ACCT 3230 Exam 1

Users (present and potential)

investors and creditors use financial reports to make their capital allocation decisions

Present Value of a Single Sum

the value now of a given amount to be paid or received in the future, assuming compound interest

What is the objective of financial reporting?

-The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity. -Investors and creditors are the primary users for general-purpose financial statements.

present value table

Table of factors that shows what a single amount to be received in the future is worth today, at a given interest rate.

Basic Elements of Financial Statements

"Moment in Time": 1) Assets, 2) Liabilities, 3) Equity, "Period of Time": 4) Investments by Owners, 5) Distributions to Owners, 6) Comprehensive Income, 7) Revenues, 8) Expenses, 9) Gains, and 10) Losses

Qualitative Characteristics of Accounting Information

"The FASB identified the qualitative characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes."

Revenues and gains increase both net income and owners' equity.

True

In November and December 2020, Coronado Industries, a newly organized magazine publisher, received $81000 for 1,000 three-year subscriptions at $23 per year, starting with the January 2021 issue. Coronado included the entire $81000 in its 2020 income tax return. What amount should Coronado report in its 2020 income statement for subscriptions revenue?

$0, none of the $81000 is recognized.

Pearson Corporation makes an investment today (January 1, 2020). They will receive $15000 every December 31st for the next six years (2020 - 2025). If Pearson wants to earn 12% on the investment, what is the most they should invest on January 1, 2020?

$15000 × 4.11141 = $61671.

What would you pay for an investment that pays you $25000 at the end of each year for the next twenty years? Assume that the relevant interest rate for this type of investment is 12%.

$25000 × 7.46944 = $186736.

Ziggy is considering purchasing a new car. The cash purchase price for the car is $43100. To the closest whole percentage, what is the annual interest rate if Ziggy is required to make annual payments of $10000 at the end of the next five years?

$43100 ÷ $10000 = 4.31; 4.32948 is PV factor for 5%

For Sheridan Company, the following information is available: Cost of goods sold $397000 Dividend revenue 14500 Income tax expense 35000 Operating expenses 137000 Sales revenue 619000 In Sheridan's multiple-step income statement, gross profit

$619000 - $397000 = $222000.

What would you pay for an investment that pays you $40000 at the end of each year for the next ten years and then returns a maturity value of $600000 after ten years? Assume that the relevant interest rate for this type of investment is 8%.

($40000 × 6.71008) + ($600000 × 0.46319) = $546317.

The major classifications of activities reported in the statement of cash flows are operating, investing, and financing. Classify each of the transactions listed below as: 1. Operating activity-add to net income. 2.Operating activity-deduct from net income. 3.Investing activity. 4.Financing activity. 5.Reported as significant noncash activity

(a) Issuance of common stock. = Financing Activity (b)Purchase of land and building = Investing Activity (c)Redemption of bonds. = Financing Activity (d)Sale of equipment. = Investing Activity (e)Depreciation of machinery. = Operating Activity-Add to Net Income (f)Amortization of patent. = Operating Activity-Add to Net Income (g)Issuance of bonds for plant assets. = Reported as Significant (h) Payment of cash dividends. = Financing Activity (i) Exchange of furniture for office equipment. = Reported as Significant Noncash Activity (j) Purchase of treasury stock. = Financing Activity (k) Loss on sale of equipment. = Operating Activity-Add to Net Income (l) Increase in accounts receivable during the year. = Operating Activity-Deduct from Net Income (m) Decrease in accounts payable during the year. = Operating Activity-Deduct from Net Income

Select the qualitative characteristics for the following statements. (a) Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena. (b)Having information available to users before it loses its capacity to influence decisions (c)Information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future. (d)Information that is capable of making a difference in the decisions of users in their capacity as capital providers. (e)Absence of bias intended to attain a predetermined result or to induce a particular behavior.

(a) Comparability (b) Timeliness (c) Predictive Value (d) Relevance (e) Neutrality

Identify the accounting assumption, principle, or constraint that describes each situation. Do not use an answer more than once. (a)Allocates expenses to revenues in the proper period. (b)Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.) (c)Ensures that all relevant financial information is reported. (d)Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.) (e)Indicates that personal and business record keeping should be separately maintained. (f)Separates financial information into time periods for reporting purposes. (g)Assumes that the dollar is the "measuring stick" used to report on financial performance.

