create revenue. To show both of these numbers on the same sheet, you must use accrual accounting. Comparability – example- you record insurance payments slowly so you can compare your expenses for a certain time
9/17/09Adjustments (p.95)Before -Prepaid expense- cash went out but you don't want to record the expense yet because the service has not been used yetUnearned Revenue – money has come into the company before you want to record the revenue, because you haven't completed the service yetThese are called deferred.
After - Accrued Expenses – you will pay later, but you want to put the expense in now. (example – paying salaries – the checks have not gone out yet, but the workers already did their jobs)Accrued Revenue – you have received the money but you want to record it on a different month aka account receivable
the adjusting entry shows how much of an asset you have used upSupplies 1/1/08 - $1000 of suppliesSupplies $1000
Cash $1000 will12/31/08 Supplies Expense $800
Supplies $800this goes on your income statement and balance sheet accounts
Equipment1/1/08 Equipment $20,000
Cash $20,00012/31/08 Depreciation Expense $4000
Accumulated Depreciation $4000
Depreciation – when the value of something goes down Useful Life – how long equipment be useful forStraight Line Depreciation – divide the depreciation evenly over the useful life. It is the simplest method.
An accumulated depreciation account is called a Contra accounta Contra account shows a decrease.
Balance Sheet 08Assets
Equipment $20000Accumulated Depreciation ($4000)Book Value $16000
Balance Sheet 09Assets
Equipment $20000Accumulated Depreciation ($8000)Book Value $12000
If the machine will still be worth something at the end of its useful life then you subtract the value it will have at the end and depreciate a fraction of the result.
When you are dealing with estimates (like depreciation), you never go back to change it.
Unearned revenue unearned revenue is liability on balance sheet, revenue is on income statement10/1 - $120,000 for work on 24 houses up front payment10/1 Cash $120,000
Accrued Expenses$8750 total payroll for company, every FridayDecember 31st is a MondayJanuary 4th is a Friday12/31/08 Salary Expense $1750
Salary payable $1750 1/4/09 Salary Expense $7,000
Salary Payable $1,750Cash $8750
Accrued RevenueBilling client $12,000 after the job is completed. Start in October, finish on February 28 12/31/08 A/R $7,000
Revenue $7,0002/28/09 Cash $12,000
A/R 7,000Revenue 5,000
p.103 Trial BalancejournalizepostT.B – unadjustedAdjustments – make sure you have everything required to make your financial statementT.B. - adjustedFinancial Statements
1.Income Statement2. Retained Earnings3. Balance Sheet4. Cash Flow (can be done at any time, not contingent on anything else)
p.121 different trial balance method, makes it clearer to ee info but is more complicated
9/22/09Chapter 3The Closing ProcessAfter you journalize and post., you make the unadjusted trial balance, then your adjustments, then your adjusted trial balance, and finally your financial statements. After this process, you do the closing process. This is how you make your books ready for the new year.This entire process, from journalizing to closing, is called the Accounting Cycle.
ClosingTemporary accounts (AKA nominal accounts) – accounts that start fresh every year – income statement accounts – revenue and expenses – start at zero every yearPermanent accounts – balance sheet accounts – assets, liabilities, owners equities – use info from last year
1)Revenues (credit balance) -debit revenue and credit Income summary (Income summary is a closing account that is only used during closingRevenue
Income Summary2) Expenses (debit balance) -debit income summary, credit expensesIncome Summary 2000
Revenue 2000
Income Summary-
Debit Credit
20005000
3000 credit – net income
3)Close out Income SummaryIncome Summary 3000
Retained Earnings 30004) Dividends (this is a temporary account, but it is not an income statement account) (debit balance)Retained Earnings 1000
Dividends 1000The Balance Sheetp. 111AssetsCurrent Assets – any asset or resource of the company that will be liquidated or used within one year or the company's operating cycle (usually less than one year – the time it takes to manufacture and sell product), whichever is longerShort Term Investments – stocks or bonds that you have invested in that you plan on selling off within the next few monthsAccounts Receivable InventoryPrepaid ExpensesLong Term Investments – stocks or bonds you plan on holding for longer than a yearPlanned Assets – equipment, buildings, land used to produce revenue Intangible Assets – any asset or resource than cannot be touched – copyrights, trademarks, franchises, license agreements , goodwill (for example, trade skills)
LiabilitiesCurrent Liabilities - anything to be paid within a year/operating cycle Wages, credit card bills, etc
9/24/09Chapter 4 Chapter 4 deals with merchandising companies Merchandise companies buy goods and sell them to other people.In a service company, to show income, you show revenue, subtract expenses, and you get net income.For a merchandise company, you show sales, and subtract Cost of Goods Sold (how much it cost you to get buy goods) to get Gross Profit. Then, you subtract the expenses from Gross Profit to get Net Income.
