Acct Final

Objective is to provide relevant and timely information for managers' and employees' decision making needs, this information is often sensitive and not distributed outside the business

The area that provides External users with information

To provide relevant and timely information for the decision-making needs of external users

a concept of accounting that limits the economic data in the accounting system to data related directly to the activities of the business

owned by one individual

Advantages: easy to start and control because of only 1 owner

Disadvantages: Unlimited personal liability for business liabilities

owned by two or more individuals

Advantages: more resources from multiple owners, simple formation

Disadvantages: Unlimited personal liability for business debts for all owners

organized under state or federal statutes as a separate legal table entity

Advantages: Separate Legal Entity, Can raise more money for the company with the additional owners, Easy to sell interest, Owners not liable for business debts

Disadvantages: Legal set-up costs, taxes can be higher

combines the attributes of a partnership and a corporation

Advantages: Separate Legal entity, more favorable for tax purposes

Disadvantages: legal set up costs, differences among state laws

amounts are initially recorded in the accounting records at the cost or purchase price

resources owned by a business

has to help us in the next period

Rights of the creditors, or debts of the business

The owners' equity in a corporation

Retained Earnings + Common/Capital Stock

Assets = Liabilities + Stockholder's Equity

Are distributions of earnings to stockholders

the stockholders' equity created from business operations through revenue and expense transactions

Financial reports that summarize the effects of events on a business

• Income Statement
• Statement of Retained Earnings
• Balance Sheet
• Statement of Cash Flows

a summary of the revenue and expenses for a specific period of time, such as a month or a year

Revenues - Expenses = Net Income

Purpose: To show Net Income

A summary of the changes in the retained earnings for a specific period of time, such as a month or a year

• Beginning RE
• + Net Income
• - Dividends
• = Ending RE

A list of assets, liabilities, and stockholders' equity as of a specific date, usually at the close of the last day of a month or a year

• Assets = Liabilities
• + Stockholders Equity

A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year

How a company is using their cash

3 types: Operating, Investing and Financing

Written by management to describe financial and non financial trending, a narrative about what happened during the period

Not objective information because the report is prepared by management

Legend to the financial statements

states the principles and methods used to account for transactions

Qualitative and Quantitative

provide additional descriptions and disclosures

Assets Dividends and Expenses

are increased with a debit!

Revenue is when we receive cash, and expense is when we pay it

Not used in this class

GAAP requires that we use this

Revenue is recognized when it is earned, and Expenses are recognized when incurred

Revenue is recognized when it is earned

Recognize expenses in the same period which we used item to generate revenue

The journal entries that bring the accounts up to date at the end of the accounting period

Will always involve a revenue or an expense account and an asset of liability account

unrecorded expenses that have been incurred and for which cash has yet to been paid

Ex: Electric Bill for the month of September, received in October, We used the electric to bring in revenue, must post this in September

Expense and Liability

Are the Advance Payment of future expenses and are recorded as assets when cash is paid

Ex: Paid $600 in advance for 6 months of insurance, at the end of each month, a portion needs to be moved over to an expense account because we needed the insurance to generate revenue

Asset and expense

How much we've charged to expense since we have owned the asset

How much we've charged to expense this period

Advance receipt of future revenues and are recorded as liabilities when cash is received

Ex: Paid Down Payment on service in September, not expecting to perform service till October, Recorded in September as a liability(unearned revenue), at the end of October moved from unearned revenue to fees earned

Liability and Revenue

unrecorded revenues that have been earned for which cash has yet to be received

Ex: Preformed service for customer in September, billed in October, we record the revenue in September because we have already earned it

Asset and Revenue

The amount we have yet to move to expense

Cost of the asset minus the accumulated depreciation of the asset

• Current Assets- Expected to be used up in one year
• - Cash
• - accts receivable
• - supplies
• - prepaid expenses
• - inventory
• Long Term Investments - more than one year
• - Investments in Stocks or bonds
• - Investments in subsidiaries
• Property, Plant, and Equipment
• - Land
• - Equipment
• - Vehicles
• - Buildings
• - (Accumulated Depreciation)
• Intangible Assets
• - Copyrights
• - Trademarks
• - Patents

• Current Liabilities - Expected to be paid out within a year
• - Accts payable
• - wages payable
• - unearned revenue
• - Current Maturities of Log term debt
• Long-term Liabilities - more than a year
• - loans payable
• - notes payable
• - bonds payable

