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GAAP

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Generally Accepted Accounting Principles: Common set of standards that the accounting proessions has developed and generally accepted and universally praticed.

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SEC

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Securities and Exchange Commision: the agency of the U.S. Government that oversees U.S. financial markets and accounting standard-setting bodies

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FASB

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Financial Accounting Standards Board: The rimary accounting standard- setting body in the United States.

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Cost Principle

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Dictates the companies record asset at their cost. This information can be verified by documentation and is therfore reliable.

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Monetary Unit

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An assumption that requires companies to include in the accounting recrds only transaction data that can be epressed in terms of money. This enable accounting to quantify (measure) economic events and is vital to applying the cost principle.

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Economic Entity

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Any organization or unit in society. It may be a company, a governmental unit, a municipality, a schoo district or a church.

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Economic Enity Assumption

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Requires activites of an entity be kept separate and distinct from the activities of its owner and all other economic entities

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Assets

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The resources a business owns. The business uses its assets in carry out such activites as production and sales. Assets typically have capacity to provide future services or benefits which can reslut in cash inflows.

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Liabilites

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Claims aganist assets- That is existing debts and obligations. Accounts payable, notes payable, wages payable, wages payable, sales and real estate taxes payable, and unearned revenue are a few examples.

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Stockholders Equity

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The ownership clain on total assets. Equal to total assets minus total liabilites. The SHE section of corporations balanace sheet consits o 1) paid-in capital 2)retained earnings

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Revenues

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Gross increses in stockholders equity resulting from business activities entered into for the purpose of earning income. Generally, revenue result from selling merchandise, performing services, renting property and lending money.

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Expenses

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the cost of assets consumed or services used in the process of earning revenue. They are decreases in stocholders equity that result from operation the business. EX. ingredient exp, telephone exp, utilites, supplies exp, rent exp, intrest exp, property tax...etc

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Sole Proprietorship

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A business owned by own person. Usally only a relatively small amount of money is necessary to start in business. The owner receives any profits, suffers any losses, and is personally liable for all debts of the business.

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Partnerships

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A business owned by two or more persons associated as partners. Typically a partnership agreement sets forth such terms as inital investment, duties of each partner, divison of net income, and settlement upon death or withdrawl of a partner

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Corporations

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A business organized as a separate legal entity under state corporation law and having ownership divided in transferable shares of stock. Stockholders enjoy limited liability, may transfer all or part of their shares to ther investers at any time. A corporation enjoys an unlimited life.

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Corporation Advantages and Disadvantages

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Advantage: limited liability, ease of transferring ownership, profession management, unlimited life Disadvantage: government regulations, double taxation

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Accounting Equation

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Assets= Liabilites+ Stockholders Equity

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Investment by stockholder

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Investment of cash in exchange for common stock. Assets will increase and SHE will Increse. Journal entry: Increase Cash & Incease Common Stock

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Purchase of Equipment for Cash

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Changes the composition of Assets Journal entry: Cash decreases and Equipment Increases

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Purchase of Supplies on credit

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Supplies account under assets will increase and liabilites (accounts payable) increases

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Service Provided for cash

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cash under assets will increase and service revenue account under SHE will increase

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Purchase of advertising on credit

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result in a increase in liabilies (accounts payable) and decrease in SHE (retained earnings) The advertising is an expenses for your company (expenses increase, net income decreses retained earnings decreases, and SHE decreases.

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Service Rendered for Cash and Credit

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We receive cash and bill the balane (grant the customer credit and permission to pay part of the invoice later). This will increase Assets (cash and accounts receivabe) and SHE (service revenue)

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Payment of Expenses

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Results in an equal decrease in Assets (cash) and SHE (expenses are increasing thereore net income, retained earnings and SHE is decreasing)

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Payment of Accounts payable (payment on account)

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Results in decrease in Assets (Cash) and Liabilites (accounts payable) oberserve that the payment of a liability related to an expenses that has previously been recorded does not affect SHE

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Recipt of Cash on Accont

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(cash from customer who owes us money for services previously provided): Receiving a sum of cash from customers who had previously been billed. Results in a change in composition within Assets. Accounts Receivable Decreases and Cash Increases.

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Dividends

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Results in a Decrease in Assets (cash) and SHE (Dividends).

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DEAD

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Debit Expense Asset Dividend

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Recording Sequence

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1) Analyze business transactions 2) Journalize the transaction 3) Post to ledger accounts 4) Prepare a trial balance 5) Journalize and post adjusting entries; Prepayments/Accruals 6) Prepare an adjusted trial balance 7) Prepare financial statements: income statement , retained earning statement, balance sheet 8) Journalize and post closing entries 9) Prepare a post-closing trial balance

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Perpetual

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An inventory system under which the company keeps detaied records of the cost of each inventory purchase and sales and the records continuously show the inventory that should be on hand.

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Periodic

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An inventory system under which the company does not keep detailed inventor records throughout the accounting perods but determines the cost of goods only at the end of an accounting period

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FIFO

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Highest ending inventory lowest COGS Highest Net Income Highest Taxes

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LIFO

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Lowest ending inventory Highest COGS Lowest net income Lowest Taxes

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Inventory Turnover

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COGS/ Avg Inventory (beg + ending)/2

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Cost of Goods avaiable for sale

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Begginning Inventory + Net Purchases + Freight in

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Cost of Goods Sold

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Cost of Goods Available for Sale - Ending Inventory

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You wrote a check for $450. However your bookkeper enterd the payment in the records as $540. What needs to happen?