Service : Revenue – Expenses = Net IncomeMerchandise : Sales – Cost of Goods Sold = Gross Profit Gross Profit – Expenses = Net Income
Operating cycle – from the time you buy goods, sell them and then collect cash for the sales is the operating cycle.
MI – Merchandise InventoryBeginning Inventory + Purchases = Goods Available for SaleGoods Available for Sale - COGS (Cost of Goods Sold) = Ending Inventory
There are two systems for inventory, Perpetual and Periodic.The perpetual system means that you are always going to use specific accounts for transactions. Every time you make a transaction, you will use the MI and COGS accounts.The periodic system means that you use temporary accounts until the end of the period, then you use the MI account.
Buy $1000 of inventoryMI 1000
Cash 1000Trade Discount – when you get a discount for buying in bulkPurchase Discount – when selling to someone else, you give them credit terms (example : don't have to pay for 30 days, but if you pay within 10 then you get a discount)2/10 n/30 – 2% discount in 10 days, net amount must be paid in 30 daysThis discount is so you can get cash quicker for your sale.
Purchase inventory for $1000 on credit, 2/10 n/30MI 1000
A/P 1000always set A/P as full amount because you can't be sure you are going to take the discountif you miss the discountA/P 1000
Cash 1000 if you make the discountA/P 1000
Cash 980MI 20
Purchase Returns / AllowancesAllowances - If you buy defective goods and want to buy some that aren't defective, the company might give you a discount because of it. If you get merchandise and decide you don't want $200 worth of it, returning it looks like thisA/P 200
MI 200If you are getting a discount but returning the merchandise, then make sure you only take the discount out of the amount you keep. So for this example, if it was for $1000 but you returned $200, then you only take the discount from $800. When you send the merchandise back, you send a Debit memorandum, showing the seller than you marked this off in your books cause you sent it backIf you send back defective goods and they give you a $100 discount, it looks like thisA/P 100
MI 100
F.O.B . - Free On BoardF.O.B Destination – seller pays for shipping, ownership transfers when it gets to the destinationF.O.B. Shipping Point – buyer pays for shipping, the ownership transfers to the buyer as soon as it is shipped – at the shipping pointWhen you pay for shipping, the shipping cost is included in the inventory cost.When the company pays for it, it is just another regular expense on the income statement.
Cost – discounts– returns/allowances– transportationall of these combined are in the merchandise inventory account.In the perpetual system, you keep a separate account to keep all these in so you can specifically analyze these numbers.
Sales under the perpetual system1. Revenue Accounts Receivable 1000
Sales 10002. Inventory COGS 800
MI 8002/10 n/30no discountCash 1000
AR 1000with discountCash 980Sales Discount 20
A/R 1000a Sales Discount is a Contra account to SalesIf the customer returns $200 of goods for this sale1. RevenueSales Returns/Allowances 200
A/R 200Sales Returns/ allowances is a contra account.2. ExpensesMI 100
COGS 100You will only regain the cost if you can resell the merchandise that was returned.After receiving a return, you send the buyer a credit memo that you credited their A/R.
Adjusting EntryAt the end of the year, you count up your inventory.Beginning Inventory + Purchases = GAFSGAFS – COGS =Ending InventoryGAFS = Goods Available for saleCOGS = Cost of Goods SoldShrinkage - goods damaged, lost or stolen. - difference between the books inventory and actual inventoryShrinkage is usually a small amount, and it is included in the COGS.COGS 100
You can do an income statement in any way you want. There is n right or wrong IS, it depends on what the company wants to do.Multiple Step ISSales – COGS = Gross ProfitGP – Operating Expenses =Income from Operating
Single Step ISShow all revenues, show all expenses, and you get your net income. However, you do not really see your net income easily using this method.