Notes payable and Loans payable may be in either category depending on the term

Process of zeroing out all temporary accounts and transferring them to permanent accounts

• Temporary accounts
• Need to be reset every period, they only relate to that period
• revenue and expense accounts

• Permanent Accounts
• Roll over from year to year
• Assets, Liabilities, all balance sheet accounts

• 1. Zero Out Revenue Balances
• 2. Zero Out Expense Balances
• 3. Zero Out Income Summary
• 4. Zero Out Dividends

a temporary account that is only used during the closing process

Marketing, Production, Human resources, Finance, Management

Investors, Creditors, Government, Competitors, Suppliers

• Must Complete in Order
• Net Income also appears on Statement of Retained Earnings
• Retained Earnings Balance also appears on Balance Sheet
• Ending Cash balance on Statement of Cash Flows must agree to Balance Sheet

Whenever a Transaction occurs, it must affect at least 2 accounts

• 1. Transactions are analyzed and recorded in the Journal
• 2. Transactions are posted to the ledger
• 3. an unadjusted trial balance is prepared
• 4. Adjustment data are assembled and analyzed
• 5. Spread Sheet is prepared
• 6. Adjusting entries are journalized and posted to the ledger
• 7. An Adjusted trial Balance is prepared
• 8. Financial statements are prepared
• 9. Closing entries are journalized and posted to the ledger
• 10. A post-closing trial balance is prepared

• independent party
• Certified public accountant (CPA)
• reports opinion if financial statements are prepared in accordance with GAAP

• Inventory balance and COGS is always updated
• Journal Entries are required upon sale of goods
• Improved inventory Control
• Facilitated by bar code system
• high cost to maintain

• Inventory balance is updated at the end of the period
• COGS is recorded at the end of the period
• journal entries are required upon the end of the period
• smaller companies
• low-cost inventory

are granted by the seller to customers for damaged or defective merchandise

contra revenue

granted by the seller to customers for early payment of amounts owed

contra revenue

The cost of merchandise available for sale to customers calculated by adding the beginning merchandise inventory to net purchases

determined by subtracting operating expenses from gross profit

The cost to get the product to us

Included in cost for the perpetual system

• Merchandise inventory - A
• Sales - R
• Sales returns and allowances - CR
• Sales Discounts - CR
• Cost of Merchandise Sold - COGS - E
• Delivery Expense - E

COGS

The cost of finished goods available for sale minus the ending finished goods inventory

• Purchases - E
• Purchases returns and allowances - E
• Purchases Discounts - E
• Freight in - E

Cost of transportation

Periodic System

Ownership changes when goods are shipped

Ownership changes when they reach the buyers

selling goods on someone else's behalf

defined as the procedures and processes used by a company to:

• safeguard its assets
• process information accurately
• ensure compliance with laws and regulations

• control environment
• risk assessment
• control procedures
• monitoring
• information and communication

overall attitude of management and employees about the importance of controls, factors influencing a company's control environment are:

• management's philosophy and operating style
• the company's organizational structure
• the company's personnel policies

• 1. Competent personnel, rotating duties, and mandatory vacations
• 2. separating responsibilities for related operations
• 3. separating operations, custody of assets, and accounting
• 4. proofs and security measures

• criteria to extent credit, run credit checks
• establish credit terms
• collection
• factoring - sell receivables

We right off an account when we know a particular customer cannot pay

this is easy, mostly used for small companies

Doesn't have the best results, doesn't follow the matching principle of GAAP

We estimate the amount that is uncollectible when we think it's uncollectible

Accounts are then valued at NRV- Net realizable Value - How much you think you're actually going to collect

Don't want to overstate our income or assets because it could mislead financial statement users

Costs that only benefit the current period

• c:repairs and maintenance expense 300
• d:cash 300

Costs that improve the asset or extend it's useful life

• Asset improvements
• c:delivery truck 5500
• d:cash 5500

• Extraordinary repairs
• c:accum dep - forlift 4500
• d:cash 4500

residual value

value of the asset at the end of it's life

Annual Depreciation = (cost-salvage value)/life

find depreciation per unit = (cost - residual value)/total units of production

depreciation expense = depreciation per unit * total units of production used

depreciation expense = (book value*2)/ life

The cost of natural recourses to an expense account

the amount of an intangible asset to transfer to expense

exclusive rights to produce and sell a good with one or more unique features

amortization is computed using the straight-line method

exclusive right to publish and sell literary, artistic or musical compositions

a name, term, or symbol used to identify a business and its products

these are not amortized

intangible asset of a business that is created from such favorable factors as location, product quality, reputation, and managerial skill, allows a business to earn a greater rate of return than normal

this is not amortized

a form of an interest bearing note, like a note, a bond requires periodic interest payments with the face amount to be repaid at the maturity date

