MGT 8803 - Accounting
investing activities
buying and selling long-term assets (land, building equipment)
straight-line
method of depreciation where the cost of the asset is allocated equally over the periods of an asset's estimated useful life
accelerated
method of depreciation where you record more depreciation expense in earlier years (and less in later years) [usually because assets become obsolete and lose productivity; or matching principle because generate more revenue in earlier years; or more repairs & maintenance in later years]
direct
method that explicitly states where the cash came from and where the cash went to
indirect
method that starts off with the company's net income from the income statement, and it makes some adjustments to get to the cash flow from the operating activities
liabilities
obligations owed to creditors (money, goods/services)
Owner's Equity
residual interest of owners to assets
unit of measurement
the currency in which the company is operating
Depreciation, Depletion, Amortization
the three names for the process of cost allocation that assigns the cost of the asset to the periods benefited
capitalization
treating something as an asset, rather than as expense
sum-of-years-digits, double declining balance
two methods of accelerated depreciation
capital stock
what the company received when selling shares of its stock
materiality
Assumption that the only information that needs to be disclosed in financial statements is information that will be useful for those who rely on the financial statements to make decisions
separate entity
Assumption that we treat the business and the owners as separate entities, focusing on the accounting for the businesses, not the owners.
independent, GAAP, unqualified, modified, adverse
Audits: • Issued by ______________ CPA firms. • CPAs attest to conformity with ______________ ("present fairly"). • Financial statement opinion: ______________ (clean), ______________, ______________ (rare: public company would be delisted; even a private company avoids at all cost)
+ Net Income, - Dividends
Beginning Retained Earnings _ _____________________ _ _____________________ = Ending Retained Earnings
+ Net Income, - Dividends, + Issuance of Capital Stock
Beginning Stockholders' Equity _ _____________________ _ _____________________ _ _____________________ = Ending Stockholders' Equity
expense, asset, depreciation, expense
Capitalized Interest: interest is not an _________________recorded right away on income statement but it's an ______________ --> later on with ____________________ --> turned into an _______________)
with recourse
Contingent liabilities from discounting or factoring ____________________________ Example: Co. A sells equipment to Co. B in exchange for N/R Before due date, N/R is discounted at bank with recourse If Co. B defaults, bank can go after Co. A. This contingent liability would just be disclosed in the notes to the financial statements (contingent liability because it is a POTENTIAL liability that is not likely to arise because it is not likely that Co. B will default)
weighted average
Cost Flow Assumption that involves an average cost of all the purchases made, weighted by the number of units.
FIFO
Cost Flow Assumption that presumes that the cost of the merchandise sold is coming from the earliest batches purchased.
LIFO
Cost Flow Assumption that presumes that what's being sold first is the latest purchases that were made.
specific identification
Cost Flow Assumption when we can identify which batch a product came from and determine the cost exactly (i.e. a car dealership)
self-constructed assets
Cost includes all expenditures incurred to build the asset and make it ready for its intended use: • materials used to build the asset • construction labor • share of the general company overhead • capitalized interest (interest paid during the construction period)
conversion to cash, due date
Current Assets have a _____________________ within 1 year Current Liabilities have a __________________ within 1 year
Matching principle, Allowance for bad debts
For Income Statement: __________________ for Bad Debt Expense For Balance Statement: A/R (net) = A/R - _____________________________________
unlimited, taxation, limited, publicly, privately
Forms of Businesses: Proprietorship & Partnership • ____________liability • No ____________ (on the business; the owner, however days pay taxes) Corporation (Shareholders -> Board of Directors -> Top Managers) • ____________ liability • Taxation (corporations pay taxes, shareholders pay taxes on earnings) • Can be ____________ traded or ____________ held.
