PKU Accounting Final Flashcards
Are purchased stocks of other companies assets?
Y
examples of noncurrent assets
PPE (property, plants, and equipment)
3 examples of cash
currency, bank deposits, investments witha maturity of 90 days or less
What is PPE?
tangible long-lived assets to be used in operations over time (not purchased for resale)
What cost are most assets reported?
Historical cost
Asset depreciation is recorded in the ____ as _____
income statement
expense – depreciation and amortization expense
Notes payable (def)
amount borrowed from creditors that are scheduled to be repaid more than 1 yr in the future
Owner’s equity (def)
company’s owners’ residual claim on assets after debts have been paid
Retained earnings (def)
total amount of earnings made by the firm over its lifetime - dividends paid to its shareholders
4 basic accounting assumptions
separate entity assumption
continuity assumption
time period assumption
unit of measure assumption
Separate entity assumption
the owner of the company is separate from the company itself
ex. X record personal financials
Continuity assumtpion
Company will not go bankrupt and will continue to operate in the foreseeable future
Time period assumption
accountant should divide up complex, ongoing activities of a business into periods. The precise time period covered is included in the heading of the IS and SoCF
Unit of measure assumption
all transactions must be consistently recorded using the same currency
For multinational companies, fin statements are usu reported in _____ currency
parent company’s
Why do we need adjusting entries
Some revenues and expenses are accrued and unrecorded; rev/exp affect more than 1 accounting period
Revenue recognition can affect multiple periods when (2)
company delivered products but has not collected cash
company collected cash but has not delivered products
Expense recognition can affect multiple periods when (2)
1) the comapny incurred exp to generate rev but has not yet paid cash for the exp
2) company paid for some exp before using the exp to generate rev
Matching principle
expenses should be recorded in the same period in which they are used to generate revenue
Depreciation
gradual reduction in the recorded value of an asset over its useful life by charging it to expense
Accumulated depreciation is classified as
conta asset
an item is “material” if _____
knowledge of the item might reasonably influence the decisions of users of financial statements
6 examples of items disclosed
1) lawsuits pending
2) schedules plant closings
3) governmental investigations
4) signif events occuring after BS date
5) specific customers that account for a large portion o revenue
6) unusual transactions and related party transactions
Clear the balance of ____ and ____ accounts, so that in the next period, these accounts start from zero balance
dividends and [is] accounts
Profitability and 3 measures
How is company’s ability to generate profits?
Return on assets (ROA)
Return on equity (ROE)
Net profit margin
Return on assets (ROA)
Return on equity (ROE)
Net profit margin
equations
1) net income/total assets
2) net income/total equity
3) net income/sales
Liquidity and 2 measures
Can the company pay off its ST liabilities
1) current ratio
2) cash ratio
Equations:
Current ratio
Cash ratio
current assets/current liabilities
cash /current liabilities
Cash def + 5 ex.
any deposit banks will accept
1) coins and paper $ 2) bank credit card sales 3) travelers checks 4) checks 5) money orders
cash equivalent
def + 2 ex
very safe + stable investments. usu maturity of 90- days
1) treasury bills 2) high-grade commercial papers
Restriction cash
def
cash held for a specific purpose and is not available for paying current liabilities
4 reasons for
Cash management
accurately account for cash
prevent theft and fraud
assure the availability of adeqaure amount of cash and anticipate need for borrowing
prevent unnecessarily large amounts of idle cash that produce no revenue
7 parts to
internal control over cash
1) sep f(x) o handling cash + maintaining accounting records
2) prep cash budget
3) req daily deposits o all cash reciepts
4) make all payments by check
5) rq that every expenditure be verified before payment
6) prep control listing o cash receipts
7) promptly reconcile bank statements
Statement of a depositor’s account to the depositor
explains the diff btwn cash reported on bank statement + cash balance in the company’s accounting records
–Ch 4–
4 steps to
Reconciling the bank statement
1) compare the deposits
2) adjust the bank statement
3) adjust the company’s own records
4) compare the balances
– 4 Reconciling the Bank Statement –
3 reasons to adjust the bank statement
1) add deposits in transit
2) deduct outstanding checks
3) add/deduct bank errors
– 4 Reconciling the Bank Statement –
3 reasons to adjust the company’s own records
1) add interest revenue
2) deduct service charges and NSF “not sufficient funds” checks
3) add/deduct errors
Accounts receivable is defined as a _____ asset
current
usu within 20-60 days
Net realizable value (eq)
Accounts receivable - allowance for doubtful accounts
–Estimating Credit Losses –
What is the Balance sheet approach? (3 steps)
- separate a.receivable into groups based on how long they are past due (age classifications)
2) each age grouping has a diff likelihood of being uncollectible
3) compute a separate allowance for each age grouping
–Estimating Credit Losses –
Income statement approach: What is the amount for the journal entry?
