financial stmts Flashcards
1
Q
what are the components of a single step income stmt?
A
Revs
-Exp
=Net Incom
2
Q
What are adjusting entries?
A
they are entries made at the end of an accounting period and required every time a company prepares a financial stmt
report the correct assets, liabs, and se on the balance sheet
report the correct revenue and expenses on the income stmt
3
Q
What are the components of stmt of RE
A
Beginning Balance RE
+Net Income
= Ending Balance RE
4
Q
What are the components of a balance sheet
A
5
Q
What are the type of adjusting entries?
A
Deferrals and Accruals
6
Q
Debit to increase
A
asset
expenses
7
Q
What are deferrals?
A
they are expenses or revenues that are recognized at a later point than when the cash was originally exchanged
8
Q
Credit to increase
A
liability + equity
revenue
9
Q
What are Accruals?
A
the revenue or expenses is incurred in the current period but the related cash isn’t paid or received until future period
You act first → get cash/pay later
Work first, cash later
10
Q
Equity is increased when
A
common stock is issued, and when revenue is earned.
11
Q
Equity is decreased
A
when dividends are declared/recorded, and when expenses are incurred.
12
Q
What are two kinds of deferrals?
A
prepaid expenses and unearned revenues
13
Q
what are prepaid expenses?
A
expenses were paid in cash before they are used or consumed
14
Q
what’s the je and adjusting entry for prepaid insurance?
A
JE
DB: Prepaid Insurance
CR: Cash
End of period adj
DB: Insurance Exp
CR: Prepaid Insurance
15
Q
What are unearned revenue?
A
cash received before services are performed
16
Q
What is the JE and adj JE for unearned revenue
A
Cash
Unearned Rev
adj
Unearned Rev
Service Rev
17
Q
What are two kinds of accruals?
A
revenues and expenses
18
Q
adj JE for accrued exp (unpaid salaries)
A
Salaries Exp
Salaries Payable
19
Q
adj JE for accrued revenue (work done not billed)
A
A/R
Service Revenue
20
Q
We record depreciation JE as
A
Depreciation
Acc Depreciation Expense
21
Q
what is the formula for interest exp?
A
interest exp = principal of np * annual int rate * current portion of year
22
Q
Calc for retained earnings
A
Beg RE
+Net Income
-Dividends
=End RE
23
Q
What do closing entries do?
A
They reduce all temporary accounts balance to zero in preparation for the next period transactions
- Transfer all Income stmt accounts and balances to Income Summary
- Transfer all the Income Summary and Dividends accounts to Retained Earnings
24
Q
Single Step Income Stmt Formula
A
Revenues - Expenses = Net Income
25
Multipstep Income Stmt Equation
Sales, Net of Returns and Discounts
Less: Cost of Goods Sold
= Gross Profit
Operating Expenses
- Selling Expense
- General and Admin Expense
= Income from Operations
NonOperating
+ Other Gains and Revenues
- Other Expenses and Losses
= Income before Tax
Income Tax Expense
= Net Income
26
Earnings per Share Equation
Net Income/# of common shares outstanding
27
Shares of stock
- all corps are owned by investors who own shares of the company's common stock
- common stockholders are interest in how well each share of common stock in the company performed during the period
- corps may also issue a second class of stock called preferred stock
- common stockholders assume that dividends paid to preferred stockholders come from the companys earnings during the period
28
Earnings per share equation =
(Net Income - preferred dividends)/ number of common shares of stock outstanding
29
Below income from continuing operations the income statement reports:
Income (loss) from discontinued operations, net of tax
Gain (loss) from sale of discontinued component, net of tax
sometimes these two items are reported together in one line called "gain or loss" from discontinued operations
30
When one company (the parent) owns more than 50% of the common stock of another company (the subsidiary), the parent
consolidates (combines) all (100% of the subsidiaries ' revenues and expense with its own.
31
The income statement reports a line below net income called
Net income attributable to non controlling (minority) interest
32
Net income attributable to non controlling (minority) interest
represents the portion of consolidated net income that does not belong to the parent
you would just subtract it from the net income to get net income attributable to the parent company
33
Changes in the FMV of assets that have not been sold are called
unrealized holding gains or losses
34
OCI records
unrealized holding gains or losses.
The purpose of the account Other Comprehensive Income is to provide a place for certain unrealized gains and losses to be reported without affecting net income.
and it is a part of comprehensive income
35
How to calc comprehensive income?
