ACC 310F Lecture Notes - Lecture 8: The Home Depot, Historical Cost, Title Insurance

34 views14 pages

whitewildebeest151

7 Sep 2018

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

This unit concludes our survey of accrual accounting and the balance sheet and income statement. We have seen that accrual accounting attempts to measure the wealth that investors have invested in a company and not just the cash position of the company. To do that, accrual accounting records revenue when the goods or services have been provided. Sometimes this means accruing revenue before cash is received if the goods and services are provided first and paid for later. In other cases, this means deferring revenue when the cash is received in advance and recording revenue later when the goods or services are provided. To the best of our ability, expense follows revenue. That means that expenses are recorded in the same period as the revenue they helped to generate. For some expenses, this means they are matched with the revenue they generate because they are directly related, like the cost of a book sold in a bookstore.

Related Questions

1. Using accrual accounting, revenues are recorded

a. when cash is received without regard to when the services are performed or products have been delivered to customers.

b. when a service has been performed or products have been delivered to customers without regard to when cash is received.

c. when cash is received at the time services are performed or products have been delivered to customers only if cash is received.

d.after the services are performed or products have been delivered to customers.

2. Deferred revenue is revenue that is

a. earned and the cash has been received.

b. earned but the cash has not been received.

c. not earned and the cash has not been received.

d. not earned but the cash has been received.

3. Adjusting entries always include

a. only income statement accounts.

b. only balance sheet accounts the cash account.

c. at least one income statement account and one balance sheet account.

4. Which of the following is considered to be an accrued expense?

a. a computer technician has installed the latest software updates and was paid on the same day

b. a computer technician has been paid in advance to install software updates as they become available

c. a computer technician has just signed an agreement with you regarding pricing for future work

d. a computer technician has installed the latest software updates, but you have not received an invoice or made payment

ochreplatypus211

How do you reply to this post? Minimum of 150 words. Thank youin advance!

Cash Basis accounting is a very straight forward, single-entryapproach that can work for small businesses that do not have toomany accounts or financial transactions to manage nor do theymaintain large amounts of assets.

Some of the few advantages for this approach is that since it isa straightforward, you receive cash for products sold or servicerendered with minimal delay in between transactions, bookkeeping issimple enough that anyone can understand which âeliminates theneed to a trained bookkeeper or accountantâ(Business-Case-Analysis.com). This works well for soleproprietorship operating businesses if there are no financialstatement requirements to be published. It makes it easier for thebusiness to keep tract of their revenues within a few transactionssince it only records when cash is received or expenses are paid.âCash accounting ensures that taxes are not paid on monies thathave not yet been received; this improves cash flow and ensuresthat funds are available for tax expenditures.â(Mysmp.com).

Some of the disadvantages using cash basis is since it is asingle entry, vice double entry, there is more room for errorunlike accrual where double entry is used, every credit is indirect relation to every debit, there is a way to verify entries.Also, since it can only record revenues when cash is received orexpenses are paid, it does not have to ability to account forpromissory notes and accounts receivable. This significantly lowerstheir possibility for bigger revenue since they can only recordactual movement of cash when it happens. This simplicity also worksagainst the business, âBecause cash accounting is so simple, itdoes not allow for tracking the actual dates of sales andpurchases. Additionally, it usually does not provide a means ofmatching these transactions to specific items of inventoryâ(Mysmp.com). Because this approach can only record actual movementor revenue when it happens, the balance sheet could be inaccuratelyrecorded and could contribute to errors leading to missed paymentsof monies owed or missed revenues owed to them.

Reference:

https://www.business-case-analysis.com/cash-basis-accounting.html

www.mysmp.com/fundamental-analysis/cash-accounting.html

yellowprairie-dog170

I am unsure of what is unclear. The instructions are:

1. Set up a worksheet for the solvency ratios--currentratio and the quick ratio.

2. Compute these ratios for Doctors Smith and Brown. Todo so, you will need one additional piece of information that isnot present on the doctorsâstatements: their maximum annual debt service is$22,200.

