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Reference Guide

Accounting I - Reference Guides

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Accounting
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ACTG 2010
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Description
permacharts MT FINANCIAL STATEMENTS • Financial statements are documents that are BALANCE SHEET (B/S) STATEMENT OF RETAINED EARNINGS (SRE) prepared to represent quantitative information that has been gathered through various business • A balance sheet is a picture of a • The statement of retained earnings transactions firm’s financial position at a point in reconciles beginning and ending retained • All financial statements list the name of the entity, time earnings of period • It shows assets as well as liabilities • Changes amount shown in retained the name of the financial statement, and the and equity against assets earnings on Balance Sheet to reflect net relevant date or period • The standard statements used are the Balance • The B/S must balance effects of revenue inflows and expense Sheet, the Income Statement, the Statement of (assets = liabilities + equity) outflows over period Retained Earnings, and the Statement of • Assets and liabilities are current or • It provides a link between the Balance Changes in Financial Position non-current Sheet and Income Statement • Owners’ equity is the amount paid FEATURES OF FINANCIAL STATEMENTS into the firm for shares and retained NOTES TO FINANCIAL STATEMENTS earnings • They provide financial data to users so that they can • Contra accounts are offsetting • Notes to financial statements provide perform their own analysis of the company information on accounting methods, • They contain only a generic preparation of accounts; the asset side has credit debt provisions, inventory methods, etc. balances, but the liability side may that are not usually found in financial statements have credit or debit balances statements • They are limited to the reported information on the statements REVENUE RECOGNITION • They enhance the reader’s ability to • There is no access to detailed information understand the firm’s current financial • Revenue recognition focuses on situation • You must accept the opinion of the auditor an event where revenue is earned • Assist in predicting future cash flows and (see Auditors) regarding statements, even though viability they may be misleading • Exchange has taken place and • Most users cannot ask for supplemented reports revenues are certain to be collected • The firm has exerted a substantial RECORDING ACCOUNTING INFORMATION because the users are small (i.e., individuals) and part of production (sales) effort, have no leverage • Both sides of a transaction are recorded in revenues can be measured a General Journal objectively, the majority of total INCOME STATEMENTS costs have been incurred, and cash • Work sheets allow unadjusted account • Income statements summarize the actual will be collected with certainty balances to be segregated transactions that occur over the period • Revenue will be recorded at time of • Adjusting entries are made at the end of sale, during production, at the accounting period prior to statement • Revenues equal inflow of resources (e.g., cash) that are attributed to goods or services provided completion of production or on preparation and closing entries • Revenues include gross sales (total amount sold receipt of cash during period), sales returns (amount returned), • Affects accounts on balance sheet DEBITS & CREDITS sales allowances (deductions from sale price), to reflect changes in liabilities, and income statement in terms of • Every recorded transaction has a left side sales discounts (discounts for quick payment), and matching expenses to revenue (debit) and a right side (credit) net sales (total sales after other items are deducted from gross sales) • Placement of entry indicates debit or • Expenses are outflows that are incurred in making credit a profit USERS OF FINANCIAL STATEMENTS • Operating expenses include all expenses related Bankers Assess whether the company has collateral available as insurance for a to sale of merchandise or expenses plus all costs potential loan • Determine the company’s cash flow to see whether related to business operations the borrower can repay the loan (i.e., principal + interest) • Cost of goods sold (CGS) refers to net cost of bringing goods to market during the period Shareholders Assess the company’s performance in which they have invested and determine if the company will maintain its profits • Analysis allows • CGS = beginning inventory + cost of goods shareholders to decide whether to maintain investment, sell (purchased and/or produced) – ending inventory investment or purchase equity in the company • Gross profit (gross margin) indicates amount that Owners Assess the performance of their company and the growth or shrinkage is available to pay operating expenses that may have occurred • Also used to identify strengths and • Gross profit = revenues – CGS weaknesses within the company • Net income occurs when revenues exceed Managers Assess if a bonus is owing to them • Managers may be evaluated expenses based on the company’s performance and are rewarded for efforts if there are increased profits • Net loss occurs when expenses exceed revenues • Non-operating income and expenses result from Employees Assess the company’s performance in which they may have invested activities other than those for which the business • They would want to know if a profit was made was originally organized Suppliers Assess the company’s performance as to whether it will be able to pay its outstanding debt • Extraordinary gains or losses are significant material gains or losses which result from events Internal Assess whether the company has complied with tax laws when that are unusual in nature and infrequent in Revenue preparing financial statements occurrence Service • Non-recurring items are similar