Net Income
+ OCI
= Comprehensive Income
36
Comprehensive Income is reported two ways:
in separate financial stmt or below net income on the income stmt
37
Stockholders Equity =
common stock+ retained earnings + accumulated oci
38
at the end of the accounting period oci balances are closed out to
accumulated oci
39
The balance sheet allows us to assess a company’s ability to pay its:
short term debts, liquidity
long term debts, solvency
40
Operating cycle: the period of time between
purchasing raw materials and supplies, converting them into inventory, selling them to customers, and collecting cash from customers
41
definitions of current assets
cash or other assets the company expects to convert into cash, to be consumed within a year or as long as the operating cycle whichever is longer
42
Cash and Cash Equivalents
cash and cash equivalents are short term (up to three months) and very liquid. cash can also be restricted and if this is the case it will need to be put under noncurrent assets
43
Short term investments are
also known as debt or equity investments, trading investments, expected to be sold within a year
44
non trade receivables are
receivables not from customers
ex loans made to employees
45
inventories are
raw materials, work in process, finished goods
46
supplies are
unlike inventory, they are not sold to customers
47
long term investments are held
to earn a return on the change in market price not used to help run the business
48
Long term investment examples are
securities: bonds, common stock in other companies, longterm notes receivable
ppe not used in operations, held for future use
Investments set aside in special funds: sinking funds, pension funds, plant expansion, cash surrender value of life insurance
Investments in non-consolidated subsidiaries or affiliated companies (if the company owns >20% and < 50% of the common stock in subsidiaries)
49
land is
never depreciated
50
other assets include
LT prepaid expenses deferred charges
deferred income tax
restricted cash/securities
51
Current Liabilities are
obligations the company expects to pay or settle generally within one year of the balance sheet date
52
current liabilities examples
1. Accounts payable
2. Accrued liabilities - accrued expenses, wages payable, taxes payable, interest payable
3. Short-term notes payable (short-term debt)
4. Unearned revenue - services owed to the customer
5. Dividends payable
Current portion of long-term debt
53
Long-term liabilities examples
Bonds payable.
Long-term notes payable
Lease obligations
Pension obligations
Deferred income tax liabilities
Product warranties and contingencies
54
Stockholders’ equity examples
1. Capital stock - common stock, some companies also have preferred stock, at par value
2. Additional paid-in capital - the excess amount paid-in over par or stated value of the stock
3. Retained earnings - the undistributed earnings of a corporation.
If retained earnings is negative, it is called Accumulated Deficit.
3. Accumulated other comprehensive income - the aggregate amount of Other Comprehensive Income
4. Treasury stock - when a buys its own shares of stock (reaquires its stock), it separately reports
those reaquired shares as treasury stock. Treasury stock is a contra-equity account, it carries a debit balance.
It reduces the amount of stockholders' equity.
5. Non-controlling interest (minority interest) - added to the parent (controlling) company's stockholders' equity.
55
The Statement of Cash Flows classifies cash receipts and payments into 3 categories
operating, investing, and financing
56
Operating section is
cash inflows and outflows that affect net income, its related to revenues and expenses
you start with net income and then adjust it with the changes
57
the investing section is
making loans to others and collecting repayment, acquiring and disposing of investments and PPE (long term assets)
58
the financing section is
borrowing money and repaying loans, issuing stock, buying treasury stock, and paying dividends
59
the formula for stmt of cash flows is
cash flows form operating activities
+/- cash flows form investing activities
+/- cash flows from financing activities
Net change in cash
Add: beginning cash account balance
= cash, ending balance
60
Significant Noncash Activities are reported
at the bottom of the Statement of Cash Flows or in the notes to the financial statements. Examples include:
