ACCT10001 Lecture Notes - Lecture 2: Current Liability, Accounting Equation, Equity Method

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OC2445316

12 May 2018

School

University of Melbourne

Department

Accounting

Course

ACCT10001

Professor

Noel Boys

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Accounting Week 2

4.1 RECOGNISING BUSINESS TRANSACTIONS

Business Transactions: Occurrences that affect the assets, liabilities and equity items in an

entity and must be recognised (recorded).

Ar’s legth distace: Parties deal from equal bargaining positions, neither party is subject

to the other’s otrol or doiat ifluee, ad the trasatio is treated ith fairess,

integrity and legality.

• All entities must keep record of business transactions separately from personal

transactions of owner

Entity concept: Separation of business transactions from any personal transactions of the

owner(s).

Drawings: Withdrawals of assets from the entity by the owner(s) that are recorded as

decreases in equity.

Source documents: Original documents verifying the business transaction.

Cash transactions: Business transactions involving the exchange of cash for goods or

services.

Credit transactions: Business transactions involving an exchange of goods and services on

the proviso that cash will be received at a later date.

4.2 BUSINESS AND PERSONAL TRANSACTIONS AND BUSINESS EVENTS

Personal transactions: Transactions of the owner unrelated to the operations of the

business.

Business events: Events that will probably affect the entity without any immediate

exchange of goods and services between the entity and another entity.

4.3 THE ACCOUNTING EQUATION

The accounting equation: Expresses the relationship between the assets controlled by the

entity and the claims on those assets.

Duality: Describes how every business transaction has at least two effects on the accounting

equation.

5.9 PRESENTATION AND DISCLOSURE OF ELEMENTS ON THE BALANCE SHEET

Current assets: Cash and other assets that are expected to be converted to cash or used in

the entity within one year or one operating cycle, whichever is longer.

Non-current assets: Assets not expected to be consumed or sold within one year or one

operating cycle.

Current liabilities: Obligations that can reasonably be expected to be paid within one year

or one operating cycle.

Non-current liabilities: Obligations expected to be paid after one year or outside one

normal operating cycle.

Operating cycle: The length of time it takes for an entity to acquire goods, sell them to

customers and collect the cash from the sale.

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• Grouping current/non-current assets and liabilities useful when assessing an entity’s

liquidity

• Comparing CA to CL useful in assessing likelihood that entity will be able to pay debts

as they fall due

Asset’s lassifiatio a reflet a assets:

• Liquidity

• Marketability

• Physical characteristics

• Expected timing of future economic benefits

• Purpose

The following factors can be used to classify liabilities:

• Liquidity

• Level of security or guarantee

• Expected timing of future sacrifice

• Source

• Conditions attached to the liabilities

Classes: Different types of asset, liability and equity accounts found on the balance sheet.

Assets:

Cash and cash equivalents: Cash held at bank, on hand and in short-term deposits.

Trade and other-receivables: Amounts due from customers for the sale of goods or

services. (often called trade receivables, trade debtors or accounts receivable)

Inventories: Supplies of raw materials to be used in the production process, work-in-

progress and/or the finished goods the entity has available for sale.

Investments accounted for using the equity method: Carrying value of investments in

another entity where the investing entity has the capacity to significantly influence (not

control) the investee entity.

• Will only appear if entity owns enough shares in another entity to exert significant

influence over their decision making (not control)

Financial asset: Cash, a contractual right to receive cash or another financial asset, a

contractual right to exchange financial instruments with another entity under conditions

that are potentially favourable, or an equity instrument of another entity calculated as the

excess of the consideration paid for a business over the fair value of the net assets at

acquisition date.

Derivative financial asset: Financial asset whose value depends on the value of an

underlying security, reference rate or index.

Intangible assets: Non-current, non-monetary assets that do not have physical substance.

Identifiable intangible assets: Intangible assets that can be identified (e.g. trademarks,

brand names, patents, rights, agreements, development expenditure, mastheads, licences).

Goodwill: An unidentifiable intangible asset (e.g. an established client base or reputation).

• Can only be identified if acquired

• Calculated as the excess of the consideration paid for a business over the fair value

of the net assets acquired at the date of acquisition

Receivables: Cash the entity expects to receive from parties that owe it money.

