chapter by chapter summary.docx

12 Pages
Unlock Document

Simon Fraser University
Business Administration
BUS 251
Anne Mac Donald

Chapter 1 summary Financial statements are often part of the “Annual Report” which is prepared annually by the management of the business and made available to all owners of the business. Income statement: measures the performance (net income/profit/earnings) over a period of time.  Sales/revenues: increases in the company’s wealth arising from providing goods or services to customers  Expenses: decreases in the company’s wealth incurred in order to earn revenues  Sales revenue – cogs = Gross margin Balance sheet: measures a company’s position at a point in time  A cumulative accounting record  Describes the organizations resources and where they came from ASSETS = LIABILITIES + SHAREHOLDERS EQUITY  Assets: resources over which the company already has in control, which will provide future economic benefits from the use.  Liabilities: obligations that will have to be paid by the organization in the future  SE: The overall value of the organization belonging to its owners: o Amounts originally invested in the business by its owners + income of the organization that belongs to the owns but has not been distributed to the owners o Includes share capital(increases when more shares are issued by the company) and retained earnings (increases when the company reports a profit and decreases when dividends are paid out) Chapter 2 & 3 summary – transaction analysis and double entry accounting systems  A balance sheet must always be in balance i.e. A = L + SE  The recording of each transaction must change 2 elements in the equation in order to keep in balance  Accrual accounting provides a more meaningful measurement of a company’s financial performance and is the use of cash basis accounting which records only transactions involving inflows or outflows of cash o The matching principle : all costs associated with generating sales revenue should be matched in the I/S with the revenue earned o The historical cost model: assets are usually valued at cost not the price at which they could be sold today Financial statements reflect organizations Transactions:  Involve a past exchange of goods/services  Measurable  Occur between the organization and an outsider  Often verifiable through source documents (see slide 25)  Adjustments o To reflect a change in the recording of a transaction o To reflect new information (e.g. the change in value of an asset or a liability) o To reflect the use of accrual accounting  Chart of accounts – a list of account names only.  General journal – the ‘book’ where journal entries are recorded (all companies must have one).  General ledger – the accumulation/addition of all the journal entries for each separate B/S or I/S account name – the collection of ‘formal’t-accounts.  Trial balance - a summary of the general ledger. Provides the final account balances at the end of the period, for preparation of financial statements.  Closing entries required only at the end of the year 1. Update the retained earnings account to include the current year’s net income 2. Reduce retained earnings by any dividends declared 3. ‘Reset’ the revenues and expenses back to zero Chapter 4 summary – Revenue Recognition Cash-to-cash Cycle: 1. CASH  and INVENTORY  (Purchase of inventory) (move to 2) 2. INVENTORY & COGS expense↑ and A/R  & Revenue ↑ (Sale of inventory) (move to 3) 3. A/R  and CASH (Collection of A/R) (return to (1) Revenue recognition: recognized when goods are taken by or shipped to the customer Conditions: 1. There is a probable inflow of economic benefits as the performance has been achieved o The earnings process is substantially complete and/or o Risks and rewards of ownership are transferred to the buyer 2. The amount of revenue earned can be measured Revenue recognized before cash received: (journal entry) DR A/R (A) 100 CR REVENUE (SE) 100 Chapter 6 summary – cash, short-term investments, account & notes receivable  Bank reconciliation: a comparison of what appears in your accounting records as cash and what appears on the statement for your account, prepared by the bank. Differences must be identified and explained  Usually happens due to timing and amounts only known to one party Balance sheet disclosure for cash:  Listed under current assets  Accounts receivable (amounts owed by customers) uncertain due to bad debts, discounts for the return of goods, discounts for early payments etc.  If cash not collected we need to warn both I/S and B/S about the possible non-collection of cash  Journal entry required: DR Bad debts expense CR Allowance for doubtful accounts(AFDA) (a contra-asset ‘XA’ account)  Once adjusting entry is made for the bad debts expense and AFDA, the bad debts actually recorded in the I/S is compared to the original prediction. After a number of years the total expense will be correct (some years over or understated) as you will learn from your mistakes and better estimates in the future Short-term investments:  If excess cash is available likely to invest cash in marketable securities such as debt investments (treasury bills, government bonds) and/or equity investments (shares in publicly traded companies)  Valued at fair market value and if value changes over time, unrealized gains or losses must be recorded. Eg: Jan/07 (Purchase 100 share investment): DR Investment (A↑) (100 @$30/share) $3,000 CR Cash (A↓) $3,000 Dec/07 (year-end adjustment): DR Investment (A↑) (↑$7 to $37/share) $700 CR Unrealized gain (SE↑) $700 Dec/08 (year-end adjustment): DR Unrealized loss (SE↓) $1,600 CR Investment (A↓) (↓$16 to $21/share) $1,600 Notes receivable: special terms of payments such as date of payment or interest charged  Accounting issues: o accrue interest revenue and receivable o estimate an AFDA to deal with problems of collectability Chapter 7 summary – Inventory  Goods held for resale to customers or to be used in manufacturing goods to be sold  Management watches turnover of inventory – efficiency and how quickly inventory can be sold?  