retained earnings
accumulated earnings less dividends
cash
anything a bank will accept for deposit (checks, money orders, BANK credit card slips) -- NOT the company's cc --> would be an account receivable to the company
Change in cash
+ Investing cash flows + Financing cash flows = ________________________
investing, finance
+ ____________________ cash flows + ___________________ cash flows = Change in Cash
historical, sales, replacement, adjusted
Assets Valuation: • _______________ cost • _______________ value • _______________cost • General price-level _______________ costs
interest rate
A percentage of the principal the maker is charged to borrow money
resources, assets, funding, creditors, liabilities, owner's equity, owners
Accounting Equation. • The left side of the equation represents ________________ of the company, that is the ________________ are the resources. • The right side represents sources of the ________________ provided by the ________________ . The ________________ represent the creditor's claims. • ________________ ________________ represents the sources provided by the ________________ and the owner's claims.
Assets, Liabilities, Owner's Equity
Accounting Equation: _______________ = ________________ + __________________
Sarbanes-Oxley Act of 2022
Act that deals with opinions on internal controls
physical, intangible, legal rights
Assets • ________________ (cash, buildings, inventory, equipment) • ________________ (copyrights, patents, or trademarks) • ________________ ________________ (e.g. legal right to receive payment)
useful, salvage
Determining Depreciation: • Estimate of _____________(intended) life • Estimate of ______________ (residual, scrap) value
potential
Diluted EPS includes actual shares and ________________ shares (ex. from stock options that may be exercised in the future) in the denominator
lower
Diluted EPS will be the same or _____________ than basic EPS
Net Income, Net Loss, # Shares of Stock
Earnings Per Share (EPS) = __________________ (_____________) / ________________________
ordinary, income statement, Capitalized, balance sheet, productive life, capacity
Expenditures on Existing Assets: • ________________ Expenditures: Typically benefit only the period in which they are made (repairs, maintenance, and minor improvements). Expensed on__________________________ • _______________________ Expenditure: Benefit the company over several periods, not just the current one. Capitalized on ____________________ Companies prefer option #2 because they like to postpone expenses --> profits to look as high as possibly early on --> criteria: increase _____________________ or _________________ of asset (i.e. adding wing to building, not just repair)
management
Financial statements are the responsibility of the company's ___________________ and not the CPA
inventory
Goods either manufactured or purchased for resale
Operating Expenses
Gross Margin _ _______________________ = Operating Income
FIFO, LIFO, FIFO, LIFO, LIFO, LIFO
If prices are increasing over time: • If a company wants to record high profits on is financial statements, they will want low CGS; therefore, they would want to use __________ for financial reporting • For tax accounting, a company would want low profits and therefore a high CGS, so they would want to use _____________ With the LIFO Conformity Rule, a company could use _____________ for tax reporting and _____________for financial reporting, but if they want to use _____________ for tax reporting, they must also use _____________ for financial reporting
Discontinued Operations, Changes in Accounting Principles
Income After Taxes +/- ____________________________ +/- ____________________________ = Net Income
Income Tax Expense
Income Before Taxes - ______________________ = Income After Taxes
allowance
Instead of a return, a seller sells, "we'll knock off 20% because of defects that were there"
principal, interest rate, time
Interest = _________________ x _________________ x _________________
Lower of Cost or Net Realizable Value (NRV)
Inventories are reported at the lower of the cost amount or the net realizable value, which is essentially a market value less any selling or disposal costs.
LIFO Conformity Rule
The government has ruled that a company cannot have its cake and eat it too with inventories. They have come up with this LIFO conformity rule: If a company uses LIFO for income tax purposes, it must also use LIFO for financial reporting.