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Document Summary

Business transactions: occurrences that affect the assets, liabilities and equity items in an entity and must be recognised (recorded). Entity concept: separation of business transactions from any personal transactions of the owner(s). Drawings: withdrawals of assets from the entity by the owner(s) that are recorded as decreases in equity. Source documents: original documents verifying the business transaction. Cash transactions: business transactions involving the exchange of cash for goods or services. Credit transactions: business transactions involving an exchange of goods and services on the proviso that cash will be received at a later date. 4. 2 business and personal transactions and business events. Personal transactions: transactions of the owner unrelated to the operations of the business. Business events: events that will probably affect the entity without any immediate exchange of goods and services between the entity and another entity. The accounting equation: expresses the relationship between the assets controlled by the entity and the claims on those assets.

Related Questions

Identify two categories of revenue for Panera Bread from the table in the article Revenue Recognition: Key differences between U.S. GAAP and IFRSs. Compare and contrast the companyâs current U.S. GAAP revenue recognition with the potential adoption of IFRS. Provide the IASB Framework or the IAS statement, the changes in revenue recognition as well as potential challenges the company may face in adoption.

Table:

Subject	U.S. GAAP	IFRSs
Concept/objective	realized or realizable and earned.	According to paragraph 83 of the IASB's Framework for the Preparation and Presentation of Financial Statements, revenue is recognized when (1) "it is probable that any future economic benefit" will flow to the entity and (2) such a benefit can be measured reliably. Further, paragraph 93 of the IASB Framework indicates that revenue normally must be earned before it can be recognized.
Definition of revenue	Paragraph 78 of FASB Concepts Statement No. 6, Elements of Financial Statements, defines revenue as "inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations."	Paragraph 74 of the IASB Framework states, "The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent." Paragraph 7 of IAS 18 defines revenue as "the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants."
Sale of goods or products	SAB Topic 13 indicates that revenue from the sale of goods or products should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Delivery has occurred (e.g., an exchange has taken place). The sales price is fixed or determinable. Collectibility is reasonably assured. In addition, ASC 605-15 provides guidance on product transactions that include a right of return. Further, various industry- and transaction-specific guidance is provided in other U.S. GAAP.	Under paragraph 14 of IAS 18, revenue from the sale of goods is recognized if all of the following conditions are met: The "entity has transferred to the buyer the significant risks and rewards of ownership of the goods." The "entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold." The "amount of revenue can be measured reliably." "[I]t is probable that the economic benefits associated with the transaction will flow to the entity." The "costs incurred or to be incurred in respect of the transaction can be measured reliably."
Rendering services	>Like revenue from product sales, revenue from service transactions should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Service has been rendered. The sales price is fixed or determinable. Collectibility is reasonably assured. Other than the limited guidance in >ASC 605-20, no specific guidance on the rendering of services exists under U.S. GAAP. The appropriate method for recognizing revenue in such transactions depends on the individual transaction but is usually based on the proportional performance as of the balance sheet date.	Paragraph 20 of IAS 18 states, "When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage [i.e., percentage] of completion of the transaction at the balance sheet date." Paragraph 20 goes on to list specific conditions for determining whether an outcome of a transaction can be estimated reliably. And subsequent paragraphs provide guidance on determining the stage of completion. Paragraph 26 of IAS 18 states, "When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable."
Software arrangements	ASC 985-605 provides guidance on recognizing revenue in a software arrangement.	There is no specific guidance on software revenue recognition in IFRSs. An entity should apply the provisions of IAS 18 as appropriate.
Construction-type contracts	ASC 605-35 provides guidance on construction-type contracts. ASC 605-35-25-90 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when dependable estimates cause the outcome to be doubtful), the completed-contract method is preferable. ASC 605-35-25-25 through 25-27, the customer must approve the scope and price of change orders before the related revenue can be recognized.	IAS 11, Construction Contracts, provides guidance on construction-type contracts. Paragraph 32 of IAS 11 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when the outcome of the contract cannot be estimated reliably), revenue is recognized to the extent that costs have been incurred, provided that the costs are recoverable. Use of the completed-contract method is prohibited under IFRSs. Paragraph 13 of IAS 11 specifies that when it is probable that the customer will approve the scope and price of a change order, the related revenue can be recognized.
Milestone method	ASC 605-28 provides guidance on the application of the milestone method for recognizing revenue in research or development arrangements.	There is no specific guidance in IFRSs on the application of the milestone method for recognizing revenue in research or development arrangements.
Multiple-element arrangements	ASC 605-25 provides guidance on multiple-element revenue arrangements and establishes detailed criteria for determining whether each element may be separately considered for recognition. This guidance does not apply to arrangements or deliverables that are within the scope of other authoritative literature (e.g., ASC 985-605).	Paragraph 13 of IAS 18 indicates that the recognition criteria under IAS 18 are usually applied separately to each transaction unless either of the following conditions applies: "[I]t is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction." Two or more transactions "are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole."
Bill-and-hold arrangements	The SEC staff lists specific criteria that must be met for revenue to be recognized in bill-and-hold arrangements before delivery of the product. (Non-SEC entities also use these revenue recognition criteria because no other authoritative guidance in U.S. GAAP addresses the accounting for these transactions.) The criteria restrict revenue recognition to limited circumstances.	Illustrative Examples to IAS 18 list criteria for recognizing revenue under bill-and-hold arrangements before delivery of the product. While the objective for recognizing revenue in bill-and-hold arrangements may be similar to that in U.S. GAAP, the criteria are not the same.
Gross versus net	ASC 605-45 provides guidance on whether to report revenue on the basis of the gross amount billed to the customer (as a principal) or the net amount retained by the company (as an agent).	Paragraph 8 of IAS 18 requires that revenue be reported on a net basis in agency relationships but does not provide specific guidance to consider. Improvements to IFRSs issued in April 2009) provides examples that indicate whether an entity is acting as a principal or as an agent.
Customer loyalty programs	Revenue recognition for customer loyalty programs is not specifically addressed in U.S. GAAP. (The EITF attempted to address this issue but did not reach a consensus.) Although entities account for customer loyalty programs in different ways, such programs are typically accounted for under ASC 605-25 as multiple-element arrangements or under an incremental-cost model.	IFRIC 13 indicates that customer loyalty programs are deemed multiple-element revenue transactions and that the fair value of the consideration received should be allocated between the components of the arrangement.
Rebates, discounts, incentives, and other consideration	ASC 605-50 indicates that consideration given by an entity to its customers is presumed to be a reduction of revenue unless an identifiable benefit whose fair value can be reasonably estimated is received.	Paragraph 10 of IAS 18 states that revenue "is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity." There is no specific guidance on other types of consideration given by an entity to its customers.
Specific industry and other guidance	Certain standards in U.S. GAAP provide specialized guidance on revenue recognition, including guidance that applies to specific industries and transactions.	IFRSs provide no (or limited) revenue recognition guidance that applies to specific industries or transactions.