Some try to minimize inventory levels through the just in time system  It is an asset as it is owned by the company and has probable future value (the market value, when sold)  Valued at Lower of cost and net realizable value (market value): o Cost is defined as “laid down” cost, the cost to get the inventory ready for sale (which includes custom duties, freight-in and any repackaging/assembly costs) o NRV = estimated selling price, less any FUTURE costs that must be incurred in order to sell the item  Inventory (asset on B/S) AND COGS expense (expense on I/S) closely linked  Measured through: Beginning Inventory + Purchases + Transportation/Taxes/…(i.e. Costs to get “ready for use”) = Goods Available for Sale Ending Inventory Can be physically counted = Cost of Goods Sold Expense  Ending inventory is counted at the end of the fiscal period as COGS can only be estimated after a physical count of inventory has occurred  ACCOUNTING UNDER A PERIODIC SYSTEM o Only one entry is required at the end of the accounting period to reduce inventory for total amounts sold in the period, and record total COGS. o When sales occur during the period: o DR Cash or A/R for each sales transaction CR Revenue o Then once, at the end of the period, there is one entry: o DR COGS expense to record the entire period’s CR Inventory cost of inventory sold o Method does not identify the inventory not on hand at the end of the period as it will still be included as part of the COGS expense.  Perpetual inventory system – continually measures COGS and ending inventory o A journal entry is made everytime o E.g. an item is sold for $20, it was originally purchased for $12. o DR Cash / A/R $20 o CR Revenue $20 o These entries are (both) required for every sales transaction. o DR COGS Expense $12 o CR Inventory $12 Cost flow assumptions:  The problem if company sells goods which look alike but are purchased at different times  To decide the value for COGS expense use first in first out method (FIFO) or moving average Inventory estimation:  Possible for companies with a known cost to sales ratio Beginning inventory (from last year’s B/S) + Purchases (from amounts paid to suppliers) = Cost of goods available for sale - Estimated COGS expense (the $1,200,000 above) = Estimated ending inventory  Method does not identify theft and may be used for companies who prepare monthly I/S Chapter 8 summary – capital assets  A minor replacement to an asset = expense  A major replacement for an asset = capitalized  When to recognize an expenditure as an asset  Tangible assets (physical presence) and intangible assets (no physical presence)  Must have probable future benefits that can be measured, and are owned or controlled by the company  May generate cash flows (produce goods which are then sold to customers) or sell the product for future value  Usually valued at historical cost (cost to get asset ready for use) or fair market value (where revaluation is done on a continual basis) Eg: Jan 1 , Year 1, Original cost paid for an asset Dec 31 , Year 2, Fair market value now = $110 = $100 AJE DR Revaluation Surplus (SE ↓) $10 DR Asset $100 CR Asset CR Cash $100 $10 st st Dec 31 , Year 1, Fair market value now = $120 Dec 31 , Year 3, Fair market value now = $95 AJE DR Asset $20 AJE DR Revaluation Surplus (SE↓ ) $10 CR Revaluation Surplus (SE ↑) DR Loss (SE ↓) $ 5 $20 CR Asset $15 Cost of an asset:  Includes all those costs required to make it suitable for its intended purpose, particularly those costs incurred prior to putting the asset into service  There is judgment in determining the cost of an asset which applies to asset improvements as well  This is the choice between  CAPITALIZATION and EXPENSING) DR Asset OR Expense  CR Cash  The choice will impact:  This year’s net income and also future year’s income (through depreciation of the asset). F/S disclosure for capital assets: At any point the B/S value of a capital asset is: o Original cost to acquire asset and get it ready for use – accumulated depreciation (XA account) = Net book value o If the market value of the asset is less than the net book value an impairment loss has to be considered o Will need to record an AJE : o DR Unrealized Loss (I/S↓) 200,000 o CR Accumulated Depreciation (XA↑) 200,000 o After AJE to record impairment loss: o Cost $1,200,000 o Less: Accum. Depreciation 650,000 o Net book value $550,000 = Estimated market value Sale of a Capital asset:  When the asset is sold the asset account and the related accumulated depreciation must be removed from the accounts  DR Cash 600,000  DR Accumulated Depreciation (XA↓) 650,000  CR Asset 1,200,000  CR Gain on Sale of Asset * 50,000  Depreciation is a systematic and rational method of allocating cost of capital assets to the periods in which the benefits are received (the matching principle). To record it either use straight line annual depreciation method (equal amounts per year) or declining balance depreciation (multiply by same % each year) or units of production depreciation  Straight-line annual depreciation = ($100,000 – 10,000) / 5 yrs = $18,000  Year 1 Depreciation: $100,000 x 40% = $40,000  Year 2 “ ($100,000 – 40,000) x 40% = $24,000  Depreciation expense per unit = ($100,000 – 10,000) / 45,000 units = $2/unit  If an asset is comprised of significant components the each component should be separately depreciate using a method and useful life that is appropriate for the component  The company would need to disclose in the notes to the F/S the nature of the change in estimates (depreciation) and the effect of the change on the current year’s income Intangible assets:  Eg: patents, trademarks = difficult to assess future benefits of these assets, or to identify the costs that created the asset  Source of an intangible asset can determine its accountin
More Less

Related notes for BUS 251

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.