MGT120H5 Final: MGT120 Exam Review 2017

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Catherine Seguin

MGT120 EXAM REVIEW • Accounting – information system that measures business activities, reports data into reports, and communicates results to decision makers • Financial statements – reports companies use to understand the firm’s stance, including managers, creditors, investors, government, etc. o Income statement: Revenue – expenses (income tax expense, depreciation expense, salary expense), net income o Statement of retained earnings: Beginning retained earnings, adding net income, subtracting dividends, resulting in ending retained earnings o Balance sheet: Assets (cash + accounts receivable + supplies + furniture + land + less accumulated depreciation) = Liabilities (accounts payable + salary payable + unearned service revenue) + Shareholders equity (common shares + retained earnings + dividends) o Cash flow statement: Operating activities – investing activities + financing activities + net increase in cash + beginning cash balance = cash balance • 2 types of accounting: financial (external), management (internal) • Business: proprietorship, partnership, corporation • General Accepting Accounting Principles (GAAP) – specifies standards of how accounts record, measure, and report financial info • Publicly accountable enterprises (PAE) – firms that issue shares or debt in public markets must follow International Financial Reporting Standards (IFRS) • Private enterprises which do not issue shares must follow Accounting Standards for Private Enterprises (ASPE) Fundamental Qualitative Characteristics - relevance, faithful representation, comparability, verifiability, timeliness, understandability Assumptions Underlying the Conceptual Framework 1. Going concern – expects the firm to continue operating normally in the future 2. Separate entity – business activities are separate from activities of owners 3. Historical cost – assets should be recorded at their actual cost a. Fair value – amount the business should sell the asset for 4. Stable monetary unit – value of currency must be stable and accurate • Current assets/liabilities – within 1 year • Carrying amount – original cost net of accumulated depreciation Assets Liabilities Shareholder’s Equity Expenses Dividends Revenues MGT120 EXAM REVIEW • Cash basis accounting – transactions are recorded when cash is received or paid • Accrual accounting – revenues are recorded when earned, expenses are recorded when incurred regardless of when cash is received or paid • Accounting Cycle 1. Transaction occurs 2. Analyze the transaction 3. Record in a journal 4. Transfer to a general ledger 5. Trial balance • Double-entry bookkeeping - uses debits and credits to record the dual effects • Revenue principle – 1) When to record revenue 2) Amount of revenue to record • Expense principle – 1) Identify all expenses 2) Measures expenses and record Accounting Adjustments • Deferrals – prepaid items are an asset, unearned revenues are a liability • Accruals – expenses incurred, revenues are earned from collecting • Depreciation – allocation of the cost of a property, plant & equipment Closing the Accounts • Permanent account - (assets, liabilities, and shareholders’ equity) are not closed at the end of the period because their balances are not used to measure income • Closing entries - transfer the revenue, expense, and dividend balances to retained earnings • Net working capital = total current assets – total current liabilities • Current ratio = current assets / current liabilities • Debt ratio = total liabilities / total assets • Fraud - intentional misrepresentation of facts, made for the purpose of persuading another party to act in a way that causes damage to that party o Misappropriation of assets o Fraudulent reporting • Internal control – plan of organization and system of procedures designed and to deal with risks to the business Objectives of Internal Control • Safeguard assets • Encourage employees to follow policy • Promote operational efficiency • Ensure accurate, reliable records • Comply with legal requirements • Sarbanes-Oxley Act (SOX) – regulated corporate governance by securities Components of Internal Control • Control environment • Control procedures • Risk assessment • Monitoring of controls • Information system MGT120 EXAM REVIEW Internal Control Procedures 1. Smart hiring practices – each person in the information chain is critical 2. Separation of duties – separating asset handling, recording, and transactions 3. Proper monitoring – controls must be frequently overlooked 4. Adequate records – providing sufficient details of transactions 5. Limited access – should limit assets to only the team person responsible 6. Proper approvals – management must approve