Net credit sales * % Estimated Uncollectible
–Estimating Credit Losses –
Difference between BS and IS approach
BS – estimate allowance, then record expense for increase in allowance; more accurate
IS – estimate expense for current period then add to that allowance
2 ways to get cash quicker from ac.receivable
1) factoring accounts receivable – co sell ac receivable to financial institutions for a lower price
2) credit card sales – co can deposit credit card payment directly into
What was the Huanrui Century Pictures example?
fabricated receipt of ac receivable
avoided recording expense for uncollectible accounts
higher net income
Promissory note (def)
terms and conditions of the repayment of a note receivable
Accounts Receivable Turnover rate (eq)
Net sales/ avg ac receivable
Days sales outstanding
365/ac receivable turnover ratio
avg number of days needed to collect ac receivable
Merchandising v Manufacturing companies
Purchase inventory in read to sell condition v
produce inventory from raw material; longer operating cycle
Perpetual v periodic inventory system
All transactions and costs - recorded immediately as they occur; uses inventory subsidiary ledger, T account for each type of inventory
v
only count them periodically
Reasons for inventory shrinkage
Breakage, spoilage, theft
4 inventory cost flow methods
1) specific cost identification 2) avg cost 3) FIFO 4) LIFO
COGS eq for periodic
beginning + purchase - ending inventory
FIFO LIFO effect on income
overstate net income
v
understate income saving the most taxes
Lower of Cost or Market Rule
inventory valued at lower of its cost or market value
When is a drop in inventory value material?
Loss is more than 2% of current net income
FOB shipping v destination point
ownership passes to the buyer at the point of shipment
ownership belongs to the seller until the goods reach its destination
Oriental Ocean example
large amount of write-dwons for sea cucumbers
inventory turnover
COGS/ avg inventory
days inventory outstanding
365/inventory turnover
credit terms format
discount/days offered, n/deadline for full
What else is considered part of the cost of the asset being aquired? (2)
3 ex
transportation cost and cost of getting asset ready to use
sales taxes, delivery costs, installation costs
Gross profit method (3 steps)
determine cog avail for sale
2) est cogs by multiplying the net sales by cost ratio
3) deduct cogs from cog available for sale
cost ratio eq for gross profit method v retail method
cogs/sales
v
retail price/cost
gross profit ratio
(sales - cogs) / sales
retail method (3 steps)
1) determine both historical and retail prices and goods avail for sales
2) compute cost ratio
3) est ending inventory by multiplying retail value of ending inventory by cost ratio
Just in time inventories
purchases of raw materials just in time to process or completing goods just in time to ship to the customer
capitalize def
recording a cost as an asset on the balance sheet
PPE defined as (4 chara)
1) physical substance 2) used in operation of business 3) not intended for sale 4) expected to provide service to company for several years
capitalize v depreciate
land improvements
remodeling/instruction
interest on loan to remodel
dep
cap
cap
expense or capitalized once asset has been put in use
maintenence cost
improvement cost
expensed
capitalized
–depreciation –
straight-line method
depreciation expense = (cost -residual value)/years of useful life
–depreciation –
declining balance method
depreciation expense = remaining book value * accelerated depreciation rate
China Southern airlines example
change in depreciation policy
less expenses –> higher net income
Noncurrent assets (3 characterisitcs)
often provide exclusive rights or privleges
limited life or indef life
usu aquired for operational life
Amortization
Systematic write-off of the cost of intangible assets over their useful life or legal life, whichever is shorter
all expenditures classified as research and development should be charged to
expense when incurred
Eq for depletion of natural resources
(cost - residual value)/ total unit natural resource
Evidence of borrowing is issued when a company (3)
Obtains a bank loan
Purchases costly ppe or mech
3) replace a past-due account payable
Amortization table steps
1) interest expense = unpaid * interest%
2) reduce unpaid by installment - interest expense
4 types of bonds
1) mortage bonds
2) debenture bonds
3) convertible bonds
4) junk bonds
bond prices =
% of face value (usually 1,000)
