ACCTG 414 Final Exam review
Jocelyn’s Office hours – All students in 414 are welcome
Tuesday Dec 10 Noon – 2 pm
Wednesday Dec 11 Noon – 3 pm
Thursday Dec 12 Noon – 3 pm
Friday Dec 13 Noon – 2 pm
Or you can use the discussion board.
For the final exam
o Time: Dec 14, 2013 Saturday 1400 – 1700 (Consolidated exam 3 hours)
o Location: Pavilion Rows 2,4,6,8
o Arrive at least 30 minutes before the start time of the exam.
o Bring a non- programmable calculator.
o Please bring Your One Card or a piece of government issued picture ID
with you.
o Read each question Carefully – answer all parts
o Budget your time
Rough Split of pre midterm versus post midterm questions
Ch 1-5, appendix Approx 25 %
Ch 6-11 Approx 75%
But remember that much of the new material builds on material from earlier
chapters.
Note:
This document is not an exhaustive summary of all materials covered this
term, but this quick review may be helpful to you in studying. It is not a
replacement for reading the text and doing the assigned questions.
You may wish to add your own notes into this document. Ch 1 and 2 Objectives of Financial Accounting
To communicate financial information to parties outside the business
organization:
1. Equity Investors 4. Suppliers
2. Creditors 5. Customers, etc.
3. Employees
Financial Statements
The four basic financial statements: Statement of Financial position; Income
Statement/ statement of comprehensive income; Statement of Cash Flows;
Statement of Retained earnings/shareholders’ equity. Most companies prepare
financial statements at the end of each year (called annual reports) and at the
end of each quarter (called quarterly reports)
General justification for ASPE GAAP vs. IFRS
Cash Basis vs. Accrual Basis
Recognition Criteria
Accrual basis Cash basis
Revenue When earned When cash is received
Expense When incurred When cash is paid
Review the conceptual framework
What type of questions would you ask? Appendix - The accounting cycle
The Recording Process
Journal entries
Unadjusted trial balance
Adjusting entries
Adjusted Trial Balance
Financial statement preparation
Closing entries
Post closing trial balance
Reversing entries are optional – not required in this course.
The Journal Entries
Transactions recorded using double entry bookkeeping.
Debits Dr.
Credits Cr.
Journal Entries and T-accounts
Increases in assets are debited and recorded on the left side of the T-
account;
Increases in liabilities are credited and recorded on the right side of the T-
account;
Increases in revenues are credited and recorded on the right side of the T-
account;
Increases in expenses are debited and recorded on the left side of the T-
account;
Remember that the balances of the permanent accounts carry over to the
next year!
Remember that the income statements accounts (revenues and
expenses) will be closed through closing entries by the end of each
reporting period.
T-Accounts
You can use balances from T-accounts to prepare financial statements at the
end of a fiscal period Basic Accounts Adjusting Entries
Adjusting entries record activities that have taken place, but which have not yet
been recorded. Four scenarios:
1. Cash first, expenses later: e.g. Prepaid expense, office supplies purchased for
later use, PP&E purchased
2. Expenses first, cash later: e.g. Wages accrued but not paid, purchases of
inventory on credit
3. Cash first, revenues later: e.g. Unearned revenues
4. Revenues first, cash later: e.g. Interest revenues accrued, credit sales
Involve at least one temporary account (revenue, expense) and at least one
permanent account (asset, liabilities).
They NEVER involve cash!
Trial Balances
Purpose: To ensure both sides on an entry recorded at the same amount. – do
not guarantee that your entries are correct, but do reduce errors.
Closing Entries
Bridge the Income Statement and Statement of Financial Position ( through)
Retained Earnings;
Close Revenue into R/E by:
Dr. Revenues
Cr. Retained earnings
Close COGS/Expenses into R/E by:
Dr. Retained earnings
Cr. COGS/Expenses
What about dividends? Ensure that any dividends declared are closed to
retained earnings. You can use the income summary if you wish.
Sub-ledgers and special journals
What questions might you ask? Ch 3 - The Income Statement and Comprehensive Income
The income statement measures firm performance regardless of when cash is
exchanged. Key principle
Single step vs. Multi step
Single step
Revenues + gains
Less Expenses and losses
=Net income before taxes
less Taxes – as these mush be shown separately
=Net Income
Multi step
Revenues( from operations only)
Less COGS
=Gross Profit
less Operating expenses
= operating income
less Non operating expenses
=Net income before taxes
less Taxes
=Net Income
Function vs. Nature
Function- Sort by functional area of the business, e.g. sales, admin, engineering,
R&D, etc. You need to have the costs split by function in order to do this
Nature – Sort expenses by type e.g. Utilities, office, professional fees, etc.