to extraordinary Potential Assess the current conditions of the company and predict its future investors cash flows • Used to predict the amount and rate of return the gains/losses investor would be receiving from the company 1 ACCOUNTING I • A-727-7 w ww.permacharts.com © 2000-2013 Mindsource Technologies Inc. permachartsTM GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) • GAAP is a set of criteria by which D ISCLOSURE vs. MEASUREMENT C OST financial statements are prepared • They are universally accepted Disclosure Occurs when financial • Many assets are recorded at their purchase principles, concepts, and methods statements include extra price or at cost information on methods • To define cost, it must be tailored to the used to determine particular situation ENTITY statement, allowing a more Examples: For financial statements that are • An entity is a separate economic unit detailed analysis of prepared for a company’s investors, original for which an accountant will account company (e.g., note purchase price of asset is used to record cost for its various activities disclosure on accounting • For financial statements that are prepared for policies used) a possible buyer of the company, fair market • Each entity should be accounted Measurement Occurs when a situation value or replacement cost will be used to obtain separately • If they are all lumped under one depends on the balance current value of company accounting entity, then an individual sheet or income statement (i.e., owner) will not be able to figures (e.g., bonus to monitor which entities are generating management based on the C ONSISTENCY vs. COMPARABILITY performance of the a profit and which are generating a company) Consistency Use of same accounting loss policies over number of Examples: Sole proprietorship (single Disclosure & When amount can be fiscal years • If facts change business owner) • Partnership (two or Measurement measured, it affects balance with respect to a situation, more owners of unincorporated sheet and/or income new accounting policy is business) • Corporation (incorporated) statement, and requires introduced; no retrospective further explanation which • Division of a company (e.g., Buick) can be provided in notes restatements • If facts do • Investment in another company of disclosure not change but objectives of (e.g., 50% ownership of Cram) • A bank (e.g., depreciation is reporting change, new account (e.g., checking account at Royal accounting policy is Bank) recorded and notes indicate introduced; retroactive method used) restatement Materiality An amount is material if it MATCHING will alter original decision Comparability Two companies have a made by user of flowsheet separate set of financial • Matching involves matching expenses based on current figures statements • Very difficult, to revenues that have been earned as there are many factors Example: Shop sells a computer • Shop provided that are very different for earns revenue from amount paid by Conservatism Specific concepts are used each company that would consumer • Shop also incurred an when measurement is not allow appropriate uncertain • If the comparison • Such factors expense when it purchased computer accountant cannot from distributor • To calculate net accurately record revenue, include industry, accounting income earned from transaction, shop policies, management/ will subtract cost incurred to purchase he/she should accountant style in setting computer from amount of revenue underestimate them policies (conservative or earned • Expenses and liabilities aggressive), objectives, and should be overestimated, constraints respecting • There are other expenses (such as while assets should be accounting period costs) that cannot be easily underestimated matched to a particular form of Continuity & When accountants create revenue Going accounting policies, they Example: Salaries • Company will pay REVENUE RECOGNITION & REALIZATION Concern assume that the company will still be viable in 30 years employees’ salaries to compensate them • Revenue is recognized before the expense, time • If this proves to be for assisting company to generate as expense is matched with revenue it false, then accountant will revenue • How does an accountant generated adjust policy accordingly assess which salaries are attributable to a certain stream of revenues earned? • Criteria to be met to enable accountant to • This assumption is the • Time period becomes a crucial factor recognize revenue: continuity or going  Is the amount of revenue measurable? concern concept • Accountant cannot OBJECTIVITY & VERIFIABILITY  Are the costs used to generate the revenue accurately predict length of stream measurable within reason? time company will remain a • Depending on the situation, an  Is there a binding agreement to ensure that going concern, but he/she is individual may view recorded amount cash will be received for the product or always optimistic when as objective or subjective (e.g., value service? making his/her predictions of a building)  Are there any significant uncertainties that • Owners of building will view its value will interfere with fulfilling the agreement? as objective because the building • Realization is the process by which an UNIT OF MEASURE belongs to them increase or decrease in value of assets or • All transactions that occur in an economic liabilities is accounted for in the financial • A user of financial statements will view unit or entity are measured in dollars as unit it as subjective because value can be records of a company of value or currency of a country manipulated to encompass a number • Accountant must review criteria for revenue Advantage: Many assets and liabilities can be of items at the accountant’s discretion received, as it also applies to realization, valued • For value to be objective, amount to ensure that this is the appropriate time to needs to be verifiable account for this gain
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