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Know the 3 forms of business entities

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Sole proprietorship- A single owner Partnership- has two or more parties as co-owners each is an owner Corporation- Owned by stockholders, or shareholders, who own stock representing share of ownership in the corporation.

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Definition of Revenues

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Increase in retained earnings from delivering goods or services to customers or clients.

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Definition of Expenses

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Decrease in retained earnings that results from operations; the cost of doing business

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Internal Users

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Users of accounting information are those individuals directly involved in managing and operating the organization

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External Users

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Users of accounting information are NOT directly involved in running the organization

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FASB - responsible for GAAP (accounting principles)

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Financial Accounting Standards Board -set accounting standards

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Accounting Equation

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Assets=Liabilities + Stockholder's equity

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Know the 3 activities that business engage in and give examples of each activity.

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Financing: creates revenues, stocks Investing: increase/decrease long-term activities, plants equipment Operating: loans, pay dividends, repurchase its own stock, selling

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The International Accounting Standards Board is responsible for developing a single set of worldwide accountings standards (IFRS)

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...

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These standards will help companies to reduce accounting costs, make it easier to acquire foreign companies, and facilitate comparisons between foreign companies.

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IFRS- International Accounting Standards Board

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Know the primary objective of financial reporting

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Provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decision.

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What makes information relevant?

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Comparability, verifiability, timeliness, and understandability. It must be capable of making a difference to the decision maker, having predictive or confirming value. It must be material, which means it must be important enough to the informed user.

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Financial information should be understandable to whom

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Existing and potential investors, lenders and other creditors, those willing to spend the necessary time to understand it.

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Balance Sheet

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lists assets, liabilities and owners' equity Tells what obligations will be due in the future

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Income Statement

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revenues minus expenses equal net income Summarizes results, operations for a period of time

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Net Income =

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Revenues - Expenses Single most important item on financial statement

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Assets are recorded at historical/original cost because

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it is objective and verifiable

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Review various source documents. Source documents indicate a transaction has occurred. Ex: Invoice, check, time card, shipping/receiving documents.

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A piece of paper that has been used to record a transaction

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Owner invests in business

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Cash increases, Stockholders equity (common stock) increases

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Purchases supplies for cash

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Cash Decreases, Supplies increase

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Purchase supplies on account

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Supplies increase, Accounts payable (liabilities) increases

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Earn a revenue and receive a promise of cash at a later date

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Accounts receivable increases, retained earnings increase

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Left Side

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Debit

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Right Side

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Credit

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Initial recording of transaction is made in a journal/general journal (called journal entry, journalizing).

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The entry is then posted to ledger/general ledger.

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Know what is meant by a double-entry accounting system

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Accounting records the dual effects on the entity. Each transaction affects at least two accounts. You give something, you receive something in return.

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What is the purpose of a trial balance?

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A trial balance lists all accounts with their balances, assets first, then liabilities and stockholders' equity. Shows whether total debits equal total credits.

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Accounts Receivable

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Money owed to a business by its clients (customers or debtors) and shown on its balance sheet as an asset

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Accounts Payable

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Money owed by a business to its suppliers shown as a liability on a company's balance sheet

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When is revenue recognized with respect to accrual accounting?

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When cash is earned

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When is revenue recognized with respect to cash basis accounting?

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When cash is received

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When are adjusting entries required?

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The end of the account period. When the accounts on the trial balance need to be brought up to date

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Supplies

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Debit - Supplies Expense Credit - Supplies (Revenue) To record supplies for the month.

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Unearned Revenues/Advance Payments

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Debit - Advance Payments Receivables(unearned service revenue) Credit - Advance Payments Revenues (Service revenue) To record unearned revenues but not yet received.

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Depreciation

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Debit - Depreciation Expense Credit - Accumulated Depreciation To record depreciation for the month.

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Accrued Salaries and wages

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Debit -Wage and Salary Expense Credit - Wages and Salary Payable To record wages and salaries owed.

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Closing entries: Revenue and expense accounts are closed to Retained Earnings at the end of the year.

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They balance back to zero at the end of the year

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What is a cash equivalent?

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Investments such as time deposits, certificates of deposit, or high-grade government securities that are considered so similar to cash that they are combines with cash for financial disclosure purposes on the balance sheet.

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Which asset is most liquid?

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Cash

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Deposits in transit

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Add to Bank Statement

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Outstanding Checks

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Subtract from Bank Statement

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Service Charges

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Subtract from books

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Interest Earned

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Add to books

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Errors

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Add to Bank Statement

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Review controls over cash, especially for cash sales

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-Segregation of duties -Proper authorization -Adequate documents and records -Physical controls

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Can a foolproof Internal Control system be designed?

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No

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What accounting function can be performed only by a CPA?

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Auditing Functions

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Know and explain credit terms - i.e. 2/10, n/30

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2/10: 2 percent cash discount pay within 10 days n/10: Entire balance is due within 30 days

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FOB shipping point

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Require the buyer to pay for the shipping costs

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FOB destination point

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Require the seller to pay for the costs of shipping for merchandise to the buyer

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Who owns the inventory when it is in transit?

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Shipping is buyer Destination is shipper

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Accounts Receivable

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Short-term, within the current cycle. Sale with a verbal promise to pay

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Notes Receivable

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Long-term, past the current cycle. Liability resulting from the signing of a promissory note

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2 methods for accounting for Bad Debts

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Direct Write off method, and Allowance Method

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Calculate Net Realizable Value of Accounts Receivable

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=Accounts receivable - allowance for uncollectible accounts (bad debts)

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Calculate interest for notes receivable

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Principal*Annual interest rate*time period =interest

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Gross Profit=

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Sales - Cost of goods sold

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Notes to Financial Statements

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provide full disclosure

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Example of the matching principle

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Inventory is an asset/current asset. When inventory is sold, it becomes an expense (cost of goods sold).