(a) Expense Recognition Principle (b) Measurement Principle ( historical cost) (c) Full Disclosure Principle (d) Going Concern Assumption (e) Economic Entity Assumption (f) Predictability Assumption (g) Monetary Unit Assumption

Unusual gains and losses

(a)Unusual. High degree of abnormality and of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the company, taking into account the environment in which it operates. (b)Infrequency of occurrence. Type of transaction that is not reasonably expected to recur in the foreseeable future, taking into account the environment in which the company operates. Ex) Losses on write-down (impairment) of receivables; inventories; property, plant, and equipment; goodwill or other intangible assets. Restructuring charges. Gains and losses from sale or abandonment of property, plant and equipment. Effects of a strike. Gains and losses on extinguishment (redemption) of debt obligations. Gains and losses related to casualties such as fires, floods, and earthquakes. Gains or losses on sale of investment securities.

Journalizing

- A general journal chronologically lists transactions and other events, - The general ledger contains all the asset, liability, and stockholders' equity accounts.

Trial Balance

- A trial balance is a list of accounts and their balances at a given time. - The trial balance lists the accounts in the order in which they appear in the ledger, with debit balances listed in the left column and credit balances in the right column. - The totals of the two columns must agree.

Identifying and Recording Transactions and Other Events

- An item should be recognized in the financial statements if it is an element, is measurable, and is relevant and representationally faithful. - A company records events that affect its financial position.

Fundamental considerations the FASB must keep in mind in its rule-making activities include

- Improvement in financial reporting. - International convergence. - Simplification of the accounting literature.

Third Level: Recognition and Measurement

-Assumptions: 1.Economic Entity - company keeps its activity separate from its owners and other businesses. 2.Going Concern - company lasts long enough to fulfill objectives and commitments. 3.Monetary Unit - money is the common denominator. 4.Periodicity - company can divide its economic activities into time periods. - Principles: 1.Measurement Principle - The most commonly used measurements are based on historical cost and fair value. 2.Revenue Recognition - requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. 3.Expense Recognition - "Let the expense follow the revenues." 4.Full Disclosure - providing information that is of sufficient importance to influence the judgment and decisions of an informed user. - Constraints: Cost Constraint - cost of providing information must be weighed against the benefits that can be derived from using it.

Limitations of the Balance Sheet

-Most assets and liabilities are reported at historical cost. -Use of judgments and estimates. -Many items of financial value are omitted.

Why do we need financial information?

-Resources are limited. -Efficient use of resources often determines whether a business thrives. -Accountants must measure performance accurately and fairly on a timely basis, so that the right managers and companies are able to attract investment capital.

Accurals

1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded. 2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.

Stockholders Equity section

1. Capital Stock. The par or stated value of the shares issued. 2. Additional Paid-in Capital. The excess of amounts paid in over the par or stated value. 3. Retained Earnings. The corporation's undistributed earnings. 4. Accumulated Other Comprehensive Income. The aggregate amount of the other comprehensive income items. 5. Treasury Stock. Generally, the cost of shares repurchased. 6. Noncontrolling Interest (Minority Interest). A portion of the equity of subsidiaries not wholly owned by the reporting company.

Limitations of the Income Statement

1. Companies omit items from the income statement that they cannot measure reliably 2. Income numbers are affected by the accounting methods employed 3. Income measurement involves judgement

Enhancing Qualities

1. Comparability 2. Verifiability 3. Timeliness 4. Understandability

Transaction: On Oct 1, XYZ company purchases office equipment costing $50,000 by using a 3-month, 12%,$50,000 note payable.

1. Debit - credit analysis: -debits increase assets -credits increase liabilities 2. Journal Entry: -debit equip $50k -credit notes payable $50k 3. Posting: - Equipment = left = Notes Payable = right

Transaction: On Oct 3, XYZ company pays office rent in cash $9,000

1. Debit - credit analysis: -debits increase expenses -credits decrease assets 2. Journal Entry: -debit rent exp $9 -credit cash $9k 3. Posting: - rent exp = left - cash = right

Usefulness of the Income Statement

1. Evaluate the past performance of the company. 2. Provide a basis for predicting future performance. 3. Help assess the risk or uncertainty of achieving future cash flows.

