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Accounting Review-Final Exam.docx

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COMM 111
George Boland

Accounting Review-Final Exam Formulas: ROI=net income/sales revenue, Days Sales in Receivables: Avg A/R/one days sales, debt ratio=total liabilities/total assets, return on sales/profit margin=net income/sales revenue Current Ratio=current assets/current liabilities Acid Test=cash+ STI + net current receivables/Current liabilities Gross Profit/Margin=Revenue-Cost of Goods Sold Gross profit percentage=gross profit/Net sales revenue Inventory Turnover=COGS/Avg inventory Times interest earned ratio=operating income/Interest Expense Book Value per common share= total SE-preferred equity / #of common shares outstanding (preferred equity=redemption value +cumulative dividends) ROE(common shares only) = Net income-Prefered dividends/ Avg common shareholders equity ROA=net income+interest expense/ avg total assets Estimated value of one common share = estimated future annual income/ investment capitalization rate EPS=net income-preferred dividends/ avg # of common shares outstanding Income tax expense=IBIT (income statement) x Income tax rate Income tax payable=Taxable income (income tax return) x income tax rate Lesson 1/2 Main Statements: Income Statement, Statement of Cash Flow, Balance Sheet, Retained Earnings -IFRS=International Financial Reporting Standards -GAAP=Generally Accepted Accounting Principles Balance Sheet: Assets: Current: (Cash, A/R, N/R, Inventory, Prepaid expenses), land, buildings and equipment Liabilities: Accounts payable, Notes Payable, Accrued Liabilities(money later) Shareholder’s Equity: Contributed capital (common shares, preferred shares), Earned Capital (retained earnings) Trial Balance: list of accounts with balances (should balance) Income Statement: Revenues-Expenses Lesson 3 Accrual: records expense before paying cash or performs a service before collecting cash, business earned that will be collected, liability that occurs and has not yet been paid, cash later Deferral: expense paid in advance, cash first, (prepaid expenses) -revenue should be recorded when earned, reporting has to be done at regular intervals Adjusting Entries: deferrals, depreciation, accruals -Accumulated Depreciation : contra account to an asset Income StatementStatement of Retained EarningsBalance Sheet Chapter 4-Internal Control and Cash Fraud: two most common types are misappropriation of assets, fraudulent reporting, must have motive rationalization and opportunity Internal Control: deals with risks related to: reliability of financial records and reporting, ability to operate effectively and efficiently and have compliance with legal requirements SOX=Sarbanes-Oxley Act insists managers take responsibility for statements and people writing statements Bank Reconciliation: -cause differences between the bank and the books -could be a an item recorded by the company but not yet by the bank ( deposits in transit, outstanding cheques, bank errors) -on bank statement but not recorded by business ( bank collection, EFT, service charge, interest revenue earned on account, NSF cheque, cost of printed cheques, errors) -add up the bank and the books separately (add then subtract) -Components of Internal Control: control environment, monitoring of controls, risk assessment, information system, control procedures Internal Control Procedures: smart hiring and separation of duties, comparisons and compliance monitoring, adequate records, limited access, proper approvals, information technology, safeguard controls Cash Budget : 1. start with the cash balance at beginning of period 2. add the budgeted cash receipts and subtract the budgeted cash payments 3. Add together and get the expected cash balance( cash available/needed for new financing) 4. Compare expected cash balances (budgeted cash, new financing needed/available) Short Term Investments and Receivables -purchasing shares=STI -Unrealized loss on investment when shares are down (unrealized loss debited, STI credited ) -there is a cost/risk when selling with creditBad debt expense -balance sheet should represent the amount that the seller expects to receive -Percentages-of-sales method to estimate bad debt or aging-of-receivables -POS=income sheet approach, uses experience to estimate a percentage of sales that will prove to be uncollectable (what is the bad debt expense) -select a percentage of sales which you do not expect to receive, multiply by A/R, there you have your uncollectable accounts expense -AOR=balance sheet approach, analyzes the statement date and uses experience to estimate how much will not be collected (how much will we ultimately collect) Dr. Uncollectible receivables expense Cr. Allowance for uncollectable (contra account) -Amount within date x expected percentage uncollected = estimated uncollectable balance -add them together and you get the total for allowance for uncollectable accounts/uncollectable receivable expense -N/R incorporates interest -Methods of speeding up cash flow: credit card sales, debit sales, selling receivables at less than face value, difference is operating expense and factor’s profit is the difference between what is collected and what the factor paid Inventory and Cost of Goods Sold : -Cogs=Beginning inventory+purchases-ending inventory -Inventory Costing: Specific Unit Cost, Weighted Average Cost (combines costs on balance sheet and income statement), FIFO (most recent costs on bs) Weighted Average Cost: Per unit=cost of goods available/number of units available Cost of Goods sold=#of units x weighted average cost/unit Ending Inventory= #of units on hand x weighted average cost/unit **A new average cost is computed every time something is sold or bought FIFO -first products which are in inventory are the first ones sold -ending inventory based on the latest costs incurred Effects of FIFO and Weighted Average: Decreasing inventory : FIFOCOGS are highest, GP is lowest, ending inventory lowest, less tax paid WACOGS are lowest, GP highest, ending inventory highest, more taxes Increasing inventory FIFOCOGS lowest, GP highest, ending inventory highest, more tax paid WACOGS highest, GP lowest, ending inventory lowest, less tax paid Property, Plant and Equipment-Chapter 7 -Number on the balance sheet: cost (composed of: purchase price, taxes, commissions, setup costs, costs to get it ready for use) -some costs are separately allocated on balance sheet -figure out individual costs of lump sum by percentage of costs -capitalize or expense: Costs that do not extend the life of an asset are expensed -3 types of
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