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NEED ASAP PLEASE

Question 1

Which one of the following is not an externaluser of accounting information?

		Customers
		Investors
		Regulatory agencies
		All of these are external users

3 points

Question 2

The first step in solving an ethical dilemma is to

		identify and analyze the principal elements in thesituation.
		identify the alternatives.
		recognize an ethical situation and the ethical issuesinvolved.
		weigh the impact of each alternative on variousstakeholders.

3 points

Question 3

Generally accepted accounting principles are

		income tax regulations of the Internal Revenue Service.
		standards that indicate how to report economic events.
		theories that are based on physical laws of the universe.
		principles that have been proven correct by academicresearchers.

3 points

Question 4

Which of the following events is not a businesstransaction?

		Issuance of stock in exchange for cash.
		Hired employees.
		Incurred utility expenses for the month.
		Earned revenue for services provided.

3 points

Question 5

When assets are distributed to the owners of a corporation,these distributions are termed

		depletions.
		consumptions.
		dividends.
		a credit line.

3 points

Question 6

If total liabilities increased by $8,000, then

		assets must have decreased by $8,000.
		stockholders' equity must have increased by $8,000.
		assets must have increased by $8,000, or stockholders' equitymust have decreased by $8,000.
		assets and stockholders' equity each increased by $4,000.

3 points

Question 7

If total liabilities increased by $30,000 and stockholders'equity increased by $20,000 during a period of time, then totalassets must change by what amount and direction during that sameperiod?

