MGT 8803 - Accounting

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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


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