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Multiple-step Income Statement (which includes Gross Profit) is generally used by

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merchandisers and retailers

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What is indicated by the inventory turnover ratio?

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Cost of goods sold Measures the number of times a company sells its inventory during the year. How rapidly inventory is sold

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FIFO

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First in first out

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LIFO

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Last in Last out

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Weighted Average

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Same Unit cost to all units available

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Specific Identification

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Matching unit cost with the actual units sold

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If FIFO is used ending inventory =

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Newest inventory remains

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If LIFO is used ending inventory =

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Oldest inventory remains

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Who would use Specific Identification?

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Jewelers, auto sales, real estate, antiques

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Explain Lower of Cost or Market

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Based on the principles of relevance and representational faithfulness. LCM requires that inventory be reported in the financial statements at whichever is lower-the inventory's historical cost or its market value. The business reports ending inventory at its LCM value on the balance sheet.

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Book value of an asset =

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Cost minus Accumulated Depreciation

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Which property, plant, and equipment asset is not depreciated?

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Land

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In order to calculate depreciation, what three items need to be known?

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Cost, estimated useful life, estimated residual value

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Depreciation

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The process of allocating the cost of a long-term tangible asset over its useful life

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Amortization

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The process of allocating the cost of a limited life or intangible asset over its useful life

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Single line=

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(cost-residual value)/useful life, in years

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Units of production=

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(cost-residual value)/useful life, in units of production

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Double Declining=

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(1/useful life, in years) x 2

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Figure gain/loss

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(difference between BV and amount realized)

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What is a parent

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An investor with 50% or more in another company, investor

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What is a subsidiary

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The investee

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Know definition of current liability and give examples

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An obligation that will be satisfied within the next operating cycle or within one year if the cycle is shorter than a year Known Amounts: Accounts payable, short-term notes payable, unearned revenues, accrued expenses

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Current ratio =

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current assets divided by current liabilities

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Know what a contingent liability is and give examples

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Contingent liability: A potential loss that may occur at some point in the future. Examples: outcome of a lawsuit, tax disputes, alleged violations of environmental protection laws

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Know definition of long-term liability and give examples

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Obligations that are net satisfied within 1 year. Leases, bonds

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Callable Bonds

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Bonds that may be redeemed or retired before their specified due date

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Convertible bonds

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Bonds that can be converted into common stock at a future time

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Debenture bond

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Unsecured bond-bonds backed only by the good faith of the borrower

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Premium Bond

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A bond issued at a price above its face (par) value

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Discount Bond

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A bond issued at a price below its face (par) value

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Discount on Bonds Payable is what type of account?

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Contra liability account

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What is a capital lease? What is recorded in the accounting records for a capital lease?

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Capital lease: long-term noncancelable debt. The rights of the considered property should be recorded on the balance sheet.

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Retained Earnings represent

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Earnings that have not been distributed to stockholders

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Par Value is

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Face value. An arbitrary amount assigned by a company to a share of its stock

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Why do investors purchase preferred stock?

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They receive their dividends and assets before common stockholders

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Know cumulative feature

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The right to dividends in arrears before the current-year dividend is distributed

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If $1 par value stock is sold for $20, by what amount is Cash increased, by what amount is Common Stock increased, and by what amount is Additional Paid-in Capital increased

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Cash is increased - $20 Common Stock increased - $1 Additional Paid-in Capital increased -$19

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Treasury Stock

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A company's own stock that it has issued and later reacquired

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Why would corporations buy Treasury Stock

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-Has issued all it's authorized stocks and needs some stock for distribution -Business wants to increase net assets by buying its stock low and hoping to resell it for higher price. -Avoid a take over by an outside party

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How is Treasury Stock recorded

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Contra account decreases Stockholder's equity

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A company must have __________ and __________ to pay dividends.

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Must have enough cash to pay the dividend and enough retained earnings to declare the dividend.

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Two important dates for dividends are

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Declaration Date: Dividends are declared Payment Date: Payment of dividends

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Know effect of stock dividend

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Stock dividends increase the stock account and decreases Retained Earnings

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Know effect of stock split

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An increase in the number of authorized, issued, and outstanding shares of stock coupled with a proportionate reduction in the stock's par value

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Net Income =

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Revenues - Expenses

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What is the purpose of the Statement of Cash Flows?

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Show where cash came from (receipts) and where it was spent (payments)

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Indirect Method

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Reconciles from net income to net cash provided by operating activities

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Direct Method

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Reports all cash receipts and cash payments from operating activities

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Liquidity is

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Measure of how quickly an item can be converted to cash

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Profitability is

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How well management is using company resources to earn a return on the funds invested by various groups

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Working capital =

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Current assets - Current liabilities

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How are common-size income statements created?

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Each item is expressed as a percentage of the revenue (net sale) amount Divide everything by the net sale amount

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Which ratio assesses capital structure and risk in a corporation?

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Debt to Equity ratio = Total liabilities / Total Stockholders' Equity

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Inventory turnover

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A measure of the number of times inventory is sold during a period. Cost of goods sold/average inventory=Inventory turnover

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Accounts receivable turnover

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A measure of the number of times accounts receivables are collected in a period Net sales/Average Net receivables= Accounts receivable turnover

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Earnings per share (EPS)

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Amount of a company's net income earned for each share of its outstanding common stock (Net income - Preferred Dividends)/Average # shares of common stock outstanding=EPS

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