Look at the accounts you are given and use this to determine the better
approach. Smaller businesses generally sort by nature, bigger organizations
with more separation by departments may use function.
Income statement Equations:
Revenue – Cost of Goods Sold = gross profit
Net Income + /- Other comprehensive income = comprehensive income
Components
(IFRS and ASPE GAAP)
o Heading – for the [year] ended [date], or other period covered
o Revenues -Sales or service revenue
o Gains -e.g., selling an equipment for cash greater than its net book value
o Expenses -Cost of goods sold, operating expenses, etc.
o Losses e.g., selling an equipment for cash less than its net book value
o Other revenues and expenses
o Interest revenue, dividend income, interest expense Income from Continuing Operations
o Discontinued Operations
o Income or Loss from Discontinued Operations, net of tax
o Gain or Loss on Disposal of Discontinued Operations, net of tax
Net income
IFRS only
o +/- Other comprehensive income
Comprehensive income
Differences between IFRS and ASPE
Accounting for discontinued operations and intra-period tax allocation.
Earnings management
Typical Questions? Ch 4 - The Statement of Financial Position, Statement of Retained Earnings/
Changes in Shareholders’ Equity and Disclosure
STATEMENT OF FINANCIAL POSITION
Equation: Assets = Liabilities + Shareholders’ equity
Components of the Statement:
- Heading – as at [date]
- Assets: Economic benefits owned by the business as a result of
past transactions.
- Liabilities: Debt and other obligations of the business that result
from past transactions.
- Shareholders’ equity: Residual claim of and financing provided by
the owners of the business.
- Current vs. Non Current
- Major categories
o Review major categories for presentation.
- Order of accounts
o Assets- liquidity
o Liabilities – time to maturity
o Sh. Equity - permanence
STATEMENT OF RETAINED EARNINGS
This is reported as a solo statement under ASPE GAAP only
Opening Retained Earnings + Net Income - Dividends = Closing Retained
Earnings
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
IFRS Only
A continuity schedule of opening balances +/- changes = closing balance for
each component of shareholders equity, including retained earnings.
Financial statements - Note Disclosure
Purpose: to provide supplementary information about the financial condition of
the company.
- Describe accounting policies followed by the company
- Provide additional detail about an item on the financial statements.
- Provide additional information about an item not on the financial
statements.
- Subsequent events, consider the difference in treatment of the two
types of subsequent event.
Typical Questions? Ch 5 – CASH FLOW STATEMENT – indirect method only
Cash and Cash equivalents
• Cash on hand, Bank balances
• Bank overdrafts
• Short term risk free investments with maturity dates within 3 months.
Reports the changes to other accounts that affect a change in cash and cash
equivalents on the SFP. The change in the cash account is usually not equal to
net income:
Revenues reported do not always equal cash collected (credit sales).
Expenses reported do not always equal cash paid (prepaid expenses).
In relation to the SFP:
The sum of cash flows from operations, cash flows from investing, and
cash flows from financing must equal to the change in cash and cash
equivalents on the SFP.
Statement of Cash Flows reports operating cash flow, as well as, other cash flow
information.
Provides important information to investors and creditors.
In particular, information about differences in the timing of revenue and
expense recognition under GAAP and the associated cash inflows and
outflows.
Preparing a cash flow statement
Heading - for the [year] ended [date], or other period covered
Cash flow provided by (used in) operating activities (Indirect method)
Net Income
Adjust for Non-Cash Changes in non-cash W/C accounts
- Subtract increase in assets
- Add decreases in asset
- Add increase in liabilities
- subtract decreases in Liabilities
Adjust for non cash items included in net income
Add Depreciation & Amortization
Add Loss on Sale of Assets
Subtract Gain on Sales of Assets
Cash flows provided by (used in) investing activities
Cash paid for long-term assets
Cash proceeds from the sale of long-term assets
Cash flows provided by (used in) financing activities
Cash dividends paid
Cash received on issuing debt – i.e. borrowing
Cash paid for retirement of debt Cash received from issuance of common shares
Ch 6 - Revenue and Expense Recognition
Why do we care about revenue recognition?
Revenue has a BIG impact on bottom-line profitability managers may be
tempted to manage revenue
Criteria for revenue recognition – existing standard
A firm recognizes revenue when it has:
• Performance achieved
• Measurability of the revenues and associated remaining costs.
• Collectability is reasonably assured.
Revenue is most often recognized at the time of sale, as long as:
- Reasonable estimate of uncollectible amount
- Reasonable estimate of sales returns
- Reasonable estimation of all other material expenses representing
uncertain future outflows (e.g., warranty costs).