Consolidated Financial Statements, Equity Method, mark-to-market rule
Long-Term Investments: • Ownership of >50% of company's stock --> _________________________________ • Ownership of 20%-50% of company's stock --> _________________________________ Do not recognize dividends when they receive them, but rather they will recognize dividend revenue as it's being earned by the company they're invested in (ex. Sears owns 40% of another company's stock; if the other company had profits of $100,000, then Sears would have to report 40% of that ($40,000) as income from the investment, even if they received no dividends at all from that company) • Ownership of <20% of company's stock --> same as short-term investments (_________________________________)
cost, doubt, replaced
Lower of Cost or NRV: Inventory is reported at less than ____________ when: • the future value of the inventory is in ___________ (damaged, used, or obsolete); or • it can be __________________ new at a price less than the original cost
market, cost, market
Marketable Securities: • Stocks reported at _____________ ("Mark to market") • Bonds reported at _____________ if intention is to hold to maturity; if not, reported at _____________
Balance Sheet
Measures financial position at a point in time.
units of output
Method of depreciation where the more output, the more depreciation
Gross Margin, Operating Income, Income Before Taxes, Income After Taxes, Net Income
Net Sales - Cost of Goods Sold = __________________________ - Operating Expenses (S, G, & A) = _____________________________ +/- Other Rev & Expenses (Gains, Losses, Interest, Div Rev) = ____________________________ - Income Tax Expense = ___________________________ +/- Discontinued Operations +/- Changes in Accounting Principles = _______________________________
Cost of Goods Sold
Net Sales - Ending Inventory = _______________________
Cost of Goods Sold
Net Sales - ______________________________ = Gross Margin
- Ending Inventory
Net Sales _ ________________________ = Cost of Goods Sold
Other Revenues & Expenses
Operating Income - _______________________________ (Gains, Losses, Interest, Div. Rev.) = Income Before Taxes
shipping
Ownership of Inventory of Goods in Transit: Whoever is responsible to pay for the _______________ records the inventory on its balance sheet.
vendor
Ownership of Inventory of Goods on Consignment: Rather than selling merchandise to another company, a company will give those goods on consignment telling them that if they don't sell the merchandise, they can return it to them or if they do sell the merchandise, they can keep a certain percentage --> title remains with ______________ (title does not transfer for goods in consignment)
expenses
Payment, or obligations, for goods or services received
credit sales, Allowance for Bad Debts, income statement, balance sheet
Percentage of Credit Sales Method Bad Debt Expense = Percentage of _________________ [This amount is added to _______________________________] • Bad debt expense is an account that appears on the _____________________, so it does not carry over from one year to the next. • The allowance account is a ____________________ account. It does carry over from one year to the next. The amount at the end of one year becomes the balance at the beginning of the next year
New Allowance for Bad Debts, Previous Allowance for Bad Debts
Percentage of Receivables Method New Allowance for Bad Debts = Percentage(s) of ending balance in A/R [Bad Debt Expense = ____________________________________ - ____________________________________]
over time, matching principle, benefiting
Prepaid Expenses are transferred to expenses ________________________ (when benefits are received) Because of the _________________________, we do not record these as expenses when the payment is made, but rather we spread the expenses over the periods that we're _____________________ from these expenditures.