The Periodic SystemIn this method, you do not use COGS and MI until the end of the period. Instead, you use temporary accounts PurchasesPurchases 1000
A/P 10002/10 n/30Accounts Payable 1000
Purchase Discount 20Cash 980
returnsAccounts payable 200
Purchase Returns/ Allowances 200shippingTransportation In 20
Cash 20
SalesA/R 1000
Sales 1000There is only one part to the entry in the periodic system, rather than the 2 in perpetual.
2/10 n/30Cash 980Sales Discount 20
A/R 100
returnsSales Returns/allowances 200
A/R 200
There are no adjusting entries for the periodic system. This is because we never actually deal with the MI.
Closing Entries1) Revenues → IS2) Expenses → IS3) IS → RE4) Dividends → RE
Chapter 4 reviewMerchandising companies – sellingFor merchandising companies, the IS and BS have a few new numbers.Income StatementSales – COGS = Gross ProfitGP – Expenses = Net Incomeinstead of revenue – expenses = net income like a service companyBalance SheetBeginning Inventory + Purchases (Purchase Price – Discounts – Allowances + Transportation) = GAFSGoods Available for Sale – COGS = Ending Inventory
Perpetual SystemMI
Cash or A/PA/P
MICash
MICash
Everything will affect Merchandise Inventory under this system
If you sell something, you will always have a two part entry1.A/R
Sales2. COGS
MIPeriodic SystemPurchases
Cash or A/PA/P
Purchase DiscountCash
Transportation-inCash
If you sell you only use one entryA/R
SalesWhen you end the period, you have to make adjustments for shrinkage.
10/8/09Goods on Consignment – you give your inventory to someone else, they sell it. You still own the goods, so they still count towards your inventory.If you buy something using FOB shipping point, it counts as your inventoryIf you sell something using FOB destination, it counts as your inventoryIf you have damaged or obsolete inventory, it does not count as inventory.
Inventory CostingThere are four methods you can use for this1) Fifo – first in, first out2) Lifo – last in, first out3) Weighted Average4) Specific IdentificationYou can choose whichever of these you want, but you should try to be consistent on which system you use.
Perpetual – Fifo1/1 Beginning Inventory – 10 units @ $5 = 502/15 Purchase – 4 units @ $8 = 32 3/8 Sale – 9 units6/25 Purchase – 3 units @ $10 = 3011/11 Sale – 6 units
Don't bother with the profits of sales, it is not important for inventory or COGS. Remove irrelevant information at the beginning of each problem.
3/8 9 @ 5 = 45 COGS$5 units were the first in, sell them first
Inventory – 1 @ $5, 4 @ $8 = Total Inventory $37You do not include the 6/25 purchase because it has not happened yet, and we are using the perpetual system where you keep track of
11/6 1 @ $5, 4 @ $8, 1 @ $10 = $47Inventory – 2 @ $10 = Total Inventory $20COGS $92, EI $20Perpetual – LifoSame info as the Fifo numbers3/8 4@ $8, 5 @ 5 = $57 = COGSInventory – 5 @ 5 = $25 Total Inventory
By using FIFO, you can make your EI look better, making you have larger assets. This can be used in a period of rising prices to result in a higher EI. This also gives you a more accurate EI because it uses more current prices.By using LIFO, you can make your COGS look higher, making your net income lower, which results in lower taxes.
Perpetual – Weighted Avg (same numbers as before)3/8 Sell 9 units – total units 14, $82 total, 5.86 per unit., $52.74 total11/11 5 units 5.86, 3 at 10, 7.41 per unit, 44.46COGS 97.20, EI 14.82Weighted Avg will always be in the middle of Fifo and Lifo
Perpetual – Specific ID3/8 6\5 units from beginning inventory, x5 = $254 units from 2/15, x8 = 32$57 total11/11 3 from BI x5 = $153 from 6/25 x10 = $30 $45 totalYou do not have a rule for specific ID, as the numbers can fluctuate depending on which you sell.
Only Lifo and Weighted Avg change under the Periodic system.
Periodic – Lifo15 units sold over the year – 3 @ 10, 4 @ 8, 8 @ 5 =$102The numbers didn't change for this example, but the point is that you just take all purchases at the end of the year and work backwards.It is also simple to find your EI using this method.