• c: cash xxx
• d: bonds payable xxx

• c: interest expense xxx
• d: cash xxx

• c: cash 96406
• c: discount on BP 3594
• d: Bonds payable 100000

When the market interest rate is higher than the bond interest rate

Amortizing a bond discount

• c:interest expense xxx
• d:Discount on BP xxx

• c:cash 104000
• d:Premium on BP 4000
• d:Bonds payable 100000

When the market interest rate is lower than the bond interest rate

Amortizing a bond premium

• c:Premium on BP xxx
• d:interest expense xxx

Loss- acts like an expense, recorded if the price paid for the redemption is above the carrying amount

gain- acts like a revenue, recorded if the price paid for the redemption is below the bond carrying amount

gain/loss on redemption of bond

total of discount or premium/ # of periods

Shares of Ownership

Stock remaining in the hands of the stockholders

when only one class of stock is issued, each share has equal rights

One or more classes of stock with various preference rights, such as preference to dividends

Either stated as dollars per share or as percent of par

Cumulative preferred stock - has a right to receive regular dividends that were not declared paid in prior years, Noncummulative does not have this right

The monetary amount printed on a stock certificate

Stock is often issued at an amount that is different from par

A cash distribution of earnings by a corporation o its shareholders

• Three conditions for cash dividends
• 1. Sufficient retained earnings
• 2. Sufficient cash
• 3. formal action by the board of directors

the date the board of directors formally authorizes the payment of the dividend

• d: cash dividends
• c: cash dividends payable

the date the corporation uses to determine which stockholders will receive the dividend

Any investors that purchase stock before the date of record will receive the dividend

the date the corporation will pay the dividend to the stockholders who owned the stock on the date of record

• d: cash dividends payable
• c: cash

a distribution of shares of stock to stockholders

are normally only declared on common stock and are issued to common stockholders

stock that a corporation has issued and then reacquired

• a corporation may purchase its own stock for a variety of reasons including:
• 1. To provide shares for resale to employees
• 2. to reissue as bonuses to employees
• 3. to support the market price of the stock

board of directors may restrict the use of retained earnings for payment of dividends, they are classified as

• 1. Legal - state laws may require this
• 2. Contractual - a corporation may enter into a contract that requires restrictions
• 3. Discretionary - A corps board of directors may restrict voluntarily

a process by which a corporation reduces the par or stated value of it's common stock and issues a proportionate number of additional shares

When the physical inventory on hand at the end of the period is lower than then balance of merchandise inventory

adjusting entry in this case

• d: COGS
• c: Merhcandis inventory

First in First out

Gives us a higher net income in a period of increasing prices

last in first out

gives lowest net income in a period of increasing prices

Management shoudl identify any risks(customer requirements, regulatory changes, changes in economic factors) analyze their significance, assess their likelihood of occuring, and take any necessary actions to minimize them

Monitoring the internal control systems is used to locate weaknesses and improve controls

often includes observing employee behavior and the accouting system for indicators of control problems

• 1. the human element of controls - human error can occur
• 2. cost benefit considerations - cost should not exceed their benefits

an analysis of the items and amounts that result in the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger

• Balance per bank
• + deposits in transit
• - outstanding checks
• +/- bank errors

• Balance per books
• + interest
• + deposits straight to the bank
• - NSF checks, from customers
• - bank service charges
• +/- book errors

• Employee's costs
• c: wages exp
• d: cash
• d: state inc tax pay
• d: federal inc tax pay
• d: FICA pay

• Employer's costs
• health insurance
• works comp ins
• SUTA - state unemployment tax
• FUTA - Federal unemployment tax
• retirement plan
• social security and medicare tax

Not certain Liablities

• remote - 1% chance we'll lose, don't do anything
• reasonably possible we'll lose, disclose in notes of financials
• Probable- $ estimate amount (c: exp, d: liab)
• probable- no estimate, disclose in notes