Accounting

if owners of stock sell their shares in secondary market, the business has no transaction bc it had no involvement in it.

"issued 100 saures at par value $2 and received $345 cash" Dr. Cash Cr. CS = 200 cr. APIC = 145 USE APIC TO BALANCE

recording depreciation expense:

-A +EXP - NI -SE no affect on cash cash is not assets no cash involved in depreciation

4 assumptions of GAAP

1. Separate entity assumption - transactions of the business are accounted for separately from transactions of the owner 2. continuity assumptions -a business is expected to continue to operate into the foreseeable future 3. stable monetary unit assumption - financial information is reported in the national monetary unit (dollars) without being adjusted for inflation

DURING THE PERIOD

1. analyze transactions 2. record journal entries in journal 3. post amounts in T accounts in ledger

RRP

1. delivery has occurred / service has been rendered ex. an order online is not a Rev. until it has been shipped 2. evident of payment arrangement 3. fixed / agreed upon price 4. collection is reasonably assured - customer can pay the bill

which of the following does NOT properly describe the accrual basis of accounting

1. expenses are recognized when incurred regardless of timing of cash flows TRUE 2. revenues are recognized when incurred regardless of timing of cash flows True 3. GAAP requires use of accrual True a4. it should not be used when providing financial statements to external decision makers FALSE ----needs to be used

Matching Principle

1. expenses must e recorded in THE SAME PERIOD as the revenues that caused them ex. when you sell a product: dr. accounts receivable cr. sales revenue AND dr. cost of goods sold cr. inventory 2. expenses have to be recorded in the same period they were incurred regardless of timing of cash payment ex. ) if you receive a bill but don't pay it until next month you still have to record it in this month -*when you get the bill dr. utilities expense cr. accounts payable -*when you pay the bill dr. accounts payable cr. cash -* when you prepay the bill dr. prepaid rent cr. cash -* when you use/incur/expire/consume what you prepaid for: dr. rent expense cr. PREPAID RENT

Russel company annual acct. period ends Dec 31 for each transaction that requires an adjusting entry at EOP you are to provide the adjusting entries required for Russel Co. no adjusting entries have been made during the year. if no entry is required state the reason why

1. on Dec 31 RC owed employees 3750 for wages that were earned by them during december and were not recorded dr. wages expense 3750 cr. salaries payable 3750 2. during december, RC purchased office supplies that cost 1,000 which were placed in the supplies room for use as needed. the 2015 purchase was recorded as follows: dr. office supplies inventory 1000 cr. cash 1000 at January 1, the beginning balance of unused office supplies was 300. at december 31 a physical count showed unused office supplies amounting to 100. 3. on December 1 RC rented some office space to another party and collected 900 for rent for the period December - March. the rent collected was recorded as follows: dr. cash 900 cr. unearned rent revenue 900 whats the AJE dr. unearned rent rev 300 cr. rent revenue 300 * 1 month used up 4. on August 1 RC borrowed 2,000 cash on a one-year, 8% interest bearing note payable. the interest is payable on the due date May 31. the note was recorded as follows Aug. 1 dr. cash 2,000 cr. notes payable 2,000

Accounting Cycle

1. original transactions 2. analyze 3. record in gen journal as journal entry 4. post in gen ledger to T-accounts 5. compute ending balances in T-accounts 6. make trial balance 7. EOP Adjustments (redo steps 2-6) 8. prepare financial statements 9. Report, I/S, O, B/S, CF

the big four

1. received cash first - before performed /earned 2. paid cash first 3. received cash second - 4. paid cash second

4 principles of accounting under GAAP

1. revenue recognition principles 2. matching principle 3. Historic Cost

Bill and Chad organized ABC corps on January 1 2015 each of these owners invested 100,000 cash and received shares of stock

1. sold stock to the owners dr. cash 100,000 cr. Common Stock 100,000 2. borrowed 80,000 on a one-year not payable dr. cash 80K cr. notes payable 80k 3. purchased land by signing a 70,000 8% note payable and paying cash of 20,000 dr. land 90,000 cr. cash 20,000 cr. notes payable 70,000 4. paid 10,000 of accounts payable dr. accounts payable 10k cr. cash 10k 5. purchased a service vehicle and paid 24,000 cash Property Plants Equipment 24k cr. cash 24k 6. purchased 20,000 of inventory on credit dr. inventory 20K cr. account payable 20K 7. paid dividends of 10,000 to each of three investors dr. Retained Earnings 30k Cr. Cash 30k