maturity value
Principal plus interest
no depreciation, depreciation, depletion, amoritization
Property, Plant & Equipment Fixed (Tangible) Assets • Land (______________________) --> never expensed (does not get used up & does not deteriorate) • Buildings, Equipment, Land Improvements (i.e. paved parking lots, fences, lighting) (______________________) • Natural resources (i.e. timber fields, oil wells, mines) (____________________) Intangible Assets (i.e. patents, copyrights, trademarks) (________________________) To get the cost of purchased assets, you need to include all of the costs that were incurred to get the asset ready for initial use (freight cost, installation cost, testing equipment cost)
+ freight-in, - purchase returns & allowances, - purchase discounts
Purchases _ ____________________ _ ____________________ _ ____________________ = Net purchases
understandability, timeliness, full disclosure, comparability, objectivity, decision relevance
Qualities of Financial Statements • _______________________ • _______________________ • _______________________ _______________________ • _______________________ • _______________________ • _______________________ _______________________
assets
Resources owned or rights to receive resources
earned, delivery, performance
Revenue is recognized when ________________ • ________________ of goods • ________________ of service (the earning process is considered to be complete even though cash has not yet been collected)
cost principle
Rule that assets are valued at their historical cost
marketable securities
Short term investments in stock or bonds
notes to the financial statements
Summary of significant accounting policies: assumptions, estimates, and judgments
principal
The face amount of the note (amount borrowed)
liquidity
The order of presentation for assets is determined by:
gross sales, net
To use ____________________ method for inventory, company has to assume ownership risks If a company just act as a broker to enact a transaction between a buyer and a seller, they must use the ____________________ method
investors, creditors, government agencies, company management, financial analysts
Users of Financial Reports • ________________ (stockholders) • ________________ (banks) • ________________ ________________ (SEC) • ________________ ________________ • ________________ ________________
revenue
Value received for goods sold or services performed
going concern
We presume that the company will continue to operate -- that it'll be ongoing
periodicity
We presume that we can arbitrarily pick any time period that we want to and report the financial results for that time period
bad debts expense
What to do about bad debts? • Do not reduce net sales. • Instead, record a ______________________
Income Statement, Balance Sheet
Which Cost Flow Assumption system is best? Depends on which financial statement is considered the most important ______________________ -> LIFO is a better measure of income (most up-to-date number for Cost of Goods Sold because most recent goods go into COGS) ______________________ -> FIFO (you see ending inventory on balance sheet and will get most up-to-date number for ending inventory) *many companies use LIFO for some inventories and FIFO for others
Generally Accepted Accounting Principles, Securities & Exchange Commission, Financial Accounting Standards Board, International Financial Reporting Standards
_____________ _____________ _____________ _____________(GAAP) • _____________ & _____________ _____________ (SEC):The rule-making resides under the authority of the SEC. • _____________ _____________ _____________ _____________(FASB): consists of representatives from public accounting firms, industry, government agencies, and academia. _____________ _____________ _____________ _____________(IFRS)
perpetual, high, periodic, large
____________________ Inventory System • Records updated when purchase or sale is made. • Most often used when each item has a relatively ___________ value. ______________ Inventory System • Records are not updated when a purchase or a sale is made [once a year physical inventory count to determine inventory shrinkage] • Used when inventory is composed of a ___________ number of diverse items, each with a relatively low value.
revenues earned, - expenses incurred
__________________________ _ ________________________ = Net Income
operating activities
a company's day-to-day activities
dividends
a distribution of earnings, and that only occurs when the board of directors decides to distribute the earnings
financing activities
cash obtained from or repaid to owners and creditors (loans, repayments, stock issuance)
capitalized interest
interest paid during the construction period
cash equivalents
investments coming due within 3 months
matching principle
• Costs are reported as expenses in the same time period as their related revenues. • Costs that cannot be matched with specific revenues are matched with future time periods that benefit from the cost.
Notes Receivable
• Formal contracts signed when a customer buys merchandise or services on credit. • Specify due dates for the payments, interest that must be paid, the interest rates • Classified as a current or long-term asset, depending on due date.
statement of cash flows
• How did the company receive cash? • How did the company use its cash? Shows how cash changed from the beginning to the end of the period Reports the amount of cash collected and paid out by a company in operating, investing, and financing activities.
inflow, outflow
• Major operating cash _____________ —cash receipts from selling goods or from providing services. • Major operating cash _______________ —payments to purchase inventory and to pay operating expenses
income statement
• Shows the results of a company's operations (i.e., success) over a period of time. • Focuses on a time interval. It looks at what happened over a period of time. At a minimum, this period of time is a one year period. • Fiscal year is any 12 month period that the company chooses.
cash, received, paid out, accrual
• ______________ is not necessarily involved in the determination of revenues or expenses. • With cash basis accounting, revenues will be recognized when cash is ______________ , and expenses will be recognized when cash is ______________ • Income statement uses ______________ accounting, not cash basis