Periodic – Weighted Avg112/17 = 6.59/ unit 6.59 x 15 = COGS6.59 x 2 = EI/$9
WA perpetual7/1 4 units – 4/2.4 = 9.60(12 dollars price, divided by 5 units – 2.4/unit)11/1 4 units -4/5.49 = 21.96 (2.4 remaining unit + 36 total price = 38/7 units = 5.49/unit)EI – 88.47 (16.47 (3 at 5.59) + 72 = 88.47)
WA periodic120/19 = 6.32/unit6.32 x 8 = 50.53 COGS69.52 EI
FifoCOGS 30 EI 90Lifo Perpetual COGS 34 EI 86Lifo Periodic COGS 72 EI 48WA Perpetual COGS 31.56 EI 88.47WA Periodic COGS 50.53 EI 69.52Fifo- highest incomeLifo – lowest incomeWA – middle ground
10/15/09Bank ReconciliationsBank BalanceWhat the bank has recorded in your accountBook Balancewhat your have in your book
It is very rare for your book and bank balance to be the same.
10/20/09Compare your book and bank balances.
Bank Balance-outstanding checksdeduct these from the bank balance-deposits in transitmoney placed in the bank after the bank is closedadd to balance-bank errorssubtract or add depending on overstatement or understatement
Book Balance-interestadd to balanceCash 10
Interest Revenue 10-NSF (non sufficient funds) and service feesnot enough money in a customer's account to pay for a check subtract from balanceAccounts Receivable 10
Cash 10-service feessubtract from balanceMisc Expense 10
Cash 10-debit memos/credit memosdebit memo – money wired out – subtract balancecredit memo – money wired in – add to balance-transposed numbersadd or subtract depending on numbers
Bank Reconciliationa) 400 deposit after banking hoursb) outstanding checks 1456c) bank balance 10129d) books 9000e) bank collected note for 200f) NSF for 120g) service fee 25e) transposed 253 instead of 235 on check for utility bill
Bank Balance: starting 10,129Add: Deposit in transit $400Deduct: Outstanding checks $1456Adjusted Bank Balance : 9073
Book Balance starting 9000Add:Collection of N/R 200Error in recording check 18Deduct:NSF 120Service Fee 25adjusted book balance 9073
Chapter 7ReceivablesAccounts Receivable and Notes Receivablesale on creditA/R 1000
Sales 1000COGS 900
MI 900When transactions happen in A/R, you also make a note in the subsidiary ledger, which has a page for each customer. These pages will have the customer's deb it, credit and balance.
Sale 1000Cash collected a few days afterA/R (credit card company) 980Credit Card Exp 20
Cash 1000
There are two methods for companies to extend credit to customers1) Direct Write-Off – This is used when the amount of Bad Debt is immaterial. In this situation, you wait until the customer does not pay, and then you can write it off to Bad DebtBad Debt Expense 500
A/R 500if you get the money after this, then you reverse this transactionA/R 500
Bad Debt Expense 500Cash 500
A/R 500this method is only used in small companies or companies with small amounts of debt, and usually you do not want to do this because you do not want to reverse transactions.2) Allowance Method – in this situation, you make an estimate of how many people are not going to payBad Debt Expense
Allowance for Doubtful AccountsWhen we find out that a customer is not going to pay, we write off their A/RAllowance for DA
A/R
10/22/09Allowance Method – Matching Principlethis will show up on your Income Statement and Balance Sheet.You want to match your numbers with the transactionsIn these cases, you use the Allowance for Doubtful Accounts, a contra account to A/R
estimateBad Debt Exp
Allowance for DA
write offAllowance for DA
A/R
recoveryA/R
Allowance for DACash
A/R
Calculating Allowance for Doubtful AccountsFor the Income Statement method, you take the percentage out of your sales, then put it in Allowance for DA.For the Balance Sheet method, you take the percentage out of your A/R, then check what is already in the Allowance for DA, then add enough to make it equal to your percentage. .Income Statement - % of SalesBalance Sheet - % of Receivable
Credit Sales 300,000A/R 800,000Allowance for DA 38,000
a) 1% of sales = 3000b) 5% of A/Rc) customer won't pay $500
a)Bad Debt Expense 3000
Allowance for DA 3000b)Bad Debt Expense 78000
Allowance for DA 78000c)Allowance for DA 500
A/R 500
Notes ReceivableN/R are formal, written promises to pay. An official document is signed for very large amounts. It is rare for most customers to have one.Maker – person who signed and said they will pay. It is called a N/P (note payable) on his endPayee – receiver of money promised in the note – N/R $10,000 90 day note, 5% interest Dated Feb 1216 days Feb – 90 - 16 = 7431 days March – 74 – 31 = 4330 days April – 43 – 30 = 13Matures 13th May
Feb 12thN/R 10,000
Sales 10,000COGS
MI
A/R 15,000Pay 5,00010,000 N/R
Cash 5,000N/R 10,000
A/R 15,000
365 day year = 360 days – banker's rule10,000 x 5% x 90/360 = 125$125 worth of interest
May 13th
Cash 10,125N/R 10,000Interest Revenue 125
If he pays, he Honors the note.