- Most common in retail, wholesale & manufacturing
- Even when right of return exists, as long as the company has
booked reasonable allowance for sales return, we can still
recognize revenues at the point of sale.
If there is uncertainty in the three criteria then wait until the uncertainty is
resolved.
Criteria for revenue recognition – proposed standard
IFRS
1. Identify the contract(s) with the customer – May be explicit or implicit
2. Identify the separate performance obligations – may be one or many
3. Determine the transaction price – using either weighted probabilities
method or most likely amount. You must determine an amount for
revenue. This is very different from the existing approach.
4. Allocate the transaction price to the performance obligations
5. Recognize revenue when a performance obligation is satisfied
Review the two cases covered in the lectures.
Methods
Percentage of completion method - Recognize revenue and profit as contract
progresses. Extent of completion, at any one point in time, is determined by the costs
incurred to date divided by the total estimated costs of the contract. If it becomes
apparent that a loss is expected on a contract, recognize the total amount of the
expected loss immediately. Completed contract method - Recognize revenue and profit when the contract is
complete. If it becomes apparent that a loss is expected on a contract, recognize the
total amount of the expected loss immediately.
Percentage of completion method
Review profitable contracts
Calc. Year 1 Year 2
Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) B/D
Contract Value (F) Given
Revenue recognized to date G F X E
Less: revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Given
Gross profit I - A
AND
Loss contracts
Calc. Year 1 Year 2
Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) B/D
Contract Value (F) Given
Revenue recognized to date G F X E
Less: revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Plug this
Total estimated Loss Calc this
(Profit) Loss previously recognized Prior yrs
Gross profit
Typical Questions? Ch. 7 – Financial Instruments: Cash, Receivables and Payables
Cash
Cash and Cash Equivalents – Identifying amounts to be included in cash
equivalents – See chapter 5 material
Accounts Receivable
Relevant Formulae
1 Ending A/R= Beg. Bal. A/R+ Credit Sales – Cash Received – Write-off +
0 Recovery of previous write-off
2 Ending Allowance for doubtful accounts (ADA)= Beg. Bal. AFDA + Bad
Debt Expense – Write-off + Recovery of previous write-off
Two approaches to determining Allowance for Bad Debts
1 Percentage of (Credit) Sales (Income statement approach)
2 − Focuses on calculating the Bad Debt Expense recorded for the year
Aging Method (Balance sheet approach)
3 − Focuses on calculating the Ending Balance of Allowance for Bad
Debts
4 − Bad Debt Expense is a “Plug”
Accounts Receivable Relevant entries
0 Credit sales: Dr. Accounts receivable
Cr. Revenue
2 Record bad debt expense:
0 Dr. Bad debt expense
0 Cr. AFDA
3 When bad debt happens (when we are sure a specific customer
defaults): Dr. AFDA
4 Cr. Accounts receivable
5 Recovery of bad debt:
6 Dr. Accounts receivable
7 Cr. AFDA
0 Dr. Cash
1 Cr. Accounts receivable
Notes receivable/Payable
- Notes: written promises
- May be at a market rate of interest – no discounting needed
- May be at a low rate on interest – discount the face value of the
note and the interest payments at the market rate
- May be at no interest – discount the face value at the market rate
of interest. Other items
Sales discounts
- Account for sales discounts by recording “allowance for sales
discounts”
o A contra account for sales revenue on Income statement
Customer return merchandise
- Debit to “Sales returns and allowances”
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and
merchandise return
- Credit to Allowance for sales return and allowance
- A balance sheet contra account attached to accounts receivables.
Transfers of A/R
Identify if the transaction is to be accounted for as a sale or a borrowing
transaction. Sale transactions
Journal entries to remove the A/R, any associated AFDA, record the receipt of
cash, the residual obligation, if any, and a loss on disposal.
Borrowing transactions
Journal entries to record the new debt and interest costs/ fees. The A/R and
associated AFDA remain on the books.
Types of Questions Ch. 8 Inventory
1
2 INV =EBNV + PBBchase – COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable
value of the inventory.
Key equation: Beginning Inv+ Purchases - COGS = Ending Inv
Issues
Consignment inventory - Consignment inventory on the firm premises owned by others
should be excluded. Consignment inventory of the firm held elsewhere should be
included in the inventory of the firm.
Goods in transit at period end - Items shipped FOB shipping point are considered to
have been sold when shipped. Items shipped FOB destination are not considered to
have been sold until they have arrived at their destination.
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at
period end are incorrectly excluded from the physical inventory count or if items already
sold are incorrectly included in the period end inventory count.
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