contract rate
a bond’s stated rate of interest
interest payment =
principle * contract rate * time
Selling price of the bond =
present value of the bond + accrued interest since the last interest payment date
bond issued at a discount v premium
company recieved a smaller amount of cash than the face value of the bond v larger
discount rate aka effective interest rate
rate used to compute the PV of future cash flows
carrying value of bond
bonds payable - discount on bonds payable
If a bond is issued at discount, company must repay additional cost of borrow as a _____ which is ______ over its lifetime
interest expense
amortized
bond prices vary _____ with changes in market interest rates
inversely
bonds can be retired by
exercising a pcall provision
purchasing the bonds on the open market
corporations 3 characteristics
1) created by law
2) rights and responsibilities are separate from those of its owners
3) assets and debts belong to the corp not its owners
advantages of incorporation
1) limited personal liability for s.holders
2) ownership transferability
3) professional management
4) continuity of existence
disadvantages of incorporation
1) heavy taxation
2) greater regulation
3) cost of formation
4) separation of ownership and management
publicly owedn corporations must (4)
prep financial statements with GAAP
2) have fin statement audited by an indep CPA
3) comply w federal securities laws
4) submit fin info for SEC review
3 stockholder rights
voting rights to elect director or set policies
2) proportionate distribution of dividends
3) proportionate distribution of assets in case of liquidation
2 ways to increase S.Equity
1) paid-in capital – contributions by investors in exchange for capital stock
2) retention of profits earned by corporation – retained earnings
outstanding v treasury shares
issued shares that are owned by stockholders
issued shares that have been required by the corp
loss contingencies
existing uncertain situation that may reuslt in a possible loss
loss contingencies are only reported as a liability if both:
likelihood that result = loss will occur
loss amount can be reasonably estimated
commitments
contracts for future transactions; not a liability
estimated liability
known to exist, but precise dollar amount cannot be determined until a later date
accrued liabilities
recognition of expenses for which payment will be made in the future
unearned revenue
cash collected from customer before revenue is earned, liability
interest coverage ratio
operating income/ interest expense
margin of protection for creditors, higher = better
3 special types of liabilities
leases – contracts where lessor gives lessee right to use an asset for x time for periodic rental payments
postretirement benefits – obligation of the employer for benefits that employees earn the right to recieve while they are working for that employer
deferred taxes – the portion of income taxes expense that is deferred to future tax returns as a result of timing diff btwn accounting principles and tax rules
preferred stock
separate class of stock, typically having priority over common shares in 1) dividend distributions 2) distribution of assets in case of liquidation 3) cumulative dividend rights 4) usu callable by co 5) normally has no voting rights
cumulative preferred stock
if all or part of the regular dividend on the preferred stock is omitted in a given year, the amount omitted is called divdend in arrears and must be paid in the next year before any dividend can be paid on common stock
book value per share of common stock
(total s.equity - preferred stock and p.stock dividends in arrears)/number of common shares outstanding
what is the price corporation records treasury stock
at cost (purchase price)
dvidend characteristics (4)
declared by board of directors
not legally rq
created liability at declaration
rq sufficient REarnings and cash
stock dividends
increasing each stockholders stock by some percentage, no change in par values
prior period adjustments
correction of an error identified as affecting net income in a prior period; under statement of retained earnings
prior period adjustment value
value forgotten * (1-tax rate)
return on total assets
net income/ avg total assets
return on common s.equity
net income/avh common s.equity
comprehensive income
net income + other comprehensive income
released as its own statement or combined with net income on income statement
how is a company’s investment in another valued?