If he does not pay, he Dishonors the note.A/R 10,125
Interest Revenue 125N/R 10,000
$5,000 60 day note dated Nov 15th %10 interest15 Nov 60-15 = 4531 Dec 45 – 31 = 14Matures Jan 14th
Nov 15th
N/R 5,000Sales 5,000
Accrual Adjustment Dec 31st - 5,000 x 10% x 46/360 = 64Interest Receivable 64
FactoringWhen you sell your A/R to another company and give them the rights to collect on your A/R.You do this if you need the money for a debt right now100,000 A/RSell for 80,000
Cash 80,000Factoring Fee Expense 20,000
A/R 100,000
Pledging If you want to borrow money, you can use your A/R as collateral.
On the Balance Sheet, you have a section called Plant Assets where all of the land costs go. Equipment – whatever you need to pay to get equipment into your business is part of the cost of equipment.
Lump sum price - $150,000Land, Building and EquipmentAppraisal – how much is all of this worthIf the land is worth 100,000, building is 50,000 and equipment is 30,000, you take a ratio to find out amount you are paying with your lump sum price.
DepreciationCostSalvage ValueUseful Life
Straight Line Depreciation(Cost – salvage value) / Useful Life (100,000-20,000) / 4 years = 20,000Depreciation Expense 20,000
Accumulated Depreciation 20,000
Most companies choose to use Straight Line Depreciation because it is easy, efficient and can be done automatically.
Units-of-Production DepreciationYou might have a machine that you use a lot one year, then they are not used, then they are used a lot again. If you know this and want a more accurate depreciation number, you use this method.
Step 1(Cost – salvage value) / # of units expected to produce
(100,000-20,000) / 800,000 = 10 cents per unit
Step 2 Depreciation per unit X # units actually produced = depreciation expense 0.10 X 50,000 = $5,000
Declining Balance MethodThis can be used if the value is going to go down slower as time goes on. This is what the IRS uses for tax balances.
100,000 for 5 years 10,000 salvage
Step 1 Calculate the Straight Line Rate – 100%/ Useful life – 20%
Step 2Multiply your SL rate by your rate of decline – such as double or triple declining - double declining 40%
Step 3DD Rate (double declining rate) X Beginning Book Value 40% X 100,000 = 40,000
Depreciation Exp Accumulated Dep. Book Value
1 100,000 x 40% = 40,000 40000 60000
2 60,000 x 40% = 24,000 64000 36000
3 36000 x 40% = 14,400 78400 21600
4 21600 x 40% = 8640 87040 12460
5 2960 90000 10000
10,000 is your salvage value, so you have to force the last entry. You can never go past the salvage value, no matter when happens.
If your estimates are wrong, you do not have to change old statements, you just work on with the new estimate. (current BV – SV) / New estimate
1. Revenue Expenditure – IS – things needed to keep your machines running smoothly – repairs etc.These are just ordinary, day to day repairs.Repair Expense 5000
Cash 50002. Capital Expenditure – BS - Capitalizing – when a repair increases the value of an object – when the repair increases the efficiency, productivity or extends useful life of the object.These are extraordinary betterment.Equipment 5000
C ash 5000
Disposal10000 Cost/10 years = 1,000/year depreciation10 years have gone by
Accumulated Depreciation 10,000Equipment 10,000
Income Statement – Loss on Disposal 2,000
Intangible AssetsPatent - inventionsCopyright – writing, music, etc. - anything involving the artsGoodwill – when you pay extra because you're buying reputation and other positive thingsLicense
Amortization – depreciation for intangible assetsAmortization Expense
Acc Amortization You only use the straight line method for amortization.