Practice Exercise 11âII: Solvency Ratios

Refer to Doctors Smith and Brownâs financial statementspresented in the preceding Chapter 10.

Required

1. Set up a worksheet for the solvency ratios. current ratio and the quick ratio.

The requested information is below:

Exhibit 10-1 Westside Clinic Balance Sheet

Assets	December 31, 20x2		December 31, 20x1

Current Assets
Cash and cash equivalents		$190,000		$145,000
Accounts receivable (net)		250,000		300,000
Inventories		25,000		20,000
Prepaid Insurance		5,000		3,000
Total Current Assets		$470,000		$468,000
Property, Plant, and Equipment
Land	$100,000		$100,000
Buildings (net)	0		0
Equipment (net)	260,000		300,000
Net Property, Plant, and Equipment		360,000		400,000
Other Assets
Investments	$133,000		$32,000
Total Other Assets		133,000		32,000
Total Assets		$963,000		$900,000
Liabilities and Fund Balance
Current Liabilities
Current maturities of long-term debt	$52,000		$48,000
Accounts payable and accruedexpenses	293,000		302,000
Total Current Liabilities		$345,000		$350,000
Long-Term Debt	$252,000		$300,000
Less Current Maturities of Long-Term Debt	?52,000		?48,000
Net Long-Term Debt		200,000		252,000
Total Liabilities		$545,000		$602,000
Fund Balances
Unrestricted fund balance	$418,000		$298,000
Restricted fund balance	0		0
Total Fund Balances		418,000		298,000
Total Liabilities		$963,000		$900,000

Exhibit 10-2 sets out the result of operations for two years,with the most current period in the left column. If the balancesheet is a snapshot, then the statement of revenue and expenses isa diary because it is a record of transactions over the period of ayear. Operating revenues and operating expenses are set out first,with the result being income from operations of $115,000($2,000,000 less $1,885,000). Then other transactions are reported;in this case, interest income of $5,000 under the headingâNonoperating Gains (Losses).â The total of $120,000 ($115,000 plus$5,000) is reported as an increase in fund balance. This figurecarries forward to the next major report, known as the statement ofchanges in fund balance.

STATEMENT OF CHANGES IN FUND BALANCE/NET WORTH

Remember that our formula for a basic statement of revenue andexpense looked like this:

Operating Revenue â Operating Expenses = Operating Income

Exhibit 10-2 Westside Clinic Statement of Revenue andExpenses

	For the Year Ending

Revenue	December 31, 20x2		December 31, 20x1

Net patient service revenue		$2,000,000		$1,850,000
Total operating revenue		$2,000,000		$1,850,000
Operating Expenses
Medical/surgical services	$600,000		$575,000
Therapy services	860,000		806,000
Other professional services	80,000		75,000
Support services	220,000		220,000
General services	65,000		60,000
Depreciation	40,000		40,000
Interest	20,000		24,000
Total operating expenses		1,885,000		1,800,000
Income from Operations		$115,000		$50,000
Nonoperating Gains (Losses)
Interest Income	$5,000		$2,000
Net nonoperating gains		5,000		2,000
Revenue and Gains in Excess of
Expenses and Losses		$120,000		$52,000
Increase in Unrestricted Fund Balance		$120,000		$52,000

The excess of revenue over expenses flows back into equity orfund balance through the mechanism of the statement of fundbalance/net worth. Exhibit 10-3 shows a balance at the first of theyear; then it adds the excess of revenue over expenses (in theamount of $115,000) plus some interest income (in the amount of$5,000) to arrive at the balance at the end of the year.

If you refer back to the balance sheet, you will see the$418,000 balance at the end of the year appearing on it. So we canthink of the balance sheet, the statement of revenue and expenses,and the statement of changes in fund balance/net worth as lockedtogether, with the statement of changes in fund balance being themechanism that links the other two statements.

But there is one more major reportâthe statement of cashflowsâand we will examine it next.

