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ACC100 Exam Review.pdf

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Ryerson University
ACC 100
Keith Whelan

green=scan blue=understand Chapter One: Communicating Accounting pink=master (The process of identifying, measuring & communicating economic information to various users) Types of Business Entities (organized to earn an income/profit) Sole Proprietorship: A business with one owner (and is not a *taxable entity) unlimited Partnerships: Owned by two or more individuals (also not a taxable entity) liability Corporation: Many owners – ownership based on shares – limited liability – organized limited liability under the laws of a province or federal government *taxable entity–any income earned by the business is taxed on the tax return of the individual Types of Non-Business Entities (organized for a purpose other than earning a profit) gov’t entities private organizations Users of Accounting Information suppliers competitors bank/creditors internal external (users mgmt.) external financial analysts current & potential owners Rev. Canada 4 Fundamebtal Financial Statements (attempt to capture financial information about a company so users can make informed decisions) 1.) Income Statement a. Reports the results from Operations in a specific period of time b. Revenues, expenses, and Net Income/Loss (Part of “performance”▯) 2.) Balance Sheet a. Shows the financial position of the company up to date b. Assets, Liabilities, and Shareholder’s Equity (at a specific poin▯t of time) 3.) Cash Flow Statements a. Shows the movement of cash and cash consequences of transactions by t▯he type of activity for a period of time / reports the cash receipts & payments▯ for a period of time 4.) Statement of Retained Earnings (closes net income to balance sheet) a. Shows the changes in retained earnings for a specific period of time ▯(format similar to equation) b. Dependent on the results of the income statement Income Statement => Statement of Retained Earnings => Balance Sheet => C▯ash Flow Financial Statement Assumptions Cost Principle: Assets are recorded at the cost to acquire them Going Concern: That a company will continue to operate in the near future Monetary Unit: How we measure (eg. Canadian Dollar, Japanese Yen, Mexican Peso) Economic Entity: Assuming that everything is accounted for in business. Personal costs must be sepfraieess Time Period: Assume it is possible to break up an entity’s earnings in discrete time periods (a month, quarter, year) Activities in a Cash Flow Statement Operating Activities: “Day to day” activities – selling goods/services Investing Activities: Purchase and sale of long-term assets – ie. buying land,buying equipme▯nt Financing Activities: Money needed to start a business – raising funds REVENUES EXPENSES are earned when... are... -good is delivered -the cost of assets consumed or the cost of a service used -service is provided ie. sales, interest revenue, fees earned, -must be matched to the revenue they help commissions earned generate ie. cost of goods sold, rent expense, insurance expense, *depreciation expense *depreciation–the process of allocation the cost of a long-term tangible Balance Sheet asset over its useful life (SHAREHOLDER’S EQUITY or OWENQUISY ) (ASSETS) A= L + SE -owned to owners such as shareholders -made up as: 1) Common Shares -owned 2) *Retained Earnings -owned by the company -paid as dividends -physical good or legal right -has future economic benefit (LIABILITES) for the company -owned to outside/third parties -paid in cash or goods or services *Retained Earnings (the profit that has been “retained” or kept within the business for future growth) ...all the net income from prior years LESS all the *dividends paid at in the prior years... *dividends–a distribution of the net income of a business to its shar▯eholder’s equity (retained earnings) RETAINED EARNINGS EQUATION: Beginning RE + Net Income - Dividents = Ending Retained Earnings Beginning Retained Earnings B R/E $$$ Net Income + N I $$ Dividends - DIV. ($$) Ending Retained Earnings E R/E $$ APPENDIX A (examples of financial statements) IncomeStatement StatementofRetainedEarnings BalanceSheet CashFlowStatement extra: Which statements would these types of people want to look at before agreeing to do business with someone? Shareholder: sales compared – [income statement] Banker, debt on books: [balance sheet-liabilities] / Banker, dividends paid: [statement of retained earnings] Advertising Acc’t Manager: spending to generate sales: [income statements-expenses] green=scan blue=understand pink=master Financial Statements & Annual Reports objectives of financial reporting primary: -to provide information that is useful for decision making eg. ( borrow $$? invest? extend credit? sell shares/bonds? loan $$?) secondary: -to provide information to help present potential investors and creditors in predicting the ability of the entity to earn income and generate cash flows in the future to meet its obligations and to generate a return on investments -show how the mgmt. of an entity has discharged its stewardship and responsibility to those that have provided resources and claims to the entity (A= L + SE) characteristics that make acct. information useful understandability : the quality of accounting information that makes it comprehensive to those willing to spend the necessary time relevance : the capacity of information to make a difference in a decision -predictive value: help users predict future results -feedback value: reflects use of financial statements in confirming or correcting previous decisions