Final Review Flashcards
Materiality
the dollar magnitude of a transaction makes a difference in how it is recorded, does an error in any way affect the judgement of someone relying on the information
Historical Cost
assets are recorded at original cost (recorded at the amount we paid)
Economic Entity
business transactions are separate from the personal future of the owners
Monetary Unit
all information will be measured in its monetary unit
Going Concern
company will continue to operate into the foreseeable future without forced liquidation
Time Period Assumption
the long life of a company can be reported over a series of shorter time periods (makes it possible to prepare a income statement for a specific time period)
Consistency
allows comparison within a company from one accounting period to the next
Comparability
allows users to analyze 2 or more companies and look for similarities or differences, can compare to other companies because similar methods have been applied
Understandability
information should be comprehensible to those who are willing to spend time to understand it
Accounting Equation
Assets = Liabilities + SHE
Current Assets
cash
marketable security (short term investment)
A/R
Inventory
Supplies
Pre Paid Expenses
Current Liabilities
debts paid within a year
accounts payable
wages payable
interest payable
dividends payable
unearned revenue
short term notes
current maturities of long term debt
contingent liabilities
Long Term Liabilities
Notes Payable
Bonds Payable
Mortgage Payable
Long Term Assets
- Long term Investments (stocks and bonds)
- PP&E (plant property and equipment):
Land, Buildings, equipment, furniture, vehicles, accumulated depreciation - Intangible Assets
Patents, Copyright, Trademark/Tradename, Franchises/licences, goodwill
SHE
2 parts: Common Stock and Retained Earnings
Contra Assets
Accumulated Depreciation reduces fixed assets
Allowance for doubtful Accounts (ADA) reduces accounts receivable
Contra Liability
discounts reduces the face value of note payable
Contra equity
Treasury stock
Current Ratio
CA/CL
Working Capital
CA-CL
Multi Step Income Statement
Revenue
- COGS
= Gross Profit
- operating expenses
=Income from Operations
+gain
-loss
+interest revenue
-interest expense
= income before taxes
- income tax
= Net Income
Statement of Retained Earnings
Beg RE
+Net income
-Dividends
= End RE
Statement of SHE
Beg SHE
+ New Stock
+ Net Income
- Dividends
= End SHE
Rules of Debits and Credits
debits must equal credits
debits to the left credits to the right
Normal Balance is debits
For assets, expenses, dividends, and losses their normal balance is Debits
DEAD
Debits increase Expenses Assets Dividends
CLEAR
Credits increase Liabilities, Equity, And Revenue
Normal Balance is Credits
for liabilities, equity, revenues and gains the normal balance is credit
Trial Balance
list all accounts and their ending balances to prove debits = credits
Accrual Accounting
cash comes later like accounts payable or accounts receivable
Revenue Recognition
record revenues when the earning process is complete
1. delivered the goods
2. performed the goods
Matching (expense recognition principle)
match expenses incurred with revenues earned in the same accounting period the expense helped generate the revenue
Purpose of Adjusting Entries
to update any unrecorded revenue and expenses at the end of the accounting period
“Deferred”
means you have received or paid cash in advance but will defer/put off recording revenues or expenses until it is earned (revenue) or used (expenses)
“Accrued”
means record the expense or revenue NOW along with the payable or receivable in order to follow matching and then you’ll pay cash or receive cash LATER
Closing entries
closing bringing to a zero balance all temporary accounts (revenues, expenses, dividends) and transfer their balances to Retained earnings
Journal entry to close Revenue
Revenues xx
Retained Earnings xx
Closing Entry for expenses
Retained Earnings xx
COGS. xx
Rent Exp. xx
Depr. Exp. xx
Ins. Exp. xx
Closing Entry for Dividends
Retained Earnings xx
Dividends. xx
Cash Equivalents
original maturity of 3 months or less, does not include stock, regardless of how long management intends to hold the investment
- treasury Bill
- commercial paper
- money market funds
- certificate of deposit
Bank Reconciliations
Balance per Bank
Balance per Books
Balance Per Bank
Balance per bank
+ Deposits In Transit
- Outstanding checks
+/- Bank errors
= true cash balance
Balance Per Book
Balance per Book
+ Notes Receivable
+ Interest Receivable
- services fees
- NSF checks
+/- book errors
= True cash balance
Debit Memos issued by bank
reduces the company’s cash account
Credit memos issued by bank
increases the company’s cash account
Net Sales Formula
Revenue
-Sales Return and Allowances
- Sales Discounts
= Net Sales
Gross Profit ratio
Gross Profit / Net Sales
Income Statement Method for Bad debt
% of credit sales
estimate = Bade Debt Expense
Balance Sheet method for Bad debts
% of A/R
estimate = End ADA
Impact on financial statements of recording BDE, writing off an A/R as uncollectible, collecting on a previously written off A/R
recording a BDE will credit A/R
if you write of an A/R you will credit A/R and debit ADA
if you collect on a previously written off A/R you debit A/R to reinstate it then credit ADA, then Credit A/R and debit Cash account
Direct Write off Method violates
the matching concept can only be used if the dollar amount of A/R is immaterial