Financial Accounting Standards Board

1. Financial Accounting Foundation - selects members of the FASB - Funds their activities - Exercise general oversight 2. FASB - mission to establish and improve standards of financial accounting and reporting 3. Financial Accounting Standards Advisory Council - consult on major policy issues

Deferrals

1. Prepaid expenses: Expenses paid in cash before they are used or consumed. 2. Unearned revenues: Cash received before services are performed.

Elements of the Income Statement

1. Revenues 2. Expenses 3. Gains 4. Losses

What are parties involved in standard-setting?

1. SEC - Securities and Exchange Commission 2. AICPA - American Institute of Certified Public Accountants 3. FASB - Financial Accounting Standards Board

Due Process System of the FASB

1. Topics identified and placed on Board's agenda 2. Research and analysis conducted and preliminary views of pros and cons issued 3. Public hearing on proposed standard 4. Board evaluates research and public response and issues exposure draft 5. Board evaluates responses and changes exposure draft, if necessary. Final standard issued.

Multi-step income statement format

1. operating section: Sales, cost of goods sold, selling expenses, admin expenses or general expenses 2. non-operating section: Other revenues and gains, other expenses and losses 3. income taw 4. discontinued operations: Gains and losses from discontinued operations 5. non-controlling interests: Allocation of income to non-controlling shareholders 6. EPS

Statement of Cash Flows Three Different Activities

1.. Operating: Cash effects of transactions that enter into the determination of net income. 2. investing: Making and collecting loans and acquiring and disposing of investments and property, plant, and equipment. 3. financing: Obtaining resources from owners and providing them with a return on their investment, and borrowing money from creditors and repaying the amounts borrowed.

Four steps to prepare for the statement of cash flow:

1.Determine the net cash provided by (or used in) operating activities. 2.Determine the net cash provided by (or used in) investing and financing activities. 3.Determine the change (increase or decrease) in cash during the period. 4.Reconcile the change in cash with the beginning and the ending cash balances.

Accounting Cycle Summary

1.Enter the transactions of the period in appropriate journals. 2.Post from the journals to the ledger (or ledgers). 3.Prepare an unadjusted trial balance (trial balance). 4.Prepare adjusting journal entries and post to the ledger(s). 5.Prepare an adjusted trial balance. 6.Prepare the financial statements from the adjusted trial balance. 7.Prepare closing journal entries and post to the ledger(s). 8.Take a post-closing trial balance (optional). 9.Prepare reversing entries (optional) and post to the ledger(s).

Why do we need general purpose standards?

1.General-purpose financial statements provide financial reporting information to a wide variety of users. 2.Provide the most useful information possible at the least cost.

Step 1: Net cash provided by operating activities

1.Objective: Adjust net income for items that do not affect cash. 2.This procedure requires that a company analyze not only the current year's income statement but also the comparative balance sheets and selected transaction data. A/R & A/P (up)

Related stockholders' equity statements

1.Retained earnings statement 2.Other comprehensive income 3.Statement of stockholders' equity

The Need for a Conceptual Framework

1To develop a coherent set of standards and rules. 2To solve new and emerging practical problems.

Which of the following is not classified as an unusual and infrequent gain or loss? Losses from inventory write-downs. Flood damage losses to property. A discontinued operation. Impairment losses on intangible assets.

A discontinued operation.

Retained Earnings Statement

A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific time period. Increase: - net income - changes in accounting principle - prior period adjustments Decrease: - net loss - dividends - changes in accounting principles - prior period adjustments

Increase in A/R

A/R XXXX Revenue XXXX An addition to Net Income 1.Revenue is a component of Net Income (an addition to N/I) 2.However, cash has not yet received. We need to deduct that part from Net Income to derive the real cash impact from revenue

The __________ requires that members prepare financial statements in accordance with GAAP.

AICPA's Code of Professional Conduct.

Chapter 6

Accounting and the Time Value of Money

One Statement Approach

Advantage - does not require the creation of a new financial statement. Disadvantage - net income buried as a subtotal on the statement.

The income statement is useful in assessing the risk or uncertainty of achieving future cash flows.