		$50,000 decrease
		$10,000 decrease
		$10,000 increase
		$50,000 increase

3 points

Question 8

Misra Company compiled the following financial information as ofDecember 31:

Revenues	$ 340,000
Retained Earnings, Beginning	$ 60,000
Equipment	$ 80,000
Expenses	$ 250,000
Cash	$ 90,000
Dividends	$ 20,000
Supplies	$ 10,000
Accounts payable	$ 40,000
Accounts receivable	$ 70,000
Common Stock	$ 80,000

Misra's assets on December 31 are

		$180,000.
		$250,000.
		$360,000.
		$ 490,000.

3 points

Question 9

Mofro's Computer Repair Shop started the year with total assetsof $300,000 and total liabilities of $200,000. During the year, thebusiness recorded $500,000 in computer repair revenues, $300,000 inexpenses, and Mofro paid dividends of $50,000. Stockholders' equityat the end of the year was

		$200,000.
		$100,000.
		$250,000.
		$300,000.

3 points

Question 10

A balance sheet shows

		assets, liabilities, and stockholders' equity.
		expenses, dividends, and stockholders' equity.
		revenues, expenses, and dividends.
		revenues, liabilities, and stockholders' equity.

3 points

Question 11

At September 1, Foli Co. reported retained earnings of $136,000.During the month, Foli generated revenues of $20,000, incurredexpenses of $12,000, purchased equipment for $5,000 and paiddividends of $2,000. What is the amount of retained earnings atSeptember 30?

		$136,000
		$142,000
		$8,000
		$137,000

3 points

Question 12

Grayton Industries purchased supplies for $1,000. The Companypaid $500 in cash and agreed to pay the balance in 30 days. Thejournal entry to record this transaction would include a debit toan asset account for $1,000, a credit to a liability account for$500. Which of the following would be the correct way to completethe recording of the transaction?

		Credit an asset account for $500.
		Credit the Retained Earnings account for $500.
		Credit another liability account for $500.
		Debit the Retained Earnings account for $500.

3 points

Question 13

Radio Moscow Industries purchased supplies for $1,000. They paid$400 in cash and agreed to pay the balance in 30 days. The journalentry to record this transaction would include a debit to an assetaccount for $1,000, a credit to a liability account for $600. Whichof the following would be the correct way to complete the recordingof the transaction?

		Credit an asset account for $400.
		Credit another liability account for $400.
		Credit the retained earnings account for $400.
		Debit the retained earnings account for $400.

3 points

Question 14

A credit to a liability account

		must be accompanied by a debit to an asset account.
		indicates an increase in the amount owed to creditors.
		is an error.
		indicates a decrease in the amount owed to creditors.

3 points

Question 15

In recording business transactions, evidence that an accountingtransaction has taken place is obtained from

		business documents.
		the Internal Revenue Service.
		the public relations department.
		the SEC.

3 points

Question 16

On June 1, Leno Inc. buys a copier machine for her business andfinances this purchase with cash and a note. When journalizing thistransaction, the company's accountant will

		make a simple entry.
		use two journal entries.
		make a compound entry.
		list the credit entries first, which is proper form for thistype of transaction.

3 points

Question 17

A three column form of account is so named because it hascolumns for

		debit, credit, and balance.
		debit, credit, and date.
		debit, credit, and account name.
		debit, credit, and reference.

3 points

Question 18

The first step in designing a computerized accounting system isthe creation of the

		general ledger.
		general journal.
		trial balance.
		chart of accounts.

3 points

Question 19

Chik Chik Company showed the following balances at the end ofits first year:

Cash	$ 6,000
Prepaid insurance	$ 9,400
Accounts receivable	$ 7,000
Accounts payable	$ 5,600
Notes payable	$ 8,400
Common stock	$ 2,800
Dividends	$ 1,400
Revenues	$ 44,000
Expenses	$ 35,000

What did Chik Chik Company show as total credits on its trialbalance?

		$51,400
		$60,800
		$62,200
		$70,200

3 points

Question 20

Which of the following time periods would notbe referred to as an interim period?

		Monthly
		Quarterly
		Semi-annually
		Annually

Required:

1. Correct the recorded activity for Android for Life during July on the attached spreadsheet

2. Correct the balance sheet and income statement for Android for Life in July 2015 on the attached spreadsheet.

3. Is the large decline in cash a concern?

Android for Life Inc.

