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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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TM
permacharts
FINANCIAL STATEMENTS
Financial statements are documents that are
prepared to represent quantitative information that
has been gathered through various business
transactions
• All financial statements list the name of the entity,
the name of the financial statement, and the
relevant date or period
• The standard statements used are the Balance
Sheet, the Income Statement, the Statement of
Retained Earnings, and the Statement of
Changes in Financial Position
FEATURES OF FINANCIAL STATEMENTS
• They provide financial data to users so that they can
perform their own analysis of the company
• They contain only a generic preparation of
statements
• They are limited to the reported information on the
statements
• There is no access to detailed information
• You must accept the opinion of the auditor
(see Auditors) regarding statements, even though
they may be misleading
• Most users cannot ask for supplemented reports
because the users are small (i.e., individuals) and
have no leverage
INCOME STATEMENTS
Income statements summarize the actual
transactions that occur over the period
Revenues equal inflow of resources (e.g., cash)
that are attributed to goods or services provided
• Revenues include gross sales (total amount sold
during period), sales returns (amount returned),
sales allowances (deductions from sale price),
sales discounts (discounts for quick payment), and
net sales (total sales after other items are deducted
from gross sales)
Expenses are outflows that are incurred in making
a profit
Operating expenses include all expenses related
to sale of merchandise or expenses plus all costs
related to business operations
Cost of goods sold (CGS) refers to net cost of
bringing goods to market during the period
• CGS = beginning inventory + cost of goods
(purchased and/or produced) – ending inventory
Gross profit (gross margin) indicates amount that
is available to pay operating expenses
• Gross profit = revenues – CGS
Net income occurs when revenues exceed
expenses
Net loss occurs when expenses exceed revenues
Non-operating income and expenses result from
activities other than those for which the business
was originally organized
Extraordinary gains or losses are significant
material gains or losses which result from events
that are unusual in nature and infrequent in
occurrence
Non-recurring items are similar to extraordinary
gains/losses
REVENUE RECOGNITION
Revenue recognition focuses on
an event where revenue is earned
• Exchange has taken place and
revenues are certain to be collected
• The firm has exerted a substantial
part of production (sales) effort,
revenues can be measured
objectively, the majority of total
costs have been incurred, and cash
will be collected with certainty
• Revenue will be recorded at time of
sale, during production, at
completion of production or on
receipt of cash
• Affects accounts on balance sheet
to reflect changes in liabilities, and
income statement in terms of
matching expenses to revenue
• The statement of retained earnings
reconciles beginning and ending retained
earnings of period
• Changes amount shown in retained
earnings on Balance Sheet to reflect net
effects of revenue inflows and expense
outflows over period
• It provides a link between the Balance
Sheet and Income Statement
• A balance sheet is a picture of a
firm’s financial position at a point in
time
• It shows assets as well as liabilities
and equity against assets
• The B/S must balance
(assets = liabilities + equity)
Assets and liabilities are current or
non-current
Owners’ equity is the amount paid
into the firm for shares and retained
earnings
Contra accounts are offsetting
accounts; the asset side has credit
balances, but the liability side may
have credit or debit balances
• Both sides of a transaction are recorded in
a General Journal
Work sheets allow unadjusted account
balances to be segregated
Adjusting entries are made at the end of
the accounting period prior to statement
preparation and closing entries
Notes to financial statements provide
information on accounting methods,
debt provisions, inventory methods, etc.
that are not usually found in financial
statements
• They enhance the reader’s ability to
understand the firm’s current financial
situation
• Assist in predicting future cash flows and
viability
• Every recorded transaction has a left side
(debit) and a right side (credit)
• Placement of entry indicates debit or
credit
NOTES TO FINANCIAL STATEMENTS
DEBITS & CREDITS
BALANCE SHEET (B/S)
RECORDING ACCOUNTING INFORMATION
USERS OF FINANCIAL STATEMENTS
Bankers Assess whether the company has collateral available as insurance for a
potential loan • Determine the company’s cash flow to see whether
the borrower can repay the loan (i.e., principal + interest)
Shareholders Assess the company’s performance in which they have invested and
determine if the company will maintain its profits • Analysis allows
shareholders to decide whether to maintain investment, sell
investment or purchase equity in the company
Owners Assess the performance of their company and the growth or shrinkage
that may have occurred • Also used to identify strengths and
weaknesses within the company
Managers Assess if a bonus is owing to them • Managers may be evaluated
based on the company’s performance and are rewarded for efforts if
there are increased profits
Employees Assess the companys performance in which they may have invested
• They would want to know if a profit was made
Suppliers Assess the companys performance as to whether it will be able to pay
its outstanding debt
Internal Assess whether the company has complied with tax laws when
Revenue preparing financial statements
Service
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
investor would be receiving from the company
ACCOUNTING I • A-727-71© 2000-2013 Mindsource Technologies Inc.
STATEMENT OF RETAINED EARNINGS (SRE)
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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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