True

Comprehensive Income

All changes in equity during a period except those resulting from investments by owners and distributions to owners. Includes: - all revenues and gains, expenses and losses reported in net income, and - all gains and losses that bypass net income but affect stockholders' equity. Net Income + Other Comprehensive income

Contra-asset

An account with a credit balance that is deducted from the related asset account on the balance sheet. Accumulated depreciation

Prepaid expenses

Assets paid for and recorded before a company uses them are called prepaid expenses. Example: insurance, supplies, advertising, and rent The expiration of these costs does not require daily entries, which is unnecessary in impractical. Instead, the company makes adjusting entries to record the expenses. An adjusting entry for prepaid expenses results in a: debit (increase) to an expense account and a credit (decrease) to an asset account

Contents of Balance Sheet

Assets: -current assets - long-term investments - property, plant, and equipment - intangible assets - other assets = Liabilities and Owners Equity: - current liabilities - long term debt - owners (stockholders) equity

Chapter 5

Balance Sheet and Statement of Cash Flows

Blossom Corporation engaged in the following cash transactions during 2020. Sale of land and building $181,050 Purchase of treasury stock42,900 Purchase of land41,400 Payment of cash of equipment59,500 Issuance of common stock150,700 Retirement of bonds102,700 Compute the net cash provided (used) by financing activities.

Blossom Corp Statement of Cash Flows (partial) For the yr ended Dec 21, 2020 Cash Flows from Financing Activities Purchase of Treasury Stock (42900) Payment of Cash Dividends (89700) Issuance of Common Stock 150700 Retirement of Bonds (102700) Net Cash Used from Financing Activities (84600)

Blue Corporation engaged in the following cash transactions during 2020. Sale of land and building $198,200 Purchase of treasury stock43,100 Purchase of land44,800 Payment of cash dividend86,200 Purchase of equipment53,800 Issuance of common stock155,600 Retirement of bonds108,100 Compute the net cash provided (used) by investing activities.

Blue Corp Statement of Cash Flows (partial) For the yr ended Dec 21, 2020 Cash Flows from Investing Activities Sale of Land and Building 198200 Purchase of Land (44800) Purchase of Equipment (53800) Net Cash Provided from Investing Activities 99600

Property, Plant and Equipment

Buildings Land

Investments

Cash surrender value of life insurance. Bond sinking fund.

The correct order to present current assets is

Cash, accounts receivable, inventories, prepaid items.

Reporting Various Income Items

Companies are required to report unusual and infrequent items as part of net income so users can better determine the long-run earning power of the company. These income items fall into four general categories: 1.Unusual gains and losses 2.Discontinued operations 3.Noncontrolling interest Earnings per share

Quality of Earnings

Companies have incentives to manage income to meet or beat Wall Street expectations, so that -market price of stock increases and -value of stock options increase. Quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows.

Adjusting Entries

Companies make adjusting entries to make sure: (1)Revenues are recorded in the period in which services are performed. (2)Expenses are recognized in the period in which they are incurred. Adjusting entries are classified as either deferrals or accruals.

Compound Interest

Computes interest on principal and interest earned that has not been paid or withdrawn - 2nd period interest is computed based on the principal and interest accrued in the first period. A=P(1+r/n)^nt

Usefulness of the Balance Sheet

Computing rates of return. Evaluating the capital structure. Assess risk and future cash flows. Analyze the company's: •Liquidity, •Solvency, and Financial flexibility.

Chapter 2

Conceptual Framework for Financial Reporting

Illustration: Assume that Coca-Cola acquires 70 percent of the outstanding stock of Koch Company. Coca-Cola consolidates Koch's financial results with its own. GAAP requires that net income be allocated to the controlling and noncontrolling interest.

Consolidated net income 7,124 Less: net income attributed to noncontrolling interested 26 Net income attributed to stockholder 7,098 The noncontrolling interest amounts are not an expense or dividend, but are allocations of net income (loss) to the noncontrolling interest.

vanhoe Corporation loaned $530000 to another corporation on December 1, 2020 and received a 3-month, 6% interest-bearing note with a face value of $530000. What adjusting entry should Ivanhoe make on December 31, 2020?

Debit Interest Receivable and credit Interest Revenue, $2650. 1/12 x 6% x $530000 = $2650.

Earnings per share

Earnings per share is net income minus preferred dividends (income available to common stockholders), divided by the weighted average of common shares outstanding. -Measures the dollars earned by each share of common stock. -Must be disclosed on the income statement.