Financial Statements

4 I/S O B/S CF objective: provide useful economic info about a business to investors and creditors must follow GAAP - 4 assumptions - 4 principles

AT END OF PERIOD

4. prepare a trial balance to determine if debits=credits 5. adjust revenues and expenses and related B/S accounts - record adj in journal and post them to ledger in t accounts 6. prepare an adjusted trail balance 7. prepare a complete set of financial statements 8. close revenues, gains, expenses, losses to Retained Earnings ---- record in journal and Post to ledger

during 2016, sigma earned service revenues amounting to 700,000 of which 630k was collected in cash. the balance will be collected in january 2017. what amount should the 2016 Income statement report for service revenues?

700,000 Dr. cash 630k dr. AR 70k Cr. Revenue 700k

A= L +SE

Always make sure that matches up

Zone rendered services amounting to 20,000 during 2015. the related cash was collected as follows: 16,000 in 2015 4,000 in 2016 during 2015 8,000 was incurred in wages expense, 6,000 paid in 2015 2,000 paid in 2016 In 2015 Zone declared dividends of 5,000 and paid the dividends in 2016

Assuming CASH BASIS ACCOUNTING *record when cash is collected/paid in 2015: revenue 16,000 expense 6,000 net earnings = 10,000 in 2016 revenue 4,000 expense 2,000 net earnings = 2,000 Assuming ACCRUAL BASIS ACCOUNTING *record when expenses incurred and revenue earned in 2015 revenue 20,000 expenses 13,000 { expenses +dividends} net earnings = 7,000 in 2016 revenue 0 expenses 0 net earnings = 0

Financial leverage ratio

Avg total assets / avg SE

BASSE

B + A = S -S = E beginning balance + additional = subtotal - used (Dead dogs) =ending balance(alive dogs)

Permanent accounts

B/S a = l +se never close

Stockholders Equity

Common Stock Additional Paid in Capital Retained earnings Contributed Capital Always record CS at par value, the difference btwn the cash received and the CS is the APIC NI gets closed into RE dividends come out of retained earnings

accumulated Depriciation

Contra account XA to assets credit balance

an audit guarantees that the financial statements are free of all misstatements

FALSE an audit would catch those if there were misstatements not guarantee.

the payment of a cash dividend to stockholders increase stockholders equity

FALSE dividends are paid out of RE, it decr. SE

accounts which start a new accounting period with zero balances are referred to as temporary accounts and include both balance sheet and income statements

FALSE only I/S has temp accounts

the accounting period in which service revenue is recognized is generally the period in which the cash is collected

FALSE revenue recognized when earned

revenue and expense accounts are often called permanent/ real accounts bc their balances are closed out at the end of the acct. year

FALSE they are temporary accounts bc they close out

salary expense is recognized on the income statement when the salaries are paid rather than when the employee provides the services

FALSE when incurred

a primary objective of accounting is to disclose the fair market value of assets on the balance sheet so investors and creditors know their current value.

False historic cost principle

gross margin

GM = revenue - cost of goods sold GM- Operating expenses = Pretax income

temporary accounts

I/S R-E=NI close at EOP

credit balance

Liabilities, SE, Revenue

Earnings per share

NI/ #outstanding shares put at the bottom of I/S or in notes

return on equity ratio

NI/ Avg. SE

Net profit margin ratio

NI/ Net sales (operating revenue)

Total Asset turnover

Net sales (or operating revenues) / Avg. total Assets

Cash based accounting

Opposite of accrual - GAAP requires accrual only record transactions when cash is collected or paid

Liabilities

Owed written in order of maturation current to Non current accounts: accounts payable accrued expenses payable notes payable taxes payable unearned revenue deferred revenue bonds payable dividends payable key words: payable, unearned

Interest

Principle amount * Annual int rate * #months/12 accrued expense based on amount you borrowed and how much time has passed and annual interest rate - use equation -then record: dr. interest exp. cr. interest payable

larson company ends recent yr with 3,500,000 in RE. during the year, Larsons net income exceeded its dividend declarations by 200,000. parsons dividend declarations were 25,000 greater than dividend payments how much was larson companies beginning retained earnings?