Goodwill is never amortized because you don't know what will happen to it. Instead, you test it for impairment, so you know if your reputation etc. has changed.
Chapter 8 RatioTotal Asset TurnoverNet Sales / Average Total Assets
Purchase a machine on 1/1/07 for $120,000est. useful life is 5 years, end up using it for 3 yearsest. salvage of 15,000expect to produce 210,000 unitsyear 1 – 80,000 unitsyear 2 – 50,000year 3 – 30,0001/1/10 – sold for 45,000
1. Straight Line2. units of production3. double declining
sale below book value Cash 45,000Loss 12,000Accumulated Dep 63,000
Equipment 120,000
2. 105,000/ 120,000 = 0.50/unit0.50 x 80,000 = 40,0000.50 x 50,000 = 25,0000.50 x 30,000 = 15,00040,000 book value after 3 years
Cash 45,000Accumulated Dep – Equipment 80,000
Gain on Disposal 5,000Equipment 120,000
3. 20% per year - double declining = 40% DDR (double declining rate)120,000 x .4 = 48000 BV 7200072000 x .4 = 28800 BV 4320043200 x .4 = 17280 BV 25920
Cash 45,000Accumulated Dep 94,080
Gain on Disposal 19080Equipment 120,000
11/10/09Chapter 10Long Term Liabilities Bonds – obligation of payment from the public – pay interest tooPAR – how much you borrow from the investor – principlecontract rate/stated rate – interest ratePeople make bonds because - If you use stocks, you lose controlYou get the money instantly with bondsCons of bonds:No flexibility on when to pay back interest and principle.
Bond are usually issued in thousands.
If your contract rate ends up being lower than the market rate, you are selling at a discount, which means your interest expense will be bigger.
If your contract rate is higher than the market rate, you sell them at a premium, raising the price of the bond.
Discount - CR < MRinterest expense exceeds actual amount of interestPremium – CR > MR interest expense is less than the cash interest paid
100,000 par1/1/08issue @ 98 (anything less than 100 is a discount)
Cash 98,000Discount on B/P 2,000
B/P 100,000A discount is a contra account to bonds payableB/P (bonds payable) account is ALWAYS the par value
issue @ 102 (above 100 is premium)
Cash 102,000B/P 100,000Premium on B/P 2,000
A premium account is an adjunct accountAdjunct accounts add to another accountB/V = Par + premium OR Par – discount
5,000 par1/1 year 1CR 10%MR is higherterm = 4 yrsissue at discount because MR is upissue at 97
Cash 4850Discount 150
B/P 5000
GAAP says instead of waiting for the last year to record the whole interest payment, you show it gradually over time.
Amortize150/4 = 37.50
1)Interest Expense 500 Cash 500
2) Interest Expense 37.50Discount 37.50
300,000 bond10 year bond9% sr/crbond dated 1/1 yr 1payable semi annually 6/30, 12/31sell the bond 3/1 year 1
3/1Cash 304,600
B/P 300,000Int Pay 4500
6/30 Int Pay 4500 (2 months)Int Exp 9000 (4 months)
Cash 13500 (6 months)5,000 bondsold at premium 30010 year4 years gone by5180 BV after 4 years
you call back the bond at 104 – 5200BV – 5180 – loss of 20
Premium 180BP 5000Loss 20
Cash 5200
call same bond at 99 – 4950bv 5180gain of 230
40,000 par1200 discount10 yr life5 yrs gone byretire at 102
Chapter 10 ratiop. 414Debit to Equity ratiototal liabilities to total owner's equities – does the company owe more or have more stocks
Chapter 11Equity – StockAdvantages of a corporation Generates revenue – generates cashSeparate entity – it counts as a separate person, so you are not personally responsible for the company. Also, you can make a credit card or rent a car under the company namecontinuous life – the corporation will not fall apart if one person leavesTransfers ownership easily
disadvantages of a corporationdouble taxation – corporate and personal dividend taxestriple taxation – these two and inter-company dividend taxationmore government regulation
Shareholders often do not go themselves to vote, but give someone a proxy so the person can vote instead of them.
Preemptive right – shareholders have first dibs to buy new issuance of shares of stock going on to the market before everyone else.
If a company liquidates, the shareholders have a right to some of the assets. However, the first people that get assets are the creditors of the company.
