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Accounting Principles

Terms in this set (124)

When are expenses recognized?
When the economic benefit is received
When is revenue recognized?
As it is earned
Adjusting Entries:
Accruals, deferrals, and prepaids
Accruals
When is payment made?
Revenues or expenses which have accumulated during the period but have not yet been recorded in the books.
Subsequent to the recording.
Deferrals and Prepaids
The payment is received or paid in advance of the recognition of the rev or exp
Cash Accounting
Rev is recognized in the period in which the related cash collection is made and exp are reported in the period when the cash disbursements are made.
Dividends
A corporation's distribution of profits to stockholders in the form of cash or stock coming out of Retained Earnings.
Journal
All transactions and events are FIRST recorded in a journal in chronological order with equal amounts of debits and credits to various accounts
Special Journal
Records similar transactions, such as all cash receipts or all cash payments.
GAAP
A common set of authoritative standards universally used within a jurisdiction. Standards for privately-owned companies in the U.S. are developed by the Financial Accounting Standards Board (FASB). Standards used by publicly-owned U.S. companies are promulgated by the SEC. International Financial Reporting Standards (IFRS) are developed by the International Accounting Standards Board and used as adopted by various countries throughout the world. The SEC plans on adopting or converging most of the US public-company standards to IFRS.
General Ledger
It is the summary record of transactions entered in the journal. Accounts are listed in financial statement order: Assets, liabilities, owner's equity, rev and exp
Subsidiary Ledger
Details maintained to support the balance in some general ledger accounts, such as accounts receivable.
Trial Balance
A complete listing of every ledger account with either a debit or credit balance which is done to verify the equality of the debits and credits.
Retained Earnings
The portion of the Stockholder's Equity attributable to profitable operations, and it is equal to the aggregate of net income minus any net losses and dividends since the inception of the business. It does not represent cash or funds.
FOB Destination
Title passes to the purchaser when the goods are unloaded from the common carrier and the seller bears the transportation charges.
FOB Shipping Point
Title passes to the purchaser when the goods are loaded onto the common carrier and the purchaser bears the transportation charges. Property, Plant & Equipment: Assets with a relatively long life which are used in the operation of the business and are not intended for sale in the ordinary course of business.
Working capital
The excess of current assets over current liabilities.
Contingent liability
A potential liability that may become an actual liability in the future based upon some past event.
Owner's equity
The excess of the assets minus liabilities of a business
Revenue
Inflow or enhancement of assets or settlement of liabilities from customers or clients, which results from sales of merchandise or the rendering of services (or from investments).
Expense
COGS, assets used or consumed, or liabilities incurred for the purpose of generating revenues
Debit
Left Side. Debits increase assets and exp, and decrease liabilities, capital accounts, and revenues
Credit
right side. Credits increase liabilities, capital accounts and rev, and decrease assets and exp
Accounts payable
An informal credit arrangement with payment in the future
Accounts receivable
An informal credit arrangement with payment to be received in the future.
Fiscal year
The annual accounting period which may or may not end on Dec. 31
Assets =
Liabilities + Owners' equity
NI =
(Revenue + Gains) - (Exp + Losses)
Gross Margin/Profit =
Sales - COGS
COGS =
Beginning inventory + Purchases - Ending Inventory OR Beginning inventory of finished goods + cost of goods manufactured - ending inventory of finished goods
Interest =
Priniciple x Annual rate of interest x time expressed in terms of a year
Accounting Cycle
1. Record the transaction in a journal
2. Post the journals by transferring data to the ledger accounts
3. Take a trial balance
4.Prepare the post adjusting entries to bring the accounts up to date
5. Prepare financial statements
6. Journalize and post journal entries necessary to close the books
7. Take an after-closing trial balance, which should ONLY contain assets, liabilities and capital accounts.
Balance sheet
Assets Liabilities and Equity
Current Assets Liabilities
Long term investments current
Property, plant, and equipment long term
Intangible Assets Stockholder's Equity
Income Statement (Multi-Step)
Sales
COGS
Gross Margin
-Operating Expenses
=Operating Income
+Gains and miscellaneous revs
-Losses and miscellaneous exp
=NI before income taxes
-Income taxes
NI or loss
Statement of retained earnings
Retained earnings at the beginning of the period
+NI for current period
=subtotal
-Dividends
Retained earnings at end of current period
Statement of Cash flows
Cash flows from operations
cf from investing
cf from financing
=net change in cash
+beginning cash balance
=ending cash balance
2 Purposes of internal controls
Enhance the accuracy and reliability of the accounting records and reports by reducing the risk of errors and irregularities in the accounting process, including fraudulent reporting
Safeguard company assets by preventing embezzlement, theft or unauthorized use
Principles of internal controls
Establishment of responsibilities, segregation of duties, documentation procedures, physical controls, independent internal verification, and other
Establishment of Responsibilities:
One person can be identified as responsible for the transaction
Segregation of duties
One person should not perform incompatible duties, i.e., should not have access to assets, do record keeping, or do reconciliation.