RE = beg balance + NI - Divdends 3,500,000 = beg bal +

Retained Earnings

RE = beginning RE + NI from prev period - dividends

affect of accruing income tax expense

RE decr. because expenses Incr, NI decr, so RE decr. domino affect

what is the affect of accruing income tax expense at year end?

RE decrease

Revenue

Sales revenue fee revenue interest revenue rent revenue service revenue earned, performed, sold, service provided Rev = #units sold X unit price

income takes incurred but not paid for at the end of the accounting period is an example of an accrued expense in adj entry

True

earned but not collected or used but not paid for

accrued

dr, interest expense cr. interest payable

accrued expense

dr. salaries expense cr. salaries payable

accrued expense

debit balance

assets, expenses

Adjusting entries

at the end of the period 1. record any transactions that you failed to record earlier in the period 2. record any transactions that have accrued over times ---accrue = build ---> ex. interest 3. record any unearned revenue that has now been earned AND any prepaid expenses that have expires -- shows how you've used/consumed PAY ATTENTION TO time and time passed!!!! don't kill the dead dogs Time is essential for something to accrue 4 types of adjusting entries: 1) Deferred Revenue: cash collected: shows what you've performed by the end ex. 7/6: dr. cash cr. unearned revenue 12/6: dr. unearned revenue cr. cash 2) accrued Revenue no cash collected for performance ex. no OG entry 12/6: dr. AR cr Rev 3) deffered expenses cash paid: hows what you've used - use for depreciation 7/6: dr. prepaid expense cr. cash OR dr. supplies cr. cash 12/6: dr. advertising expense cr. prepaid expense OR dr. supplies expense cr. supplies OR dr depreciation expense cr accumulated depreciation 4) Accrued Expense no cash paid Interest: 7/6: dr. cash cr. notes payable 12/6: cr. interest expense dr. interest payable **cash never involved in adjusting entries

book value

book value = historical cost of asset - accumulated depreciation

deffered

cash

Expenses

cost of goods sold wages expense rent expense interest expense depreciation expense advertising expense insurance expense repair expense Income tax supplies used - supplies expense cost of business, cost of goods sold = #units sold x unit cost Price does NOT equal cost

Trial balance

debits must = credits list all account endings from t accounts as credits and depots at end, total the columns Dr = Cr.

unearned and paid for or prepaid but not used

deferred

defferred

deferred = unearned you've already collected money you've already paid cash has been transacted put off/delay revenue until services performed, measures how much work has been completed by EOP and adjust the entry focused on updating previous journal entries now that time has passed

dr. depreciation expense cr, accumulated depriciation

deferred expense **depreciation is deferred!

Adjusting entries that INCR. Expenses

deferred expenses - previously recorded assets such as prepaid rent, supplies before use, equipment etc.. were created when cash was paid in advance and must be reduced for the amount of expense incurred during the period thru use of the asset accrued expenses - expenses that have been incurred but not yet recorded because cash will be paid after the goods/services are used *cash will be paid

Adjusting entries that INCR. Revenues

deferred revenues - previously recorded liabilities that were created when cash was received in advance and that must be reduced for the amount of revenue earned *when cash received and previously recorded BEFORE revenue earned Accrued Revenues - revenues that have been earned but not yet recorded because cash will be received after services performed or goods delivered *cash will be received

depriciation

depreciation is an Expense the value that your asset has lost over time depreciation = (cost - residual value) / # years Dr, depreciation expense cr. accumulated depreciation we can never credit long lived assets unless we sell completely --they must remain in books at historical cost ------we can only show depreciation

Bones cleaning service performed cleaning services during december 2015 but had not collected any cash from its customers as of december 31. what impact did performing these services have on the accounting equation?