Registrars – people who keep track of who owns the stocks at what point. These are often people outside of the company that are hired.
Transfer agents – people who help with the sales and purchase of stock.
Authorized Stock – how many stocks you are allowed to sell according to your charter from the government. This is the total number the company will be allowed to sell in its lifetime, so it is usually a huge number. This number can also be changed at a later date.Issued Stock – How many stocks have been sold to the public for the company's entire lifetimeOutstanding Stock – How many shares are still held by the publicTreasury Stock - when a company buys back its own shares of stock
PAR – minimum legal capital The minimum amount that can be paid per share. This is usually set at a low amount, but stock is still sold higher. This is so the creditors have something to go after.Companies usually are not allowed to sell below par, and they usually sell at a premium, above par.
Stated value and par value are the same thing.
EquityCommon Stock – Contributed Capital, Paid-in capitalRetained Earnings – Revenue less expenses less dividends
Issue 100 shares of common stock$10 par value – issue at par valueCash 1000
Common Stock 1000
issue at 15 per shareCash 1500
CS 1000 – CS always credited at parPaid in Capital in Excess of Par 500
Paid in Capital in Excess of Par = PICEPAdditional Paid in Capital = APIC these both mean the same thing
issue 100 shares no par value – issue at15/share
Cash 1500CS 1500
if there is no par value, then all of the money will be CS.
No par – stated value 10 – issue at 166Cash 1500
CS 1000PICESV 500
SV = stated value
150,000 land10,000 shares of stock10 parLand 150,000
CS 100,000PICEP 50,000
A company will sometimes offer shares of stock instead of money for people who work for the company, such as lawyers.
Organization Exp. 150,000CS 100,000PICEP 50,000
Dividends – when we give money back to the shareholders of the corporation – dividends are not guaranteed.
A corporation might not give out dividends if they want to keep the money to expand the company, or just in case they need the money. However, most corporations will give out dividends to keep their investors happy.
Date of Declaration – date when they say dividends will be given out. This is declared by the board of directors.Date of Record – they say that people who had shares at a certain date will be entitled to dividends. Date of Payment – when the dividends are payed outOnly the date of declaration and payment are recorded.
Date of Declaration -Retained Earnings 100,000
Common Dividend Payable 100,000Date of Record – no entryDate of Payment-Common Dividend Payable 100,000
Cash 100,000
If a corporation has a deficit in retained earnings, the state will not allow the corporation to pay dividends. This is so the owner cannot take the money out of the company so that if the company liquidates the credits will not be able to get it.
Preferred Stock – does not allow voting, but comes with a percentage of dividends. Same entries as common stock except you use the preferred stock account instead of common stock.
Cumulative Preferred Stock – this means that if a holder is entitled to dividends and you don't give out dividends on certain years, you owe them those dividends for the years you didn't pay them.These are called dividends in arrears.
Participating Preferred Stock – if you give the PS holders 8%, then the CS holders only get 8% too. The remaining amount, if any, is split between the PS and CS holders based on the par value.
These stock types have to be set up before hand so you know what kind of stock you are getting.
Convertible PS – the holders can convert their stock to CS at a certain point if they want to.Callable PS – the company can take back the stock. They have to pay any arrears before buying back the stock before the callback.
Treasury Stock – this is a contra account to equity. This means that we bought back stock, and decreased equity. This is stock that has been issued but was bought back. A company might do this to increase earnings per share. This can also be done so the value of the stock in the marketplace goes up because there are less stocks available. Another reason is so someone cannot do a hostile takeover because the company has the majority of the stocks again.
Financial statement analysis report – choose a company that sells merchandise. There is a page that shows all ratios in the book.
11/24/09RatiosEPS – Earnings Per Share(NI less preferred dividends) / (weighted average of common shares)
Price Earnings RatioMarket Value / EPS
Dividend Yield(Cash Dividends paid per share) / (Market price per share)
BV of PreferredHow much equity do we have per share?Equity allocated to pref. / # of shares outstanding of pref.