reliability : the quality that makes accounting information dependable in representing the events that it purports to represent - verifiability : making sure it is free from error (eg. blank statements) - representational faithfulness : corresponds to an actual event (eg. having bought land) - neutrality : not slanted to portray a company’s position in better/worse light than it is - conservatism : uncertain information should be presented so that assets and revenues are not overstated while liabilities and expenses are not understated qualitative characteristics comparability : allows for comparison to be made between or among companies consistency : allows a user to compare 2+ accounting period for the same company materiality : the impact of a mistake in the financial statement that will impact a user’s decision benefit vs cost : benefit of acct. info should exceed cost the classified balance sheet -reports an entity’s financial position -grouping similar assets/liabilities show that the have similar economic characteristics and provides more relevant information Operating cycle : the period of time between the purchase or inventory and the collection of any receivable from the sale of the inventory Current assets : assets that are going to be sold/used/consumed within one operating cycle or one year anything used to generate revenue are listed in order of liquidity on a balance sheet ( eg. cash, A/R (accounts receivable, inventory, temporary investments, prepaid cash/ prepaid anything ) Non-current or Long-term assets : to be used or consumer in more than a year eg. investments, plant property and equipment, intangibles (trademarks, copyrights) long-term fixed assets assets Depreciation : the term used for tangible assets Amortization : the term used for intangible assets (derives its value from rights & privileges) Current liability : an obligation (expected to be settled in cash or by selling/using/consuming current assets or creating new liabilities ) that will be satisfied within the next operating cycle or one year Long-term/Non-current liability : obligations that will not be satisfied within the next operating cycle or within one year ( eg. note payables and payable bonds (promise to pay money in the future, bank loans (eg. equipment, financing), mortgages payables (financing ‘real’ property) Shareholder’s equity/ Owner’s equity : owner’s claims on the assets of the business Contributed capital (capital stock): indicates the owner’s investment in the business Earned capital (retained earnings): represents the accumulated earnings or income since its inception minus all the dividends paid Liquidity : the ability of a company to pay its debts as they come due Working capital : Current assets - Current liabilities determines the liquidity of a company too little , may signal inability to pay creditors too much , could indicate that the company is not investing enough into itself (eg. new machinery) Current ratio : Current assets/Current liabilities which allow us to compare the liquidities of companies with different sizes and of a single company over time balance sheet example income statement -used to summarize the results of operations of an entity for a period of time -revenues and expenses -gains/losses are also shown Profit margin : the ration of its net income to its sales profit margin=net income/sales statement of retained earnings -explains the changes in the components of owner’s equity during the period -retained earnings and capital stock are the two primary component’s of shareholder’s equity Beginning Retained Earnings + Net Income - Dividends = Ending retained earnings statement of cash flow -summarizes the cash flow effects of a company’s operating, investing and financing activies 1) Operating Activities a. involves the purchase and sales of products and services b. day to day activities (selling goods/services) 2) Financing Activities a. involves the insurance & repayment of long term liabilities and capital stock b. money needed to start a business (raising funds) 3) Investing Activities a. purchase and sale of long-term assets (buying land, buying equipment) b. long-term investments, intangible assets green=scan blue=understand Chapter 3: Processing Accounting Information pink=master External vs. Internal Events external events: involves interaction between the entity and it’s environment (such as the gov’t,union, customer,etc; payment of wages to an employee) internal events: occurs entirely within the entity (eg. the use of a piece of equipment) Events vs. Transactions transaction: any event, external or internal, that is recognized and measurable in a set of financial statement only transactions are recorded _____ further examples: (E) external event (I) internal event (NR) not recorded 1) A supplier of a company delivers raw material the company ordered. 2) A bank loan is obtained by signing a note. 3) A new chief executive officer is hired. 4) The biweekly payroll is paid. 5) Raw materials are entered into production. 6) A new advertising agency is hired to develop a series of newspaper ads to the company. 