dr. accounts receivable (+A) cr. Service Revenue( +R, +NI, +RE)

collected cash from customers on account

dr. cash cr. acct. receivable

accrued revenue

ex. interest on investments -- investments earned interest during period but not recorded until received dr interest receivable cr, Investment income Revenue

deferred revenue

ex. unearned rev --- now earned so adjust

deferred expenses

ex. supplies dr. supplies expense cr. supplies Supplies used during the period: = beg balance of supplies+ supplies purchased in period = unadjusted balance - supplies on hand at EOP= supplies used in period ex. Prepaid expenses - usually Rent, insurance, advertising how to compute how much of an expense was used: = Prepaid amount x (# months used/ months paid for) ex. Depriciaton - property and equipment dr. depreciation expense cr. accumulated depreciation

the accounting period in which you should record operating revenues is in the period in which cash is collected

false record when earned

report

financial statements

record

gen journal

post

gen ledger

Net Income

if R> E then net income if R < E then net loss gets closed into RE at the end of the period bc you reinvest that money into the business

Time period assumption

indicates that the long life o a company can be reported in shorter time periods such as months, quarters, years

when you buy stock in another company

its an investment investments are assets

accrued expenses

liability account

current assets are listed on the B/S By...

liquidity cash always first

accrued

no cash

dr. cash cr. revenue

not an expense

non current assets

not sold/converted into cash within a year PPE Land buildings patents copyrights long term investments intangibles

Assets

own written in Order of Liquidity current to concurrent accounts: cash investments prepaid expenses accounts receivable notes receivable inventory store fixtures supplies Property Equipment land buildings Goodwill Intangibles key words: prepaid, investments, receivable

Accrual accounting

recognize revenue when earned, regardless of time when collected Revenue is NOT cash must use under rules of GAAP you can either: 1. Dr. accounts receivable cr. revenue 2. dr. cash cr. revenue 3. * when customer prepays dr. cash cr. Unearned revenue (liability) * once service performed dr. unearned rev, (remove the liability) cr. service revenue ( recognize rev.)

Accrued

recording transactions that were failed to be recorded earlier

prepaid expenses

rent advertising insurance don't kill the dead dogs

gross profit

sales revenue - cost of goods sold

current assets

sold/ covered to cash within a year cash accounts receivable short term investments prepaid expenses inventory supplies

operating (cash to cash) cycle

the time it takes for a company to pay cash to suppliers, sell goods and services to customers, and collect cash from customers ---the faster the better typical operating cycle - purchase goods and services on credit -pay cash to supplies -sell goods and services to customers -receive cash from customers

Current Ratio

total current assets / total current liabilities

an auditor who fails to detect a material misstatement of a business's financial statements may be sued by anyone who suffered a loss from relying on financial statemetns

true

application of generally accepted accounting principles requires that accrual basis accounted to be used for the income statement

true

income taxes incurred but not yet paid for at end of accounting period is an example of an accrued expense

true

recording revenues results in an increase in Assets or a decrease in liabilities

true

the current ratio is calculated by dividing total current assets by total current liabilities

true

the deferred expense such as prepaid insurance is created when cash is paid in advance of the expense incurred and is reduced when the expense is actually incurred

true

the historic cost principle measures assets and liabilities at the historical cash-equivelant amounts

true

the operating cycle is the time it takes for a company to purchase goods, pay for the goods, sell them to customers, and collect the cash from customers

true

the operating cycle is the time it takes for company to purchase goods, pay for the goods, sell them to customers, and collect cash from customers

true

unearned revenue is reported on the balance sheet as a liability account and represents amounts paid to an entity for which the entity has an obligation to provide future services/goods

true

earnings per share must be either reported on the face of the IS or disclosed in the notes to the F/S

true EPS= NI/#outstanding shares

rent of 4,000 collected in advance was recorded as unearned rent revenue. at the end of the accounting period, half the rent was earned. the related adjusting journal entry should be a credit to rent revenue for 2,000 and a debit to unearned revenue for 2,0000

true dr. unearned rev 2k cr. rent revenue 2k

current liabilities

will be paid in less than a year accounts payable accrued expenses taxes payable dividends payable short term debt

non current liabilities

won't be paid in less than a year notes payable bonds payable long terms debt

closing the books

zero out revenues and expenses by crediting or debiting them make a closing journal entry