Financial Cycle ACCTG 432

Worksheets

Companies use as a helpful tool when preparing adjusting entries, trial balances, and preliminary financial statements. If a firm uses the worksheet, it does not have to prepare separate unadjusted and adjusted trail balances. -The best way to understand worksheets is to look at the format with numbers included and then do one! You have a worksheet provided by Perdisco.

Trial Balances Unadjusted

Copy the balances from you manual general ledger to the unadjusted columns in the excel worksheet and continue with the instructions per discussion.

Owner's Equity

Residual interest that the sole proprietor, partners, or stockholders have in the assets of the organization after creditors.

Realization

Revenue is realized or realizable when a firm provides a product or service to a customer and it has received cash or something in return that will, or could be converted to cash.

Prepaid Items

Rights to the use of something, or rights to receive a benefit because the firm has already paid for the privilege.

Income Statements

Service firms, merchandisers, manufacturers.

Transaction definition and types

an exchange, a nonreciprocal transfer, an event, or an allocation or allowance. 1. Internal- adjusting and closing entries 2. External- sales to customers; purchases from vendors 3. Allocations- depreciation 4. Allowance- bad debts

Intangible Assets

represent legal rights rather than physical assets. Valued at original cost and amortized, i.e. the cost is allocated rationally to expense. An accumulated amortization account can be used, but it is more common for the intangible asset account to be reduced directly.

Receivables

trade A/R arise from extending credit to customers. Receivables are not always classified as current assets. Notes receivable (N/R) bear interest and are evidenced by a written formal note from the debtor. N/R are current based on the criterion for inclusion in current assets. Employee receivables classified as current or not depending on repayment period. Most Trade receivables are current assets.

Financing Activities

transactions involving the issuance of debt or equity and the payment of dividends. Interest expense is always an operating cash outflow.

Subscription Revenue

the adjusting entry depends on how the original transaction was recorded. Assume a $1,200, 12 month magazine subscription paid. The subscription begins with the August issue.

Prepaid Insurance

the adjusting entry depends on how the original transaction was recorded. Assume a one-year policy paid in advance on April 1, 2003.

Investing Activities

the idea is those cash flows associated with investments in assets, i.e. tangibles, intangibles, financial instruments, in hopes of returns on those assets.

Operating Activities

the profit-making transactions of the firm, i.e. cash inflows and cash outflows associated with the primary operating activities of the firm. We consider for this course that interest and taxes are operating cash flows.

General Ledger

this ledger allows managers to check the balance in any account. Note the structure of the ledger page. Discuss. The accounts receivable account balance at the general ledger level would not answer the question "what is the balance in a particular customers' account?" -This is also called the book of final entry

Inventories

supplies, merchandise for resale, raw materials, work-in-process, finished goods.

There are two types of journals:

1) The general journal- use this to journalize any transaction which does not "fit into" a special journal, transactions like adjusting entries, closing entries, correcting entries, etc. 2) Various special journals- sales (credit sales only), purchases (credit purchases only), cash receipts, cash disbursements, and payroll. (there could be others)

The direct method of calculating operating cash flows

1. Cash receipts from sales = Sales (+ a decrease in A/R OR - an increase in A/R and - a decrease in unearned revenue OR + an increase in unearned revenue) 2. Cash payments for purchases of inventory = COGS (+ an increase in inventory OR- a decrease in inventory AND + a decrease in A/P OR - an increase in A/P) 3. Cash payments for other operating expenses = Operating expenses (- depreciation and other non-cash expenses AND + an increase in prepaids OR - a decrease in prepaids AND + a decrease in accrued liabilities OR - an increase in accrued liabilities) 4. Cash payments for income taxes = Income tax expense (+ a decrease in Taxes payable OR - an increase in taxes payable)

Liabilities

1. Current liabilities- those obligations that come due within one year or the operating cycle whichever is longer. Accounts payable, short-term notes payable, unearned revenue, current maturities of long-term debt. 2. Long-term- All liabilities that are not current Mortgages. Accounts like bonds, LT N/P

Types of Special Journals

1. Sales Journal- credit sales only 2. Purchase journal- credit purchases only 3. Cash receipts- all business cash inflows 4. Cash payments (disbursements)- all business cash outflows 5.Payroll- all checks and withholdings for employees

Indirect Method for Calculation Operating Cash Flows

A. Begin with Net Income B. Add back non-cash expenses- depreciation, amortization, depletion. C. Add back losses D. Subtract gains E. Adjust for changes in current assets 1. Subtract increases . 2. Add decreases F. Adjust for changes in current liabilities 1. Subtract decreases 2. Add increases

Purpose of Cash Flow Statement

A. Explains the change in cash from one B/S to the next B/S B. Helps statement users assess the LIQUIDITY and SOLVENCY of a company 1. Liquidity- the ability to generate cash 2. Solvency- the ability to pay debts as they come due

The steps in the accounting cycle

A. Prepare journal entries in the general or special journals B. Post to a ledger and sub-ledger (if appropriate) C. Prepare the unadjusted trial balance D. Prepare adjusting entries E. Post adjusting entries F. Prepare an adjusted trial balance G. Prepare financial statements H. Prepare closing entries I. Post closing entries J. Prepare an Excel post-closing trial balance

The Balance Sheet

Assets = Liabilities + Stockholders' Equity

Matching

Expenses are recorded in the same period as respective revenue where feasible. Otherwise, a rational allocation or allowance method is used to recognize various costs, or costs are expensed immediately in the period incurred if no rational allocation method exists.