1. Issuance of common stock or bonds to purchase assets.
2. Exchanges of long-term assets (such as trading investments for buildings)
3. Converting bonds into common stock
61
to complete a stmt of cash flows you will need
prior years balance sheet as well as this years, and calc the difference in balances,
also the income stmt / net income
62
stmt of cash flows: if current assets went up
you will need to subtract from net income. because that means you had earned revenue but had not been paid
63
stmt of cash flows: if current assets went down
you add it to net income because those accounts got turned into cash
64
stmt of cashflows: if current liabilities go up
we add it to net income because it was cash we didnt spend
65
stmt of cashflows: if current liabilities go down
we subtract because we paid off the liability with cash
66
stmt of cashflows: non cash expenses
add back depreciation and amortization
These are accounting expenses — they reduce net income but don't use actual cash
67
stmt of cashflows: Gains and Losses on Sales of Long-Term Assets
subtract gains from net income because Gains are included in net income, but they’re not from operations — they’re from selling stuff. So, back it out
add losses because Losses are deducted in net income, but again, they’re not operating. So, you add them back
68
stmt of cashflows: common stock
if it goes up we add it
69
stmt of cashflows: n/p
if it goes up we add it because we received cash from it
70
stmt of cashflows: if you pay dividends
cash goes down
71
stmt of cashflows : Net change in cash
should match the difference in cash balance during the year
72
JE for write off
Allowance for Doubtful Accts
Accounts Receivable
73
two ways bad debts exp formula
= credit sales *% deemed uncollectible
or Calculating bad debts expense using the % of receivables method requires taking into account the existing (current) balance in Allowance for Doubtful Accounts.
If the allowance account previously had a debit balance, bad debts expense = required balance in Allowance + existing debit balance.
If the allowance account previously had a credit balance, bad debts expense = required balance in Allowance - existing credit balance.
74
Interest Receivable calc
Debit Interest Receivable = Principal x interest rate on the note x (# of months interest earned on the note this accounting period / 12)
Credit Interest Revenue for the same amount
75
JE for note made to customer
N/R
Service Revenue
76
JE for interest at EOY
Interest Receivable
Interest Revenue
77
When Notes Receivable are issued at face value and the financial statements are issued before interest is received from the borrower, the company must record
an adjusting entry at year-end for interest revenue and interest receivable.
78
When a company issues a zero-interest bearing note, the cash paid when the note is issued (the present value) is
less than the amount that the company will receive at maturity. The difference is interest that is implicit in the note.
79
Interest Revenue =
Beginning Carrying Value of the Notes Rec (Notes Rec - Discount) x implicit interest rate
80
When interest revenue is recorded, the company also records a decrease to the Discount on Notes Receivable.
The carrying value of the note increases as the discount decreases.
81
Entry to record Interest on a Zero-Interest Bearing Notes Receivable:
Debit to decrease Discount on Notes Receivable
Credit to increase Interest Revenue
82
If notes receivable is issued at face value
interest accrues overtime
83
Adjusting YE entry for N/R
Debit: Interest Receivable
Credit: Interest Revenue
84
Zero-Interest-Bearing Notes Receivable
No stated interest, but still has implicit interest.
Cash Received (Present Value) < Maturity Value
Difference = Discount on Notes Receivable (contra-asset)
Amortize the discount to interest revenue over life of the note.
85
Net Realizable Value of Accounts Receivable
Accounts Receivable
Less: Discount on Notes Receivable
86
Carrying Value of Notes Receivable =
N/R at maturity
Less: Discount on N/R
87
Book Value of PP&E =
PPE
Less: Acc Depr
88
Most items on the balance sheet are valued at
historical cost or some adjustment to historical cost
89
Historical cost is
the cost incurred to purchase the asset
90
Fair value is the amt an asset would sell for (or be purchased for) in a normal market
91
the fair value option
companies have the option to report financial investments at fv on the balance sheet.
when companies elect to use fv option, changes in the fv of assets are recorded as an adjusting entry at the end of the accouting period to the account called "unrealized holding g/l - income"
92
when the fv of an asset increases
we debit to increase the asset account and credit to increase unrealized holding g/l - income
93
when the fc of an asset decreases
we debit unrealized holding g/l - income and credit the asset account to decrease the asset
94
Factoring
Companies can sell their receivables to finance companies or banks for a fee in order to get cash quickly
the finance company or bank that buys the receivables is called a factor
95
When receivables are sold without recourse, for seller
the seller of the receivables (the company) has no responsibility for customers that do not pay (credit losses on the receivables).
The factor charges a fee to the seller of the receivables. The seller records this in an account called Loss of Sales of Receivables.
The seller of the receivables also sets up an asset account called Due from Factor. This is a special type of receivable from the factor to the seller of the receivables for "probable adjustments", in case any customers return merchandise or are offered discounts or allowances.
96
Receivables sold with no recourse JE for seller
The seller records the following journal entry:
Debit Cash for the amount received from the factor.
Credit Accounts Receivable for the face value of the receivables sold to the factor.