Accrued Interest. Pioneer Advertising signed a three-month note payable in the amount of $50,000 on October 1. The note requires interest at an annual rate of 12 percent. Three factors determine the amount of the interest accumulation:

Face Value of Note x Annual Interest Rate x Time in Terms of One Year = Interest $50000 x 12% x 1/12 = $500

Fundamental Quality—Faithful Representation

Faithful representation means that the numbers and descriptions match what really existed or happened. 1.Completeness means that all the information that is necessary for faithful representation is provided. 2.Neutrality means that a company cannot select information to favor one set of interested parties over another. 3.An information item that is free from error will be a more accurate (faithful) representation of a financial item.

Losses as a result of a strike are reported net of tax as a subdivision of noncontrolling interest section.

False Effects of a strike, including those against competitors and major suppliers are common types of unusual or infrequent gains and losses. Unusual and infrequent gains and losses are reported in the "Other revenues and gains" or "Other expenses and losses" section of the income statement, not as a subdivision of the noncontrolling interest section. They are not reported net of tax

How a company communicates its financial information to outside parties ?

Financial information = Financial Statements + Other finanacil reporting -Financial statements include: (1) balance sheet (2) Income statement (3) the statement of cash flow (4) statement of SE -Other financial reporting: president's letter, news releases, management's forecasts, and social or environmental impact statements

Overview of the Conceptual Framework

First Level = Basic Objectives Second Level = Qualitative Characteristics and Elements Third Level = Recognition, Measurement, and Disclosure Concepts.

Supplemental Disclosures

Four types of information that are supplemental to account titles and amounts presented in the balance sheet: 1. Contingencies. material events that have an uncertain outcome 2. Accounting Policies. explanations of the valuation methods used for basic assumptions made concerning inventory valuation, depreciation methods. investments in subsidiaries. 3. Contractual Situations. Explanations of certain restrictions or covenants attached to specific assets or, more likely, to liabilities 4. Fair Values. Discloses of fair value, particularly for financial instruments

Gains & Losses

Gains - Increases in equity (net assets) from peripheral or incidental transactions. Losses - Decreases in equity (net assets) from peripheral or incidental transactions. Example: a)sale of investments or plant assets, b)settlement of liabilities, c)write-offs of assets.

Other Comprehensive income

Gains and losses that bypass net income but affect stockholders' equity are referred to as - Unrealized gains and losses on available-for-sale securities. - Translation gains and losses on foreign currency. - Plus others Reported in Stockholders' Equity

Intangible Assets

Goodwill

Chapter 4

Income Statement and Related Info

Illustration: KC Products Inc., a highly diversified company, decides to discontinue its electronics division. During the current year, the electronics division lost $300,000 (net of tax). KC Products sold the division at the end of the year at a loss of $500,000 (net of tax). Show how the discontinued operations would be reported on the income statement for KC Products.

Income from continuing operations $20,000,000 Discontinued operations: Loss from operations, net of tax 300,000 Loss on disposal, net of tax 500,000 Total loss on discontinued operations 800,000 Net income $19,200,000

Multi-step Income Statement

Income statement format that contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income •Separates operating transactions from nonoperating transactions. • Disclosing income from operations highlights the difference between regular and non-recurring or incidental activities.

Single-step Income Statement

Income statement format that groups all revenues together and then lists and deducts all expenses together without calculating any subtotals.

Revenues

Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity's ongoing major or central operations. Examples: sales, rent

Noncurrent Assets - Intangible Asset

Intangible Asset: Lack physical substance and are not financial instruments. -Limited life intangibles amortized. -Indefinite-life intangibles tested for impairment. goodwill, patent, trademarks, copyright

Illustration: XYZ company deposits $10,000 in the First State Bank, where it will earn compound interest of 9% per year compounded annually. XYZ company will not withdraw any interest until 3 years from the date of deposit.

Interest = P〖(1+i)〗^n- P

Illustration: If Barstow borrows $10,000 for 3 months at a 8% per year, the simple interest is computed as follows.

Interest = p x i x n (n = # of period) = $10,000 x .08 x 3/12 = $200

Current liability

Interest payable Cash dividends payable Unearned revenue Salaries and wages payable Accounts payable. Current maturity of long-term debt. Notes payable (due next year). Income taxes payable.

current asset

Investment in stock Trading securities Equity investments (to be sold within one year). Equity investments (to be sold within one year). Accounts receivable. Supplies Inventory Prepaid insurance.