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You must increase (debit) cash for the difference

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You wrote a check for $540. How ever your bookkepper entered the payment in your records as 450. What needs to happen to your cash account in your ledger?

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Reduce cash (credit) by the difference

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Establisment of Responsibility

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Only designated personnel are authorized to handle cash recipts

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Physical controls

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Store cash in safes and bank valuts; limit acces to starge areas; uses cash registers

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Segregation of Duties

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Different indviduals receive cash, record cash recipts, and hold the cash.

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Independent internal verification

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Supervisors count cash recipts daily; treasuer compares total receipts to bank deposits daily

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Documentation Procedures

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Use remittance advice (mail recipts), cash register tape, and deposit slips

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Human Resource Controls

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Bond personnel who handle cash: require employees to take vacations; conduct background checks

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Calculating maturity value

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100,000 + (100,000 x .12 x 10/12) = intrest (110,000)

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Revenue Expenditures

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expenditures that are immediately charges against revenues as an expense. Motor tune ups and oil changes, the painting of buildings and the replacing of worn-out gears on machinery.

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Capital Expenditures

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Expenditures that increase the company's investment in productive facilities. Additions and imporvements increase teh company's investment in productive facilities.

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Land Account

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Debit: Cash price of property, removal cost of old structure, attorney's fees, closing cost, real estate broker commision, clearing, draining, filling, and grading CREDIT- proceeds of salvaged materials

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Building account

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Debit: Purchase price, architect fees, exacavation etc.

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Equipment account

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Debit: purchase price, shipping taxes, insurance during dransit, testing

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Depreciation via Straight line

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Depreciation cost = cost- salvage value Depreciation cost/ useful life (in years) = Annual Depreciation Exp.

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Depreciation if owned for less than 1yr

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Cost - Salvage/life = depreciation for one full year X portion of the year owned

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Depreciation via Unit of Production/Units of activity

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Depreciable cost/ total units of activity = Depreciation cost per unit Depreciable cost per unit X units of activity during the year = Annual depreeciation Expense

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Depreciation per unit

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Cost-Salvage/ Total activity= depreciation per unit depreciation per unit X Usage = amount for adjusting entry

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annual depreciation expense

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book value at begging of year X declining balance rate = Annual depreciation expense

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Dates of Cash Div.

answer

1) Date of Declaration 2) Date of Record 3) Date of Payment

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whats the effect of SHE of a small stock div. that has been decleard and issued?

answer

RE is reduced, CS and Additional paid in capital are increase (in total) by the same amount as RE is reduced. Total SHE is not changed

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Stock Splits

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Increase # of shares Cuts the par value Cuts the mkt value A journal entry is not required does not affect total SHE

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Treasury Stock

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is created when your company purchases its own company stock back from investors.

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Types of Cash inflows and outflows

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Operating activites Investing activites Financing activites

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Operating activities

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Cash inflow: sale of good or service, intrest received and div. received Cash outflow: suppliers for inventory, employees for service, government for taxes, lender for intrest, other for expenses.

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Investing activities

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Cash inflows: sale of property and equipment, sale of investment in debt or equity securities of other entities, from collection of principal on loans to other entitites Cash outflows: purchase property, plant, and equipment, purchase investments in debt or equity securites of other entities, make loans to other entities.

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Financing activites

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Cash inflow: sale of common stock, issuance of long-term debt (bonds and notes) Cash outflows: stockholders as dividends, redeem long-term debt or reacquire capital stock (treasury stock)

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Indirect method operating section

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calculating net cash provided/ used by operations: start with net income add: depreciation exp. , amortization exp, depletion exp, losses then make adjustments

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Net profit margin

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net income/ net sales

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earnings per share

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net income - preferred stock div/avg share of common stock outstanding

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current ratio

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Current assets/current liabilites

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acid test ratio

answer

cash + net accts rec. + short term inv. / current liabilites

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Working capital

answer

current assets - current liabilites

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Debt to asset ratio

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Total liabilites/ total assets

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inventory turnover

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CGS/ (avg inv)

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Return on SHE

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Net income/ avg SHE

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Current assets

answer

Cash & Cash equivalents Account Rec. - allowance of uncollectible accts Inventory Prepaid Exp (supplies, prepaid rent, prepaid insurance) Short-term inv. Property, plant, & equipment less accumulated dep. (land, equipment, buildings, vehices, office equipment, etc) Other assets: intangibles (goodwill franchises, patents etc.)

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Current liabilities

answer

Acct Payable Sales Taxes Payable Income taxes payable FICA taxes payable Unearned Rev Utilities Payable etc. Long-term liabilites some notes payable bonds payable - discount on bonds payable or plus premium on bonds payable mortgage payable

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SHE

answer

Preferred Stock Common Stock Addititonal paid-in capital from CS an Preferred Stock and Treasury Stock RE less treasury stock

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Statement of RE

answer

Beg RE + or minus Prior pd. adj. + net income or - net loss - cash div. - stock div. = ending retained earnings

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Income Statement

answer

Calculate net sales, gross profit, cost of goods sold, income from operations and net income:

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Net Sales

answer

Sales - sales returns and allowances - sales discount

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Gross Profit

answer

Net sales - CGS

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CGS

answer

beg inv. + net purchase + trasnportation In. - ending inv.

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Income from operations

answer

Gross profit - operating exp (selling, administration, general)

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Net Income

answer

Income from operations + other rev and gains (ex. gain on equipment, intrest rev) - other exp and losses ( ex. loss of equipment, intrest exp) - taxes

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