On July 1, 2015, Andy incorporated her business under the name Android for Life, Inc. Listed below are various transactions that occurred during the remainder of the year:

(a) On July 1, Andy purchased all of Android for Life common stock for $100,000 cash.

(b) On July 1, Android for Life paid $3,000 to an attorney to prepare and file incorporation documents with the State of Texas.

(c) On July 2, Android for Life borrowed $100,000 from a local bank. The bank note required payment of principal in four annual installments of $25,000 beginning on July 1, 2016. In addition, the note specified interest payments of 6%, with the first payment due on July 1, 2016.

(d) On July 3, Android for Life signed a five-year lease on a building to be used as the veterinary clinic. The lease required a payment of $10,000 per month , payable on the first day of each month. Android for Life paid the amount for July on the date the lease was signed.

(e) On July 5, Android for Life paid $150,000 for medical equipment, office furniture, and other equipment.

(f) On July 6, Android for Life purchased various inventory items for $8,500 cash.

(g) Also on July 6, Android for Life purchased $500 worth of office supplies for cash.

(h) On July 28, Android for Life paid employees wages of $8,000 (which included Andyâs salary of $6,000).

(i) During July, Android for Life received $30,000 from clients for office visits and sales of merchandise (food, clothes, etc.).

A review of Android for Life records at July 31, 2015, revealed the following:

(j) Clients still owed Android for Life $3,500 for services performed during July but not yet billed. These amounts are expected to be billed and collected in August.

(k) At the end of July, a physical count of inventory revealed that $1,000 of inventory was still on-hand.

(l) At the end of July, a physical count of office supplies revealed that $100 of supplies were still on-hand.

(m) Depreciation on the equipment for July was estimated to be $1,250.

(n) Interest needs to be recorded on the note payable.

	Assets								Liabilities		Stockholders' Equity
		Accounts		Office	Property, Plant	Intangible	Accumulated		Notes	Interest	Common	Retained
Transaction	Cash	Receivable	Inventory	Supplies	& Equipment	Assets	Depreciation	=	Payable	Payable	Stock	Earnings
purchase of Common Stock	(100,000)										(100,000)
Payment for Articles of Incorporation	(3,000)					3,000
Note / Loan (interest expense on income statement?)	100,000								100,000
Long-term Lease (show on income statement $10k?)	(10,000)											(10,000)
Long-term Equipment	(150,000)				150,000
Inventory Items	(8,500)		8,500
Office Supplies	(500)			500
Wages	(8,000)											(8,000)
Office Visits/ Merchandise	30,000											30,000
Services Performed		3,500										3,500
Inventory Used (income statement expense?)	7,500		(7,500)
Office Supplies Used (income statement expense?)				(400)								(400)
Depreciation on Equipment (income statement expense?)							(1,250)					(1,250)
Interest Expense (income statement expense?)										6,000		(6,000)

Totals	(142,500)	3,500	1,000	100	150,000	3,000	(1,250)		100,000	6,000	(100,000)	7,850

Android Inc.
Income Statement
For the month ended July 31st, 2015


Revenues
Sales and Revenues		33,500
Less: Cost of goods Sold		(7,500)
Gross Profit		26,000


Expenses
Organizational Expenses	3,000
Salaries Expense	8,000
Office Supplies Expense	400
Depreciation Expense	1,250
Interest Expense	500
TOTAL EXPENSE		13,150

NET INCOME		12,850






Android Inc.
Balance Sheet
As at July 31st, 2015
Assets:
Current Assets
Cash	60,000
Accounts Receivable	3,500
Inventory	1,000
Office Supplies	100
Total Current Assets		64,600

Plant Property and Equipment
Plant Property and Equipment	150,000
Less: Accumulated Depreciation	(1,250)	148,750

TOTAL ASSETS		213,350


LIABILITIES
Notes Paybles	100,000
Interest Payale	500
TOTAL LIABILITIES		100,500

Shareholder's Equity
Common Stock	100,000
Retained Earnings	12,850
TOTAL Shareholder's Equity		112,850

TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY		213,350

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ACCT10001 Lecture Notes - Lecture 2: Current Liability, Accounting Equation, Equity Method

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