BV of CommonEquity allocated to common / # of shares common
Equity of PreferredHow much you have to pay to buy back shares from thee holders.1. Call price x shares of pref. = how much you have to pay2. Dividends in arrears
p. 471 hwex 11-2a. Cash 152,000
CS 152,000b. Cash 152,000
CS 38,000PICEP 114,000
c..Cash 152,000CS 95,000PICESV 57,000
ex 11-3a. Organization Expense 40,000
CS 40,000b. Organization Expense 40,000
CS 2,000PICESV 38,000
ex 11-4a. Cash 35,000
CS 20,000PICEP 15,000
b. Cash 60,000CS 50,000PICEP 10,000
Total Paid in Capital – everything someone pays to buy your stock
Chapter 12Statement of Cash FlowThis statement goes through the cash account and shows what happened – why did we use it, where did we get it from, etc.There are three sections of a Statement of Cash Flow.1. Operating Activities2. Investing Activities3. Financing Activities
1. OperatingNet IncomeRevenueExpenses
2. Investing - assetsPropertyInvestments (Stock or Bonds from other corporations)PlantEquipmentNotes Receivable We are investing in PIPENs
3. Financing – liabilities and equityPrinciple (note or bond payable)DividendsIssuing StockTS – Treasury StockWe finance for Prince Divits.
After these three sections, there is a supplementary section where we put non-cash investing and financing activities. Some examples of this are – trading, converting preferred stock to common stock, issuing stock or bonds in exchange for assets
Sell equipment – investingExchange old car for new car – non cashborrow money from a bank – operatingsell off stock – investing buy land - investingissue stock – financingreceive cash dividend – operating (dividends from something you invested is revenue)declare dividends – non cash (the company just announces they will pay, they have not yet paid)sell machine – investing pay interest – operating receive interest – operatinglend cash to sister – investing (note receivable)you are paid back on note receivable – investing.Borrow money by issuing bond – financing
pay back principle on bond – financingtreasury stock (buying back out own stock) – investingbuy someone else's bonds – investingresell treasury stock – financing
Calculating cash flow from operating activitiesIndirect methodFixing net incomeAdd back depreciation and amortization (amortizing applies for discounts and intangibles)Add back lossesAdd back decreases in current assetsAdd back increases in current liabilitiesSubtract gainsSubtract amortization of premiumsSubtract increases in current assetsSubtract decreases in current liabilities
Cash Income from OANI 400,000Adjustments
Depreciation 80,000Gain on Sale (20,000)Increase in AR (40,000)Increase in AP 6,000Decrease in PPD exp 12,000Decrease in WP (2,000)Total – 36,000
Net cash provided by operating activities – 436,000Cash flow from investing activitiesCash flow from financing activitiesWhen these three are added up, you get the total change in cash.
Cost – Accumulated Depreciation = Book ValueBook Value ? Selling Price = Gain/Loss
Chapter 13Who wants to analyze a corporation?External users, board of directors, CEOs, managers
Liquidity – how quickly it can be turned into cash
Is a company able to meet short and long term obligations?How profitable is the company?Market prospects – how is this company doing in the market? What do people think about it?
Horizontal Analysis – compare a company's performance this year to its performance in past yearsLook at each account and note the change in dollar valuesAnother way to do this is to look at the percent of change% change = [( analysis year (08) – base year (07) ) / Base year (07) ] x 100
Trend Analysis – take the analysis year and divide it by another year, then multiply by 100 Vertical Analysis – you compare all of the items on the balance sheet to total assets because total assets is 100% of what a company has.
Ratio Analysis – p. 557 – all the ratios in the book STUDY THESECurrent Ratio – Current Assets / Current Liabilitiescan a company meet its obligations
Acid Test/ Quick Ratio – (Cash + A/R + Short Term Investments ) / Assets better idea of if company can meet short term obligationsit uses the three most liquid assets
A/R Turnover - Sales / Average A/Rdenominator will always have the term on the bottom and it will be an average
Inventory Turnover – COGS / Average Inventory
Day's Sales in Receivables – (A/R / Sales) x 365how many days worth of sales are uncollecteddays sales are like a reversed turnover ratio multiplied by 365 and using ending instead of averageDay's Sales in Inventory –(Ending Inventory / COGS )x 365how many days worth of sales are still in inventory
Total Asset Turnover - how effectively are we turning over our assets to create profit
SolvencyDebt Ratio – Total Liabilities / Total AssetsEquity Ratio – Total Equity / Total AssetsDebt to Equity Ratio – Total Liabilities / Total Equity
Times Interest Earned –
Profitability Profit margin ratio – total profitGross Margin