Notes receivable calculating interest/ maturity value
Maturity value = principle + Interest
MV= Princ. + ( Princ. x interest % x #months/12months)
Journal entry:
Issuance-
note receivable xx
Cash xx
Year end-
Int. receivable xx
Int. revenue xx
@ maturity
cash xx
Note receivable xx
Int. Rec. xx
Int. Revenue. xx. (only the remaining amount other amount in other entries)
issuer of note
is the borrowers
Periodic Inventory
uses a purchases account, records the sale when goods are sold but does NOT update COGS or inventory
to record purchase of inventory:
Purchases xx
Accounts Payable xx
To record sale of merchandise:
Cash xx
Sales revenue xx
COGS formula
Beginning Inventory
+ Net Purchases
= Goods available for Sale
- ending inventory
= COGS
To find net purchases
purchases
- purchase return and allowances
- purchase discounts
+ freight In
= net purchases
Perpetual Inventory
keeps a running total of goods in inventory and updates COGS with every sale
requires 2 journal entries
1. record of sale
2. update inventory & COGS
to record purchase of inventory:
Inventory xx
Accounts Payable xx
to record sale of merchandise
1. Cash xx
Sales revenue xx
- COGS xx
Inventory xx
FOB Shipping Point
title transfers immediately at shipment
FOB Destination
title transfers when it gets to final destination of buyer, whoever has legal title during shipping should include in ending inventory
Inventory Cost Methods
LIFO and FIFO
know how to find COGS using LIFO/FIFO
using LIFO/FIFO you will calculate the cost of each purchase and add all of that cost together
theory of rising/falling prices and their effect on Net Income, Ending Inventory, COGS using LIFO/FIFO
FIFO effect on Net Income:
if prices are rising makes net income higher (overstated)
FIFO Ending Inventory:
assigns current cost to ending inventory (end Invt. =most recent purchases)
LIFO effect on Net Income:
in periods of rising prices net income is LESS (reduces income taxes)
matches current costs with current revenues
Long term assets original cost
original cost includes all costs incurred to bring the asset into its productive capacity (cost to buy + legal fees to acquire + shipping + installation) dont include costs that are unusual
Straight Line Depreciation
Cost - salvage/# of years life = depreciation expense
Activity Method
step 1: cost per unit = Cost - salvage/# units or hours
step 2: Depr. expense= # units produces this year x cost per unit
depreciation expense
is the amount recorded for the current year (on inc. stmt)
accumulated depreciation
is the accumulation of all the depreciation taken over the assets life (on balance sheet as contra asset account)
Book Value (BV)
cost - accumulated depreciation
To find gain/loss on sale of fixed asset
Cost xx
- AD. (xx)
= BV xx
find how much cash it was sold for (FMV)
xx Cash (FMV)
find the difference between cash and BV thats your gain/loss
Straight Line method (amortize)
cost / lesser of useful or legal life
Interest bearing notes
Maturity value= principle + interest (principle x interest % x #months/ 12 months)
Non interest bearing notes
notes issued at a discount, interest was taken out in advance
Cash proceeds= Principle - interest (principle x interest % x #months/ 12 months)
Discount
is a contra liability account, the amount that will be transferred to interest expense over the life of the note
Balance sheet CV
Note Payable xx (at FV)
- Discount xx
= Carrying Value xx (amount owed today)
Lump sum payment
use PV of $1 Table
FV x PV of $1 = PV
- carrying value increases over life of the note bc we owe for the equip. + Int.
Interest Expense
Carrying Value (CV) x Interest rate
Annuity
series of equal payments
use PVOA table
PMT x PVOA = PV
- carrying value decreases over the life of the note because you’re making payments
Coupon Rate
fixed rate of interest paid on face value of the bond, known as “face” rate
only ever use this rate to calculate pmts if its not given
Market Rate
-the going rate of interest that borrowers /lenders are willing to accept on the day of the bond is sold (issued)
-also called effective rate or yield
-market rate locks in on date of issuance
Term Bond
all bonds mature on the same date
Callable Bonds
Corporations reserve the right to buy them back early at a stated right
use call price as a % of FV
Bonds
are long term liabilities, appear on the balance sheet at their carrying value
Carrying Value
represents the amount of debt actually owed on that balance sheet date
Issuance of bonds 2 Promises
- Promise to pay lump sum of face value at maturity
- Promise to pay periodic interest payments during the life of the bond (use coupon rate only to find cash interest pmts)
If Coupon rate = Market rate
sell at FV
If Coupon rate < Market rate
sell at a discount (selling price is less than FV)
If Coupon rate > Market rate
sell at a premium (selling price is higher than FV)
Carrying Value for Premium/Discount
Premium:
CV = FV + unamortized premium
Discount:
CV = FV - Unamortized discount
If bond sold at a discount
the CV will increase over its life until it reaches FV at maturity
If bond sold at a premium
the CV will decrease over its life until it reaches FV at maturity
Effects of Discounts
- a discount adds to the cost of borrowing ( ex. interest expense) bc you have to match the market rate which is more than the coupon rate, corporation receives less cash but has to pay back FV at maturity
- CV increases over the life of the bond until it reaches FV at maturity