7) The advertising bill for the first month is paid. 8) The accountant determines the interest owed based on the notes payable amount and the interest rate. E, E, NR, E, I, NR, E, I* _____ To recognize and record that an event is a transaction, we use source documents: a piece of paper used to record a transaction that is considered evidence needed in an accounting system (eg. receipt, sales/purchase invoice, cheques, cash register tape, payroll records, shipping/recieving documents) Types of Transactions: Assets= Liabilities + Shareholder’s Equity 1.) Issuance of Capital Stock (common shares/equity) a. Increase Cash (current assets) = n/e + b. Increase Capital Stock (SE) 2.) Purchase of Equipment (cash/note) a. Decrease Equipment = + n/e b. Decrease Cash c. Increase A/P (accounts payable=liability) 3.) Prepayment of Rents = n/e + n/e a. Increase Prepaid Rent b. Decrease Cash Assets= Liabilities + Shareholder’s Equity 4.) Sale of Day Passes (i.e for gym) a. Increase Cash b. Decrease Revenue (net income) = n/e + (increase equity; expenses decrease equity) 5.) Rental of Space (with promise to pay) a. Increase in A/R (current asset) = n/e + n/e b. Increase in Revenue (rental revenue) 6.) Sale of Annual Memberships a. Increase in Cash = + n/e b. Increase in Unearned Revenue (liability; b/c it’s not revenue...yet!) 7.) Payment of Salaries & Wages a. Decrease in Cash = n/e + b. Decrease in Retained Earnings _____ further examples *at least two accounts are affected by each transaction 1) issue capital stock for $50,000 increases assets + shareholder’s equity A = L + SE cash = + capital stock + 50,000 = + + 50,000 2) acquire $75, 000 in equipment. paid $25,000 in cash and issued a note payable for the rest increaes assets + liabilities cash = note payable - 25,000 = +50,000 equipment +75,000 3) purchase supplies for $800 on credit (I.O.U) increases assets + liabilities supplies= accounts payable + 800 = +800 4) paid $6,000 for first month’s rent decreases cash, increases prepaid rent (both ascash) = - 6,000 = NO CHANGE IN L or SE prepaid rent +6,000 5) sold $5000 in day passes for cash increases cash + shareholder’s equity cash = + retained earnings + 5,000 = + + 5,000 (revenue) *revenues increase retained earnings which increase shareholder’s equity! 6) sold $12,000 in annual memberships in cash increases cash + liabilities cash = unearned revenue +12,000 = +12,000 *receipts in annual membership payments creates liabilities 7) pays wages and salaries of $3000 decreases cash + shareholder’s equity cash = + retained earnings - 3,000 = + - 3,000 (expense) *expenses decrease retained earnings) 8) pays dividends of $400 decreases assets + decreases SE A = L + SE cash = + retained earnings - 400 = + -400 *dividends directly reduced retained earnings green=scan blue=understand Chapter 4 Part 1: Accrual Accounting, pink=master Adjusting Entries & Accounting Cycle Recognition & Measurement recognition: process (formally recording) an item in the financial statements of an entity measurement: -quantification of the effects of the item of the entity (eg. economic events such as the purchase of land, payment of an invoice) -the accountant must decide on the attribute to be measured realizable value: “current value” the amt. of cash you can receive today ( sefirg relevant value) historical cost: “original cost” the amt. paid for an asset. (reliable value) Cash vs. Accrual Basis Cash-basis acc’t -records revenue when cash is received (cheques, credit card or cash) -records expenses when cash is paid (usually by cheque in a business) -can misrepresent economic event -open to manipulation -does not provide full info for the external user to make a decision Accrual basis acc’t -records revenue when earned -records expenses when incurred, used or consumed to generate revenue -we record the economic activity that tthe company is engaged in -allows the reader to focus on the long-term profitability of the business rather than simply the amt. of cash received and paid in any given year *over time cash and accrual acc’ting result in the SAME OUTCOME as long as all transactions have been completed *difference b/w cash and accrual basis? the difference between these two is the TIME PERIOD THE TRANSACTIONS ARE RECORDED IN *relationship b/w the time period assumption and accrual acct’ing? if you have to break the life of a company up into time periods, accrual acct’ing must be used. accrual acct’ing answers the question of when to recognize the revenue and record the expenses. Entries Review Purchased 1 year insurance policy for $12,000 cash on Oct.1 A company had $900 in supplies from the prior year. They purchase an additional $1,500 in sup- plies on account. A cruise ship sells 200 inside cabins for $2,000 cash each on Aug.30th. *all the review entries were EXTERNAL ENTRIES because they were all made w/ outside parties *these EXTERNAL ENTRIES share the common element of resulting in a suceeding INTERNAL ENTRY which is required because during the period, revenue was earned or expen▯ses were consumed or used up * the internal entry made at the end of the period is called an ADJUSTING ENTRY Types of Adjusting Entries 1.) Prepaid Expense (you pay the cash before the expense comes up) -costs are recorded as assets & allocated to expense in future periods eg. insurance, rent, office supplies, plant & equipment a. Prepaid Rents (understand that an asset decreases and an expense increases) i. Dr. Rent Expense ii. Cr. Prepaid Rent b. Depreciation (Contra-Asset [acct. is created] which means transaction is opposite of that of a normal asset) i. Dr. Depreciation Expense ii. Cr. Accumulated Depreciation 2.) Unearned Revenue (you get the cash before the work is done) -receipts are initially recorded as liabilities and recorded as revenue in future periods when earned eg. rent collected in advance, subscriptions, gift certificates i. Dr, Unearned Revenue ii. Cr. Rent Revenue 3.) Accrued Liability (you have an expense you didn’t oay yet) 4.) Accrued Revenue (when you have done/given a service, but still need to receive the cash) prepaid insurance eg. depreciation eg.
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