cost method if ownership 0-20%
equity method if 20-50% ownership
consolidation if 50-100%
cost method
investment is recorded at cost
equity method
record investment at cost and subsequently adjusts investment account each period for the investors share of the associates net income and divdends received by the investor
2 types of securities (2+2)
debt investments – trading securities and held-for-collection securities
share investments – trading investments and non-trading securities
trading v non-trading v held-for-collection
trading – sell soon, record at fair.v and changes as net income
non-trading – hold for a while and see how they before, record at fv and changes - part of equity
held-for-collection – hold until maturity
other comprehensive income
gains and losses that have not been realizes yet and are excluded from net income on an income statement
accumulated other comprehensive income
equity account that accumulates OCIs over time
earning per share
net income/ common shares
price earnings ratio and meaning
market price per share of common stock/earnings per share of common stock
rep how much the market is willing to pay per dollar of a company’s earnings
3 types of cash flows and their def
operating – related ot main busi operation
investing – related to fin investments or LT assets
financing – activities related to funding
what is under investing activites?
cash proceeds from selling investments and intangible assets; collecting principal amounts on loans
indirect method for cash flows from operations
start from net income and make adjustments to arrive at new cash flow from operations
adjustments made for noncash expenses (depreciation expense and amortization), nonoperating gains and losses, timing differences
direct materials
raw materials and component parts used in production
can be traced directly to the specific products manufactured
direct v indirect labor
direct labor hrs * wage rate; work directly on goods being manufactured
part of manufacturing overhead
What does manu o/h include and not include?
incl/ supervisors, depreciation, utilities
DOES NOT INCL selling or general and admin expenses (not related to the production of goods)
3 cost accounting systems
absorption – all manu costs in the cost of product
variable – all variable manu costs in cost of product
activity based costing – multiple OH rates to allocate manu OH costs for different activites
what can absorption costing be separated into
job order costing
process costing
job order costing
use predetermined overhead rate = est total overhead cost/estimated total units in activity base for coming period
uses a job cost sheet
material requsition form and time ticket
– absorption costing.job order costing.job cost sheet–
authorizes the use of materials on a job
work record
where do fixed costs go in absorption and variable costing?
- capitalized as inventory
more inventory than sold = higher profit - expensed
product v period costs
costs directly related to the production of a product
not directly related to specific product; selling and administrative expenses
flow of product costs
materials inventory + direct materials = WIP inventory + direct labor + manu o/h = finished goods inventory –> COGS
contribution margin
revenue - variable costs
break even point in units and in dollars
fixed units / contribution margin per unit
fixed costs/ contribution margin ratio: unit contribution margin/unit sales price
margin of safety
actual sales - break even sales
sales mix
relative combination in which a company’s different products are sold
high low method
take highest - lowest cost period
estimate VC per unit
estimate FC
3 assumptions of CVP
limited range of activity where CVP relationships are linea
2. sales mix - constant
3. production = sales
out of pocket costs
costs that have not yet been incurred and may vary among the possible courses of action
special order decisions
should be based on incremental costs and incremental revenues (what youll get/give if you do it)
profit center v investment center v cost center
control over both costs and revenues but no control over investment funds
profit center where management also makes capital investment decisions
control over incurrence of costs but no control over revenues or investment funds
financial budget
plans for sources o funds and capital expenditures, externally focused
2 apporaches to setting budget amounts
behavioral approach – reasonable and achievable budget amounts
total quality management approach – set at absolute efficeincy
ROI
operating income/avg total assets
capital turnover * reutrn on sales
3 ways to imporve roi
increase sales prices
decrease expenses
lower invested capital
residual income
operating earnings - (investment capital * minimul reutn * minimum return)
economic value added
after tax operating income - (total assets - current liabilities)*weighted avg cost of capital
4 parts of balanced scorecard lens
financial, customer, business porcess, learning and grotwh perspective
where does US file financial reports?
EDGAR
What is disclosed in financial reports? (3+3)
financial information – 1) management discussion and analysis 2) audit opinion 3) financial statements; notes to fin statements
non-financial information – 1) internal control 2) corporate social responsibility 3) environmental, social, and governance
3 steps of auditing financial reports (1, 4, 4)
audit standard – AICPA
.process – planning, risk assessment, testing and evidence, reporting
.opinion – unqualified opinion, qualified opinion, adverse opinion, disclaimer of opinion