- Amortization of discount increases interest expense because interest expense is based on CV, and CV grows with every interest period
Effects of Premium
- premium reduces the cost of borrowing (matching with the market rate of interest) which represents you true cost to borrow and Market rate is less than coupon rate
- CV decreases over its life until it reaches FV at maturity
- Amortization of premium reduces interest expense each pay period bc CV is decreasing over the life
to find total cost of borrowing
- compare difference of cash in and cash out = cost to borrow over the life of bond
- Total cash Paid in interest
+ Discount or - Premium
= total cost to borrow
Bond selling price
PV of face + PV of cash Interest pmts = selling price of the bond
Interest Expense with mkt %
Interest expense = CV x Mkt. %
Cash to repurchase a bond
cash to repurchase = FV x Call % (or Mkt. %)
to find gain/loss on retirement
find the difference between the cash to repurchase and the CV
Earned Capital vs Contributed Capital
earned capital is the # of assets that are earned and retained by the company (R/E) vs. Contributed capital is the amount that shareholders have given the company for stock (APIC, Common stock, preferred stock)
what effects R/E
dividends and net income
Authorized shares
total # of shares that can be sold by corporation
Issued shares
total # of shares held by outside sources
Outstanding stock
of shares held by outside sources
( # shares issued - # treasury stock = Outstanding stock)
Treasury Stock
stock the company has reacquired
- carries a debit balance and reduces SHE
what are the rights of common and preferred stockholders
Preferred Stock rights
1. Dividend preference- right to receive a dividend before common stockholders
2. liquidation preference- after creditors
3. NO voting rights
Common Stock rights:
1. voting rights- vote on major issues, vote for board of directors
2. Dividends- right to receive share of corporations earning as their return on investment ( after preferred Stockholders)
3. Liquidation- right to proportionate share of assets upon liquidation (after creditors and Preferred Stockholders)
4. Preemptive right- right to current stockholders to maintain their percentage of ownership by buying a proportional # of shares of any future issues
Issuance of stock
if selling price > par
cash ( # of shares x selling price) xx
Common Stock xx
APIC/CS xx
Stock issued for non cash asset
record at FMV of stock traded (1st choice) or appraised value of asset recorded
Dividends
- always decrease RE
- preferred stockholders receive dividends before common stockholders
Calculation of preferred dividend
of shares outstanding x par value x % return
Calculation of common dividend
of shares outstanding * $ amount of dividend
3 dates of cash dividend
Declaration-
Record-
Payment-
Dividend Distribution
Pref dividend = #issued x par x % return
preferred shareholders get their dividends first, if cumulative must pay all unpaid dividends from prior years (dividends in arrears) + current years dividends before common shareholders get anything
what do cash dividends reduce
R/E, Cash, SHE
Treasury stock using the cost method
to purchase:
Treasury Stock xx
(# of shares x cost)
Cash xx
(# of shares x cost).
To sell treasury stock:
Cash xx
(# of shares sold x market price)
Treasury Stock xx
(# of shares x cost)
APIC- TS xx
Total SHE
Total Contributed Capital
+ Retained Earnings
- Treasury Stock
= Total SHE
to find total contributed capital
Pref. stock
+ Common Stock
+ APIC accounts
= Total Contributed Capital
EPS
(Net Income - Pref. Dividends) / (weighted average CS outstanding)
3 sections to cash flows
purpose is to show sources and uses of cash
1. Operating
2. Investing
3. Financing
Operating Activities
Net Income
+ Depreciation Exp.
+ Amortization Exp.
+ loss on sale of PPE
+ decreases in all CA
+increases in all CL
- gain on sale of PPE
- increases in all CA
- decreases in all CL
= cash flow from operating
Investing Activities
+ proceeds from sale of PPE
+ proceeds from sale of investments
- Purchase of PPE using CASH
- purchase of intangibles using CASH
= cash flow from investing
includes all changes in long term assets if the change involved cash in or out
Financing activites
+ proceeds from issuing bonds payable
+proceeds from issuing stock for cash
- PMT of cash dividends
- PMT of L-T debt (principle only)
- purchase of Treasury Stock
= cash flow from financing
includes all changes in long term debt and SHE if the change involved a cash in or out
look for issued new debt or stock + retired long term debt - paid cash dividends
what do u not include in cash flow statement
non cash transactions:
- Exchange land for Common Stock (or any asset other than cash)
- exchange L-T debt for fixed asset
- stock dividends
Depreciable Base
Cost - salvage
Selling Price/ Max price of bond
PV of $1 + PVOA
Bond Retirement
FV
+/- discount/premium
= CV (what bond is worth)
FV x retirement % = cash paid
compare CV and Cash paid to find gain/loss
to find change in cash
add cash flow operations + cash flow investing + cash flow financing
statement of cash flows
- focuses on the companys ability to generate cash internally, its management of CA and CL
- compares cash at the beginning of the period to cash at the end of the period
- definition of cash includes cash and cash equivalents (investments with original maturity dates of 3 months or less : Treasury bills, commercial paper, certificate of deposit, money market funds)