Special Journals

Many firms have multiple repetitive transactions that deserve their own special place. This is the purpose of a special journal. It provides that special place where voluminous, repetitive, like transactions can be grouped. This eliminates the necessity of journalizing and posting individual transactions from the general journal to the general ledger. -Special journals contain these like transaction entries in chronological order, as well. See special journals and discuss formats.

Recognition

Physically recording a transaction in the accounts that will ultimately emerge in the financials statements.

Operating Cycle

The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash.

Control Accounts

The general ledger account "accounts receivable" is the control account for the A/R sub-ledger. The sum of the individual customer account balances must equal the summary balance in the G/L control account after all posting.

Subsidiary Ledgers

To answer the above question, a firm can employ subsidiary ledgers. These ledgers maintain detailed records of underlying customers, suppliers, etc. Managers can ascertain balances in individual customer or supplier accounts by looking at the respective balances in a sub-ledger account.

I/S for Merchandisers

Typically a multiple-step format i.e. net sales, subtract cost of goods sold to arrive at gross margin or gross profit. Operating expenses listed next, then other revenues and gains are added and other expenses and losses subtracted to arrive at income(loss) before income taxes. Subtract income taxes to arrive at net income(loss). If the firm is a corporation then earnings(loss) per share must be reported on the face of the income statement. b. Cash discounts: examples 2/10, n 30 2/15,n EOM c. Net sales = gross sales - sales discounts - sales returns and allowances d. Cost of goods sold = beginning merchandise inventory + net purchases + transportation in = (cost of goods available for sale) - ending merchandise inventory i. Net purchases = all purchases - purchase discounts - purchase returns and allowances. (purchase discounts expressed like sales discounts, but offered to the firm as the customer) e. Operating expenses and losses- typically broken down into administrative and selling expenses. i. Selling expenses includes wages of the sales staff, commissions, advertising, and marketing expenses. ii. Administrative expenses include things like transportation out, other administrative wage and salary expense, depreciation, legal expenses, etc. f. Other revenues and gains- interest revenues and gain on the sale of investments or PP&E. g. Other expenses- interest expense and losses on the sales of investments or PP&E. h. Earnings(loss) per share- for now we will assume this is net income(loss) available to common stockholders divided by the number of weighted average common shares outstanding. i. at this point net income minus preferred dividends = income available to common stockholders

Chart of Accounts

We record transactions in accounts, i.e. asset, liability, equities, revenues, etc. Firms enumerate these accounts in what is called a "chart of accounts". There is a schema to the chart like Assets- 100's; Liabilities- 200's, Equities- 300's; Revenues- 400's; etc. Revenue, expense, gains, losses, dividends (drawings), and the income summary are temporary accounts, i.e. these are closed at period end. Assets, Liabilities, and OE are real (permanent) accounts, i.e. they are not closed in the closing process. Contra-accounts have normal balances opposite of their related accounts, i.e. accumulated depreciation reduces its related operating asset account and its normal balance is a credit.

Treasury Stocl

a company's own stock that was repurchased in the market and not retired.

T-Account

a pictorial representation of an account. The left side is the debit side and the right side is the credit side.

Transaction Processing

all the activities that convert data about transactions for a firm into financial statements.

Current Assets

an asset that can be converted to cash or consumed within the operating cycle or one year, whichever is longer. Most businesses one year, not distilling or ship building

Periodicity Principle

accounting reports should be prepared on a periodic basis like once per year, quarter, month, etc.

Retained Earnings

beg. R/E + net income or - net loss - dividends

I/S for Service Firms

consists of revenues, gains, expense, and losses a. Format is mostly single step- i.e. all revenues and gains listed first, then all expenses and losses. Examples of service firm revenues, gains, expenses, and losses

Partnership equity

consists solely of the partners' capital accounts.

Corporate Equity consists of:

contributed capital: common stock, preferred stock, APIC common, APIC preferred, i.e. investments by owners. Preferred stock has a par value and holds preference in dividends and liquidation over common stockholders. Common stock can have a stated, par, or no-par value. Par, stated, or no-par is shown in the balance sheet along with the number of authorized, issued, and outstanding shares of preferred (if issued) and common.

Sole Propreitors

equity solely of the proprietor's capital account

Investments and Funds

firms sometimes invest in stocks, bonds, or other securities of other entities. These go in the investments and funds section of the balance sheets. a. includes cash set aside for a specific purpose and long-term receivables b. All other investments not trading or held to maturity. Valued at fair market value at the balance sheet date. Would be current assets if intention is to sell within one year or the operating cycle whichever is longer. c. Held to maturity- bonds or other debt instruments that management intends to hold until maturity. Valued at historical or original cost. Would be current assets if maturing within one year or the operating cycle whichever is longer.

Trading Securities

investments in stock, bonds or other instruments of another entity that management intends to sell in the near future. These are always classified as current assets. T/S Valued at fair market value at the balance sheet date.

Adjusting Entries

never impact cash, always at least one I/S and one B/S account.

PP&E

physical (tangible) assets used in the operations of the firm. Examples: a. Land is valued at original or historical cost b. All other disclosed at historical cost less accumulated depreciation, thus displaying these items at book value. (This is not a measure of PP&E market value, rather, depreciation is a rational allocation process that matches the cost of the asset with the revenues that those assets help to generate over time).

Payroll Checking Account

referred to as an imprest account because it is then increased to a certain amount for each pay period, and reduced by the employees cashing their paychecks.