Study Guides (238,105)
Canada (114,924)
Commerce (679)

Midterm 2 Study Notes (Ch5,7,8) - COMMERCE 2AA3 - FINANCIAL ACCOUNTING

4 Pages
Unlock Document

McMaster University
Aadil Merali Juma

MIDTERM 2 COMM 2AA3 Quicknotes November 8, 2013 Chapter 5: Reporting and Interpreting Cash Flows  Purpose of Cash Flows – to provide information about cash receipts, cash payments, and net change in cash resulting from the operating, investing and financing activities of a company during a specific period o Operating – income statement items, current assets, current liabilities (should be positive)  must convert from accrual to cash o Investing – long term assets, investments (good to be negative) o Financing – long-term liabilities, owners equity  Preparation o Different than other financial statements – i) detailed information concerning changes in account balances that occurred between two periods (adjusted trial balance not sufficient) ii) deals with cash receipts and payments (accrual concept not used) o Comparative balance sheet, current income statement, additional info (to ensure cash flow = bank)  Method to convert operating activities from accrual to cash 1. Indirect Method – differences between net earnings and net cash flow from operating activities; easier to prepare; reveals less o Begin with Net Income, make adjustments o Add – i) amortization expense ii) losses on disposal of assets iii) decreases in current assets iv) increases in current liabilities o Subtract – i) gains on disposal of assets ii) increases in current assets iii) decreases in current liabilities o Gains/Losses on disposal of an asset – report proceeds from sale of asset under cash flows from investing activities  Gain/Loss on Disposal of Asset = Proceeds – Book Value (BV of Asset = Historical Cost – Acc. Dep.)  Gain/Loss is “paper gain/loss” – affects NI but not cash 2. Direct Method – net cash provided by operating activities is calculated by adjusting each item, in T-accounts, in the income statement from accrual to cash basis o Calculate i) cash collections from customers ii) cash payments to suppliers iii) cash payments for operating expenses iv) cash payments for interest and income taxes o Collections from customers – End. A/R = Beg. A/R + Rev. – Collections  Payments to Suppliers – two step process i) calculate purchase(= End Inv. – Beg. Invii) calculate payment for purchase(= Beg. A/P – End. A/P + Purchases)  Payments for Operating Expenses Operating expenses + Increases in prepaid expenses -- Increases in accrued liabilities -- Decreases in prepaid expenses + Decreases in accrued liabilities o Adjusting operating expenses for changes in prepaid expenses and accrued liabilities  Payments for Operating Expenses = Operating Expenses – Changes in P/E  Ending P/E = Beg P/E + Payments for P/E – Op Expense  Payments for A/L = Operating Expenses – Change in A/L  Ending A/L = Beg A/L + Op Expense – Payments for A/L  Payments for Income Taxes – End IT Payable = Beg IT Payable + IT Expense – Payments for IT  Payments for Interest – End Interest Payable = Beg. Int. Payable + Int. Expense – Int. Payment Chapter 7: Reporting and Interpreting Sales Revenue, Receivables and Cash  Revenue Recognition Principle – recognize revenue when 1. Earnings process is complete or nearly complete – service performed  Shipping Term – FOB = freight/free on board;  FOB Shipping Point – title of goods passes from seller to buyer at sellers point of sale  FOB Destination – title of goods passes from seller to buyer when goods delivered to byer 2. An exchange transaction takes place 3. Collection is reasonably assured  Sales Revenue is reduced by (contra-revenues) o Credit Card Discounts – credit card companies charge a fee, yet companies accept credit Sales Revenue Less: Credit Card Discounts cards to i) increase sales ii) avoid providing credit directly to customers iii) avoid loses due Sales Discounts to bad checks iv) receive payment more quickly (credit card payment = liquid) . Sales Returns and Allowances o Sales Returns and Allowances – when customer is sold damaged merchandise Net Sales i) Return for full refun sales returns ii) Keep merchandise, but receive credit (reduction in A/R, store credit, cah)sales allowance o Sales Discounts (cash discounts) – discounts given to customers to encourage early payment (when purchased on open account)  2/10, n/30  discount %/# days in discount period, full amount due/maximum days in credit period  Take discount unless i) interest rate on borrowed money or ii) return on investment opportunity, is greater than annual rate  Interest rate for 20 days = amount saved/amount paid = $2/$98 = 2.04%  Annual Rate = 365 days/20 days = 37.23%  Sales and Receivables recorded at gross amount (assume discount not taken)  debit Sales Discount when customer pays within discount price  Bad Debt – results from credit customers who will not pay amount owed 1. Direct Write-Off Method – assumes A/R are collectible; recognizes bad debt expense when A/R determined uncollectible (write off A/R; causes net assets to and net income to decrease)  Bad debt expense recognized in period A/R written off 1 MIDTERM 2 COMM 2AA3  A/R reported at gross value  Violates Matching Principle  Can invoke Materiality Principle or Private Entity Gap  Journal Entry Bad Debt Expense xx A/R xx 2. Allowance Method – recognizes bad debt expense when A/R are estimated to be uncollectible (Allowance for Uncollectible Debt)  Bad debt expense recognized in period of sale  A/R reported at net value – Net A/R = Gross A/R – Allowance for Uncollectible Accounts  Journal Entries  End of year adjusting entry Bad Debt Expense Allowance for Uncollectible Accounts  Accounts determines uncollectible – writing off A/R Allowance for Uncollectible Accounts A/R  Accounts written off can be collectible A/R Allowance for Uncollectible Accounts  Should not affect I/S; net assets do not change a) Percentage of Sales Method/ Income Statement Approach – percentage of credit sales estimated to be uncollectible is applied to total credit sales to calculate bad debt expense; disregards how much is already in allowance account b) Percentage of Receivable Method/Aging Method/Balance Sheet Approach – allowance estimated before adjusting entry for bad debt expense is prepared; account for amount in allowance account  Bad debt expense is determined from the aging schedule of A/R 1) Determine desired ending balance of Allowance using aging schedule of A/R (weighted average) 2) Calculate amount of adjustment on the basis of existing balance of the allowance  Evaluate credit policy – ability to pay suppliers, cash flow problems risk of default o Receivables Turnover = Net Sales / Average Net Trade Receivables how quickly people are paying o Days in Receivables – 365 / Receivables Turnover  how
More Less

Related notes for COMMERCE 1BA3

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.