Debit Loss on Sale of Receivables for the finance charge from the factor.
Debit the Due from Factor account (a type of receivable) to account for probable sales returns and allowances.
97
When receivables are sold without recourse, for factor
The factor (the buyer of the receivables) sets up a liability account called Due to Customer (seller of receivables) related to the estimated probable adjustments that
the seller may have if its customers are allowed sales returns, discounts or allowances.
The factor (the buyer of the receivables) records the fee charged to the seller of receivables as Interest Revenue.
98
Receivables sold with no recourse JE for factor
The factor records the following journal entry:
Debit Accounts Receivable for the face value of the receivables purchased.
Credit the Due to Factor account (a liability) to account for probable sales returns and allowances
Credit Interest Revenue for the fee the factor charges to the seller of receivables
Credit Cash for the amount of cash paid to the seller of the receivables
99
When receivables are sold with recourse seller
the seller of the receivables (the company) guarantees payment to the purchaser (the factor) from customers that do not pay.
In addition to recording the Due from Factor and the Loss on Sale of Receivables, the seller also estimates the fair value of the receivables that will not be collected from customers and records this amt to a liabilty account called recourse liability
100
Receivables sold with recourse JE for seller
The seller records the following journal entry:
Debit Cash (for the amount received from the factor)
Credit Accounts Receivable for the face value of the receivables sold to the factor.
Debit Loss on Sale of Receivables for the finance charge from the factor PLUS the fair value of the recourse liability
Debit the Due from Factor account (a type of receivable) to account for probable sales returns and allowances.
Credit to increase Recourse Liability (this is the only change compared to "without recourse" sales of receivables)
101
When receivables are sold with recourse factor
The factor (the buyer of the receivables) continues to record the Due to Customer Liability account for potential adjustments and Interest Revenue
The factor does not need to record any adjustment for uncollectible receivables since the risk is assumed by the seller.
102
Receivables sold with recourse JE for factor
The factor records the following journal entry:
Debit Accounts Receivable for the face value of the receivables purchased.
Credit the Due to Factor account (a liability) to account for probable sales returns and allowances
Credit Interest Revenue for the fee the factor charges to the seller of receivables
Credit Cash for the amount of cash paid to the seller of the receivables
103
Secured Borrowing (Assigning or Pledging Accounts Receivable)
Companies can use their receivables as collateral when borrowing money.
If the company does not pay its loan, the lender can take the receivables and collect the cash.
The lender typically charges interest on the loan plus a finance fee on the receivables assigned.
104
secured borrowing On the date the note is issued:
The borrower records interest expense equal to the finance fee on the receivables assigned.
The lender records interest revenue equal to the finance fee on the receivables assigned.
105
secured borrowing On the date the note matures:
The borrower records interest expense on the loan.
The lender records interest revenue earned on the loan.
106
Cost of goods available for sale formula
Beginning Inventory
Plus: Purchases of Inventory
107
COGS Formula
Costs of goods available for sale
Less Ending Inventory
108
Periodic Inventory System
The quantity of inventory on hand is determined at the end of each period by physical count. Cost of Goods Sold is calculated as the difference between Cost of Goods Available for Sale and Ending Inventory
109
Perpetual Inventory System
All purchases and sales of goods are recorded as they occur
110
Companies choose one of four inventory cost flow assumptions:
Specific Identification - each item is labeled with the cost incurred to purchase the item. Rarely used in practice
Average Cost ( weighted average cost ) - items are valued at the weighted average cost of all units available during the period
FIFO - First in First Out - we assume that the earliest goods purchased were the first ones that were sold. Cost of goods sold is comprised of the earliest goods purchased. Ending inventory is comprised of the most recent goods purchased.
LIFO - Last in First Out - we assume that the most recent purchases were the first ones sold. COGS is comprised of the most recent purchases. Ending inventory is comprised of the earliest purchases
111
To find the cost of ending inventory use
the opposite of what method you chose, LIFO or FIFO, so if you did FIFO, the ending inv is most recent purchases, if you did LIFO use the most latest purchases
112
Weighted Average
First find the weighted average cost per unit then divide by # of units available for sale
Ex. (2000*$4)+ (6000*$4.40)+(4000*$4.75) = 43900/ 10000 units = 4.39 * units sold
4.39 * ending inventory
113
Dollar LIFO EOY current inventory at prior year prices =
current year invenotry / current year price index
114