each transaction 7. Information technology – can increase efficiency of the firm like passwords 8. Safeguard controls – keeping important documents in vaults and safes Internal Controls for E-Commerce • Encryption – converting info into a code to prevent unauthorized access • Firewalls – barriers to prevent hacking Problems • Stolen credit cards numbers – are used in fraudulent activity • Computer viruses – Trojan horse is a malicious computer program • Phishing – creating bogus websites to attract people and steal information Internal Controls Limitations • Colluding – employees working together to deceive the firm • Complexity – if the system is overcomplicated it can be inefficient Bank Reconciliation 1. The company’s cash account on its own books 2. The bank statement showing actual amount of cash in the bank • Signature card – bank requires each person to sign against forgery • Deposit slip - customer keeps a deposit receipt • Cheque – serves as remittance advice and proof • Bank statement – is an electronic funds transfer (EFT) showing multiple things Controlling and Managing Cash • Cash receipts • Cash payments • Cash budget - financial plan helping coordinate business activities over a period o Beginning cash, + receipts - the cash payments, beginning balance + expected receipts – expected payments = cash balance at end of the period, compare the expected cash balance to the budgeted balance • Cash equivalents - include liquid assets such as treasury bills • Short-term investments - investments held for one year or less • Held for trade investment – holding for a short period of time and selling for more • Fair value – amount a buyer is willing to pay to acquire an investment • Unrealized gain – sales price > carrying amount • Unrealized loss – sales price < carrying amount Accounting for Uncollectible Receivables • Benefit – customers who can’t pay cash can buy on credit, so sales increase • Cost – firm will be unable to collect from some customers buying on credit • Bad debt/uncollectible account expense - expense on the income statement MGT120 EXAM REVIEW • Allowance method records collection losses on the basis of estimates, not waiting to see which customers will pay • Allowance for Uncollectible Accounts - shows amount of receivables expected to not to be collected o Journal entry: Dr Uncollectible-account expense Cr Allowance for uncollectible accounts • 2 Ways to Estimate Uncollectibles: o Percentage of sales – computes uncollectible account expense as a percentage of revenue o Aging of receivables – balance sheet approach because it focuses on accounts receivable • Writing off uncollectible accounts – determines they can’t collect from a customer o Allowance for uncollectible accounts………. 2,300 ▪ Accounts receivable……………………………….2,100 ▪ Accounts receivable…………………………………200 o Wrote off uncollectible accounts. • Direct write off method – decides that a customer’s receivable is uncollectible o Bad debt expense …………………2,000 ▪ Accounts receivable…………………..2,000 o Wrote off uncollectible account by direct-write off method. ➢ This method 1) does not set up an allowance for uncollectibles so assets are overstated 2) causes a poor matching of uncollectible account expense, overstating net income • Notes receivable are more formal where the debtor signs a promissory note o Principal x interest rate x time = amount of interest Speeding up Cash Flow • Credit card sales – merchant sells and allows customer to buy with their money • Debit card sales – customer uses their debit card to pay with their bank of choice • Selling receivables – firm sells its receivables to another business (factoring) • Sales discount – offers customers a discount if they pay immediately Evaluating a Company’s Liquidity • Current ratio = total current assets / total current liabilities • Acid test ratio = cash + short term investments + net receivables/current liabilities • One days’ sales receivable = net sales / 365 days Net income = sales revenue – cost of goods sold = gross profit – expenses Inventory = number of units of inventory on hand x cost per unit of inventory COGS = number of units of inventory sold x cost per unit of inventory • Periodic inventory system - does not keep a continuous record of on hand o Used for all types of goods, inventory counted once a year • Perpetual inventory system – maintains a running record of all inventory on hand o Used for cheap goods, inventory counted once a year MGT120 EXAM REVIEW Periodic System Perpetual System Purchases…………….600,000 Inventory……………...600,000 Accounts payable…………..600,000 Freight in……………...4,000 Accounts payable…………..600,000 Inventory………………4,000 Accounts payable……………..4,000 Accounts payable……………...4,000 Accounts payable…….25,000
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