The objective of financial reporting identifies ______________ as the primary users for general-purpose financial statements

Investors and creditors.

Noncurrent Assets - Long-Term Investments

Long-Term Investments a)Securities (bonds, common stock, or long-term notes). b)Tangible fixed assets not currently used in operations (land held for speculation). c)Special funds (sinking fund, pension fund, plant expansion fund, or cash surrender value of life insurance). d)Nonconsolidated subsidiaries or affiliated companies.

Illustration: Lancer, Inc. reports net income of $350,000. It declares and pays preferred dividends of $50,000 for the year. The weighted-average number of common shares outstanding during the year is 100,000 shares. Lancer computes earnings per share as follows:

Net Income - Preferred Dividends / Weighted Average of Common Shares Outstanding 350000 - 50000 / 100000 = $3.00 per share

Which of the following statements related to noncontrolling interest is incorrect?

Noncontrolling interest in net income is reported as an expense on the income statement.

Noncurrent Liabilities

Obligations that a company does not reasonably expect to liquidate within the normal operating cycle. All covenants and restrictions must be disclosed. Examples: long-term debts, obligation capital lease, deferred income taxes

Current Liabilities

Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities. Examples: Note payable, Account payable, Income tax payable

Discontinued Operations

Occurs when two things happen: (1) A company eliminates the results of operations of a component of the business. (2)The elimination of a component that represents a strategic shift, having a major effect on the company's operations and financial results. Amounts are reported "net of tax." Discontinued Operations are reported after "Income from continuing operations."

Insurance. October 31, Prepare the journal entry to record the insurance expenses.

Oct 31 Insur exp $500 Prepaid Insur $500 ($6,000 / 12 months = $500 / month)

Insurance. October 4, Pioneer Advertising paid $6,000 for a one-year fire insurance policy. Prepare the journal entry to record the purchase of the insurance.

Oct 4 Prepaid Insur $6k Cash $6k

Unearned Revenue. Pioneer Advertising received $12,000 on October 2nd from KC for advertising services expected to be completed by December 31. Prepare the journal entry to record the receipt on October 2nd.

Oct. 2 Cash $12k Unearn Serv Rev $12K

Accrued Revenues. In October Pioneer Advertising performed services worth $2,000 that were not billed clients before Oct. 31. Prepare the entry to revenues for services performed.

Oct. 31 Act Recv $2k Serv Rev $2k

Unearned Revenues. Analysis reveals that Pioneer Advertising earned $4,000 of the advertising services in October. Prepare the entry to record the revenue for services performed.

Oct. 31 Enarn Serv Rev $4k Service Rev $4k

Accrued Interest. Pioneer signed a three-month, 12%, note payable in the amount of $50,000 on October 1. Prepare the adjusting entry on Oct. 31 to record the accrual of interest.

Oct. 31 Intrst exp $500 Intrst payable $500

Supplies. An inventory count at the close of business on October 31 reveals that $10,000 of the advertising supplies are still on hand. Please prepare an adjusting entry.

Oct. 31 Supplies Exp 15K Supplies 15k

Supplies. Pioneer Advertising purchased advertising supplies costing $25,000 on October 5. Prepare the journal entry to record the purchase of the supplies.

Oct. 5 Supplies 25k Cash ` 25k

Expenses

Outflows or other using-up of assets or incurrences of liabilities that constitute the entity's ongoing major or central operations. Examples: cost of good sold, rent, depreciation, interest, rent, salaries and wages, taxes.

$51,970 receivable at the end of each period for 7 periods compounded at 12%.

PV = $51,970 x 4.56376 = $237,179

How much is receiving $1 five years from now worthy today if interest rate is 10%?

PV = $1 X 〖PVF〗_(5,10%)

How much is receiving a FV n years from now worthy today if interest rate is i%?

PV = FV (PVF _n,i)

Capital Stock

Preferred Stock Common Stock

Non-current liabilities

Premium on bonds payable. Bonds payable.

Prepaid Expenses and Unearned Revenue on Balance Sheet

Prepaid Expenses: Asset Unearned Revenue: Liability

Present Value of Ordinary Annuity

Present value of a series of equal amounts to be withdrawn or received at equal intervals. PVA _(n.i) = Annual Amount x [(1 - (1/(1+i)^n) / i]

Noncurrent Assets - Property, Plant, and Equipment

Property, Plant, and Equipment: tangible long-lived assets used in the regular operations of the business. •Physical property such as land, buildings, machinery, furniture, tools, and wasting resources (minerals).

