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Final Exam Quick Review Fall 2013.doc

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Jocelyn King

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. S
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