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COMM 293 - Final Exam Review

16 Pages

Course Code
COMM 293
Patricia Mallia

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Chapter 1 Wednesday, September 04, 2013 11:14 AM • Financial activities: when a company exchanges money with its lenders and owners • Investing activities: when a company buys or cells property • Internal decision makers (managers), external decision makers (long officer, investors, etc.) Statement of Financial Position • Reports the financial position (assets, liabilities, equity) of an accounting entity at a particular time • Statement heading: name of the entity, title of statement, date, unit of measure • Accounting entity: the organization for which financial data are to be collected • Basic accounting equation: • Prepayments: advance payment of any insurance premiums (future economic benefits) • Accrued liabilities: amounts owed to supplier for various services (rent, utilities, etc.) • Short term borrowing (banks/creditor), long term borrowing (formal written debt) • Shareholder's equity: financing provided by owners of shares in the business and earning over time ○ Share capital: investment of cash and other assets in the business by owners for shares ○ Retained earnings: amount of earnings reinvested in the business (not distributed to shareholders) Statement of Comprehensive Income • Changes in equity except from investments by owners or distributions to owners ○ Comprised of profit and other comprehensive income ○ Other comprehensive income: income/expense items not recognized on the income statement • Income statement reports for a specific period of time (generally one year) • Interest expense: cost of using borrowed funds Statement of Changes in Equity • How profit, dividends, and other changes to shareholder's equity changed the financial position ○ Stated over an accounting period (period of time) ○ • Shows how the income statement/finance position are linked through shareholder's equity Statement of Cash Flows • Divides cash flows (receipts) and outflows (payments) into operating, investing and financing activities ○ Covers a specific accounting period • Operating activities: directly related to earning income • Operating activities: directly related to earning income • Investing activities: the acquisition or sale of the company's productive assets • Financing activities: directly related to the financing of the company itself (receipts/payments) Relationship among the Four Financial Statements • Profit from the income statement results in an increase in ending retained earnings on the statement of changes in equity • End retained earnings from the statement of changes in equity is one of the three components of shareholder's equity on the statement of financial position • Change in cash on statement of cash flows added to cash balance at the beginning of the year equals the balance of cash at the end of the year, appearing on the statement of financial position • Income statement through changes in equity show changed financial position over the year Notes to Financial Statements • Notes provide supplemental info about the financial condition of a company ○ Provides descriptions of the accounting rules applied in the company's statements ○ Additional detail about a line of the financial statement ○ Additional financial disclosure about item not listed on the statements International Financial Reporting Standards (IFRS) • USA -Securities and Exchange Commission, Canada - Canadian Securities Administration • Standards prevent managers from manipulating and reporting false values • Ultimately managers are responsible for financial statements ○ Managers must take steps (auditors, ethics, internal controls) • Report to management: responsibility for financial statement information and the steps to ensure accuracy of records Chapter 2 Friday, September 13, 2013 9:53 AM Assets Liabilities Shareholders' Revenues Expenses Equity Cash Trade Payables Share Capital Sales Cost of Sales Revenue Short-term Accrued Contributed Fee Revenue Wages Expense investments Liabilities Surplus Trade Receivables Notes Payable Retained Earnings Interest Rent Expense Revenue Notes Receivable Taxes Payable Rent Revenue Interest Expense Inventory Deferred Depreciation Revenue Expense Prepayments Bonds Payable Advertising Expense Long-term Income Tax Investments Expense Equipment Buildings Land Intangibles • Assets are listed in order of liquidity • Liabilities are in order of time to maturity • Higher the ratio, the more that a company relies on external financing for their business rather than investments from investors/shareholders Chapter 3 Saturday, October 05, 2013 2:59 PM Accrual Accounting: • Revenues are recognized when they are earned • Expenses are recognized when they are incurred Revenue Principle: • Revenues are recognized when: 1. The significant risks and rewards are transferred to the buyer 2. It is probable that future economic benefits will flow to the entity 3. The benefits and the costs associated with the transaction can be measured reliably • Expenses are recorded as incurred, regardless of when cash is paid Transaction Analysis Rule: • Revenues increase profit ○ This increases retained earnings, and shareholders equity ○ These accounts have credit balances • Expenses decrease profit ○ This decreases retained earnings and shareholders' equity ○ Expenses have debit balances (increase an expense you debit the account) • When revenues exceed expenses, the company reports profit ○ Increasing retained earnings and shareholder's equity ○ When expenses exceed revenues, a loss results that decreases retained earnings and shareholders' equity Recording revenues results in either an increasing assets or decreasing liabilities. • Expenses are recorded when they are incurred to generate revenue during the same period • Assets are reported at amounts that represent the probably future benefits remaining at the end of the period • Liabilities are reported at amounts that represent the probable future sacrifices of assets or services owed at the end of the period Types of Adjustments: • Deferred revenues: cash received in advance of the service/good being delivered • Accrued revenues: revenues that were earned but not recorded because cash was received after • Deferred expenses: previously recorded assets when cash was paid in advance • Accrued expenses: expenses incurred but not recorded because cash was not paid Adjustments entries always include one account on the financial position and one on the income statement. • Adjustments never include cash Chapter 4 Monday, October 07, 2013 10:00 AM Statement Relationships among Elements of the Statements Income Statement Revenues + Gains - Expenses - Losses = Profit Statement of Changes Beginning Retained Earnings + Profit - Dividends = Ending in Equity Retained Earnings Statement of Financial Assets = Liabilities + Shareholders' Equity (Share capital + Position Retained Earnings + Components (Cash) Statement of Cash Change in cash (operating, investing, and financing activities) Flows Income Statement: • Prepared first because profit is a component of retained earnings • Used to calculate earnings per share (EPS) Statement of Changes in Equity • Profit from the income statement is carried forward to retained earnings • Dividends deduct, and share capital adds to shareholder's equity Statement of Financial Position: • Share capital, retained earnings and other components are used • Accumulated depreciation is at the end of month value Use income summary account to close revenue, expense, profit, and dividend accounts • Balance of income summary must be then closed to the appropriate accounts Chapter 7 Monday, October 07, 2013 10:42 AM Differences between Bank/Company Balances: • Outstanding cheques • Deposits in transit ○ Deposits made one/two days before recorded statement ○ Compared deposits listed on bank statement with company deposit records • Bank service charges • NSF charges • Interest • Errors Ending cash balance per books $xxxx Ending cash balance per bank statement $xxx + Collection by banks xx + Deposits in transit xx - NSF cheques/Service charges xx - Outstanding cheques xx Ending correct cash balance $xxx Ending correct cash balance $xxx Chapter 8 Thursday, October 31, 2013 11:54 AM Merchandise inventory: inventory that has been purchased by a retailer in a finished condition Cost of Sales: number of units sold, times the cost per unit Cost of goods available: value of inventory + value of purchases +Beginning Inventory +Purchases of merchandise during the year =Cost of goods available for sale -Ending inventory____________________ =Cost of sales Perpetual Inventory System: • Units and cost of the beginning inventory • Units and cost of each purchase • Units and cost of the goods for each sale • The units and cost of the goods on hand at any point in time Periodic Inventory System: • Companies do not maintain an ongoing record of inventory during the year • Inventory is measured at the end of the accounting period Error Understatement of Ending Inventory: Year of the Error Following Year Beginning Inventory NE U Ending Inventory U NE Cost of Sales O U Gross Profit U O Profit before Income Tax U O Income Tax Expense U O Profit U O Retained Earnings U NE Specific Identification Method: • Co
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