Unearned Revenue

Receipt of cash before the services are performed is recorded as a liability called unearned revenues. Example: rent, tuition, airline tickets, magazine subscriptions, customer deposit. The adjusting entry for unearned revenues results in a: debit (decrease) to a liability account and a credit (increase) to a revenue account.

Illustration: In 2018, Hillsboro Co. determined that it incorrectly overstated its accounts receivable and sales revenue by $100,000 in 2017. In 2018, Hillboro makes the following entry to correct for this error (ignore income taxes).

Retained Earnings 100,000 Accounts Receivable 100,000

Accrued Revenues

Revenues recorded for services performed but cash has yet to be received at the statement date are accrued revenues Example: rent, interest, services performed. An adjusting entry for accrued revenues results in a: debit (increase) to an asset account and a credit (increase) to a revenue account.

In preparing a statement of cash flows, which of the following transactions would be considered an investing activity?

Sale of equipment at book value

Sheffield Company reported 2020 net income of $159,800. During 2020, accounts receivable increased by $13,270 and accounts payable increased by $9,892. Depreciation expense was $46,700.Prepare the cash flows from operating activities section of the statement of cash flows.

Sheffield Company Cash Flow Statement For the Yr ended Dec 21,2020 Cash Flows from Operating Activitites Net Income 159800 Adjustments to reconcile net income to Net cash provided by Operating Activities Increase in Acoounts Receivable (13270) Increase in Accounts Payable 9892 Depreciation Expense 46700 =43322 Net Cash Provided by Operating Activities 203122

Adjusted Trial Balance

Shows the balance of all accounts, after adjusting entries, at the end of the accounting period.

Chapter 3

The Accounting Information System

What group currently writes the Generally Accepted Accounting Principles?

The FASB is currently the rule-making body for GAAP. The Board has codified well over one hundred Statements of Financial Accounting Standards, and Interpretations of those standards. The FASB is a private-sector body, the third such body serving as the entity which creates GAAP for U.S. businesses. The FASB has no authority to enforce GAAP, however.

The Accounting Cycle

The series of accounting activities included in recording financial information for a fiscal period

Fundamental Quality—Relevance

To be relevant, accounting information must be capable of making a difference in a decision. 1.Predictive value - Financial information has predictive value if it has value as an input to predictive processes used by investors to form their own expectations about the future. 2.Comfirmatory value - Relevant information also helps users confirm or correct prior expectations. 3.Materiality - Information is material if omitting it or misstating it could influence decisions that users make on the basis of the reported financial information.

Objective of financial reporting:

To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.

Purpose of the Statement of Cash Flows

To provide relevant information about the cash receipts and cash payments of an enterprise during a period. The statement provides answers to the following questions: 1.Where did the cash come from? 2.What was the cash used for? 3.What was the change in the cash balance?

The first step taken in the establishment of a typical FASB statement is

Topics are identified and placed on the board's agenda.

Posting

Transferring journal entries to the ledger accounts is called posting

Stockholders' Equity

Treasury stock Common stock Deficit

Corporations whose securities are listed on a U.S. stock exchange are required to file audited financial statements with the Securities Exchange Commission.

True

Valuation of Long-Term Bonds

Two Cash Flows: Periodic Interest Payments (annuity) Principal paid at maturity (single-sum) interest = bond face value X face interest n%

Increase in A/P

XYZ Exp XXXX AP XXXX An deduction to Net Income 1.When A/P increases, it does not have an influence on cash. 2.However, cash did not decreased. 3.We need to add that part to Net Income to derive the real cash impact from the decrease in A/P.

Noncontrolling interest

When a company owns substantial interests (generally greater than 50%) in another company, GAAP generally require that the financial statements of both companies be consolidated together into one set of financials. Noncontrolling interest is the portion of equity (net assets) interest in a subsidiary not attributable to the parent company.

A separation of operating and non operating activities of a company exists in

a multiple-step but not a single-step income statement.

Post-Closing Trial Balance

a trial balance prepared after the closing entries are posted

Dividends paid

classified as financing activities.- did not go through net income

Dividends received

classified as operating activities.

Interest received and paid

classified as operating activities.