STATEMENT OF CASH FLOWS

To perceive why a statement of cash flows is necessary, we mustfirst revisit the concept of accrual basis accounting. If cash isnot paid or received when revenues and expenses are entered on thebooksâthe usual situation in accrual accountingâwhat happens? Theother side of the entry for revenues is accounts receivable, andthe other side of the entry for expenses is accounts payable. Theseaccounts rest on the balance sheet and have not yet been turnedinto cash. Another characteristic of accrual accounting is therecognition of depreciation. A capital assetâa piece of equipment,for exampleâis purchased for $20,000. It has a usable life of fiveyears. So depreciation expense is recognized in each of the fiveyears until the $20,000 is used up, or depreciated. (Land is anexception to this rule: it is never depreciated.) Depreciation isrecognized within each year as an expense, but it does notrepresent a cash expense. This is a concept that now enters intothe statement of cash flows.

Exhibit 10-4 presents the current period cash flow. In effect,this statement takes the accrual basis statements and converts themto a cash flow for the period through a series of reconcilingadjustments that account for the noncash amounts.

Understanding the cash/noncash concept makes sense of thisstatement. The starting point is the income from operations, thesubtotal from the statement of revenue and expense. Depreciationand interest are added back, and changes in asset and liabilityac-counts, both positive and negative, are recognized. Theseadjustments account for operating activities. Next, capital andrelated financing activities are addressed; then investingactivities are adjusted. The result is a net increase in cash andcash equivalents of $45,000 in our example. This figure is added tothe cash balance at the beginning of the year ($145,000) to arriveat the cash balance at the end of the year ($190,000). Now referback to the balance sheet, and you will find the cash balance isindeed $190,000. So the fourth major reportâthe statement of cashflowsâinterlocks with the other three major reports.

Exhibit 10-3 Westside Clinic Statement of Changes in FundBalance

	For the Year Ending

Statement of Changes in Fund Balance	December 31, 20x2	December 31, 20x1

Balance First of Year	$298,000	$246,000
Revenue in Excess of Expenses	115,000	50,000
Interest Income	5,000	2,000
Balance End of Year	$418,000	$298,000

Exhibit 10-4 Westside Clinic Statement of Cash Flows

Statement of Cash Flows	For the Year Ending

	December 31, 20x2		December 31, 20x1

Operating Activities
Income from operations		$115,000		$50,000
Adjustments to reconcile income from
operations to net cash flows from
operating activities
Depreciation and amortization		40,000		40,000
Interest expense		20,000		24,000
Changes in asset and liabilityaccounts
Patient accountsreceivable		50,000		â250,000
Inventories		â5,000		â5,000
Prepaid expenses andother assets		â2,000		â1,000
Accounts payable andaccrued expenses		â9,000		185,000
Net cash flow from operating activities		$209,000		$43,000
Cash Flows from Noncapital Financing Activities		0		0
Cash Flows from Capital and Related Financing ActivitiesAcquisition of equipment	$ 0		$(300,000)
Proceeds from loan for equipment	0		300,000
Interest paid on long-term obligations	â20,000		0
Repayment of long-term obligations	â48,000		0
Net cash flows from capital and related financing activities		â68,000		0
Cash Flows from Investing Activities
Interest income received	$5,000		$2,000
Investments purchased (net)	â 101,000		0
Net cash flows from investing activities		â96,000		2,000
Net Increase (Decrease) in Cash and Cash Equivalents		$45,000		$45,000
Cash and Cash Equivalents, Beginning of Year		145,000		100,000
Cash and Cash Equivalents, End of Year		$190,000		$145,000

amberdinosaur553

ACC 310F Lecture Notes - Lecture 8: The Home Depot, Historical Cost, Title Insurance

Document Summary

Get access

Related Documents

ACC 310F Study Guide - Quiz Guide: Deferral, Deferred Income, Accrual

ACC 310F Lecture Notes - Lecture 4: Financial Statement, Income Statement, Balance Sheet

ACC 310F Lecture Notes - Lecture 6: Deferred Income, Deferral, Accrual

Related Questions