Changes in Accounting Principles

companies can change principles, but they must demonstrate that the newly adopted principle is preferable to the old one. Such changes result in lost consistency from period to period •Retrospective adjustment. •Cumulative effect adjustment to beginning •retained earnings. •Approach preserves comparability across years. •Examples include: •change from FIFO to average cost. •Accounted for in the period of change or the period of and the future periods if the change affects both. •Not handled retrospectively. •Not considered errors. •Examples include: Useful lives and salvage values of depreciable assets. Allowance for uncollectible receivables.

An adjusting entry would never include a:

debit to an asset account and a credit to a liability account. because income statement amounts would not be adjusted. Every adjusting entry includes the adjustment of one balance sheet account and one income statement account.

A common set of accounting standards and procedures are called

generally accepted accounting principles.

During the first year of Swifty Corporation's operations, all purchases were recorded as assets. Supplies in the amount of $27100 were purchased. Actual year-end supplies amounted to $5900. The adjusting entry for store supplies will

increase expenses by $21200. $27100 - $5900 = $21200.

Simple Interest

interest paid on the principal alone Interest = p x i x n (n = # of period)

The income statement reveals

net earnings (net income) of a firm for a period of time.

The failure of financial reports to provide information on customer satisfaction indexes, reject rates, and company sustainability efforts describes the financial reporting challenge of

nonfinancial measures.

The gain or loss from disposal of a component of a business is shown as a (an):

part of discontinued operations.

Present Value

the current value of future cash flows discounted at the appropriate discount rate Present value factor (look up from PV table) i = interest n = period

Financial Reporting

the financial information a company provides to help users with capital allocation decisions about the company

Capital Allocation

the process of determining how and at what cost money is allocated among competing interests

The PCAOB (Public Company Accounting Oversight Board) was established under

the provisions of the Sarbanes-Oxley Act (SOX).

The objective of the conceptual framework is

to provide financial information about the reporting entity primarily to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.

The objective of general-purpose financial reporting is?

to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers

The single-step income statement emphasizes

total revenues - total expenses

Two Statement Approach

two separate, but consecutive statements of net income and other comprehensive income

Time Value of Money

•A relationship between time and money. •A dollar received today is worth more than a dollar promised at some time in the future. Why? $1 X 10% = $0.1 + $1 = $1.1 (a year from now)

Current Assets

•Cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer. Presented in the balance sheet in order of liquidity.

Accrued Expenses

•Expenses incurred but not yet paid in cash or recorded. •Example: rent, interest, taxes, salary. •An adjusting entry for accrued expenses results in a: debit (increase) to an expense account and a credit (increase) to a liability account.

Two Types of Events

•External - between an entity and its environment. E.g., a transaction with another entity •Internal - event occurring entirely within an entity. E.g., consuming raw materials •Transactions are types of external events. •A company records as many events as possible that affect its financial position.

Step 2: Net Cash Provided by Investing and Financing Activities

•Investing activity -Cash outflow due to land purchase ($15,000) •Financing activity: -Cash inflow due to stock issuance $50,000 -Cash outflow due to dividend payout ($14,000) =$36,000

What is decision usefulness?

•Investors/creditors are interested in assessing the company's (1) ability to generate net cash inflows and (2) management's ability to protect and enhance the capital providers' investments. •Financial information should therefore help investors/creditors assess the amounts, timing, and uncertainty of prospective cash inflows.

Statement of Stockholders' Equity

•Reports the changes in each stockholders' equity account and total equity for the period.

Correction of Errors

•Result from: mathematical mistakes. mistakes in application of accounting principles. oversight or misuse of facts. •Corrections treated as prior period adjustments. •Adjustment to the beginning balance of retained earnings.

Significant Noncash Activities

•Significant financing and investing activities that do not affect cash are reported in either a separate schedule at the bottom of the statement of cash flows or in the notes. Examples include: •Issuance of common stock to purchase assets. •Conversion of bonds into common stock. •Issuance of debt to purchase assets. •Exchanges on long-lived assets.

Closing

•To reduce the balance of the nominal (temporary) accounts to zero in order to prepare the accounts for the next period's transactions. •To transfer all income statement account balances to the Retained Earnings account in owner's equity. •Balance sheet (asset, liability, and equity) accounts are not closed. •Dividends are closed directly to the Retained Earnings account.