Documentation Procedures
The forms and procedures to control the process, e.g., pre-numbered forms.
Physical, mechanical, and electronic controls
Locks, safes, passwords
Independent internal verification
Having another person compare the assets with the records
Other Controls
Required vacations and bonding (insurance) of employees
Bank Reconciliation
Explains the differences between the balance per the bank statement and the cash balance in the ledger
Adjusted balance per bank
Balance per bank statement
+ deposits in transit
+/- Errors by bank
- Outstanding Checks
=Adjusted balance per bank
Adjusted balance per book
Cash balance in ledger
+ Collections by bank
+/- Errors on books
- deductions by bank
-NSF checks
-bank service charge
= Adjusted balance per book
When to debit the petty cash account
When establishing the imprest account or when changing the total amount of the fund
Perpetual method
Changes in inventory are recorded as they occur
Periodic inventory method
No running record of inventory on hand is maintained. Inventory balances are periodically updated after taking a physical count of the merchandise on hand.
Lower-of-cost-or-market
Determining the dollar amount of the inventory is based on the dollar amount of the inventory or the market, whichever is lower.
FIFO
The first inventory acquired is assumed to be the first inventory used.
LIFO
The last inventory acquired is assumed to be the first inventory used.
Weighted Average Cost
The avg cost per unit for the period is the total cost divided by total units.
Understated ending inventory causes net income to be
understated the first year but overstated the second year
2/10 n/30
The customer can take a 2% discount if the invoice is paid within 10 days. Otherwise the purchaser must pay the net within 30 days, thus foregoing the discount.
Bad Debt Expense should be recognized in what period using what method?
In the period in which the sales were made using the allowance method
Valuing Accounts receivable at net (or cash) realizable value is
required by GAAP
How to journalize bad debt
Dr Bad Debts Expense
Cr. Allowance for doubtful accounts
Depreciation
A systematic and rational allocation of cost, less residual value if any, over the estimated life of the asset/ group of assets. It is a process of cost allocation, not of valuation of the asset.
Common methods of depreciation
Straight line, sum of years digits, declining balance, and modified accelerated cost recovery system
Straight line =
(cost - residual value)/useful life in years = depreciation per year
Sum of years digits
Depreciation expense declines over time.
Ex: Add life expectancy years together 1+2+3+4+5 = 15
Remaining life at beginning of year/sum of years digits x (Cost - residual value)
Declining Balance
A fixed rate of depreciation is taken each year on the cost less acc dep. Note that residual value is not used in the calculation. Double declining balance means uses twice the straght line rate. Thus, if estimated life is 5 years, the straight line rate is 1/5 = 20%. Therefore, double declining rate would be 2 x 20% = 4o%.
MACRS
Modified Accelerated Cost Recovery System
Used for tax returns where the rates are provided by the IRS. Cost is multiplied by the rate without regards to residual value.
The cost of an investment in a security includes
The purchase price, brokerage commission, taxes, and other expenditures.
Trading Securities Classification.
Classified as current assets on balance sheet if management intends to make a quick profit from the sale. The investments are reported at their fair value, with any adjustment reported in the income statement.
Available for Sale Investments Classification
They are either classified as current or non-current depending upon the intent of management. The investments are reported at their value, with any cumulative adjustment reported in the balance sheet as a component of stockholders' equity.
Held to Maturity Investments in debt securities are reported at their
amortized costs
The equity method should be used if
The company owns between 20-50% of the voting common stock in another company. The investment account is increased for the company's share of reported income (and revenue recorded) and decreased for dividend received (and cash increased).
Consolidated financial statements are normally prepared if
the company owns over 50% of the voting common stock of the another company.
A partnership...
has two or more owners engaged in a business of seeking profits. Each owner has his/her own Capital account and Drawing/Withdrawals account.
Factors that go into a partnership agreement
1.Salary equivalents (to reflect the amount and value of time devoted to business)
2.Interest equivalents (to reflect the value of the capital invested in the business),
3.Profit and loss sharing ratio, regardless of the amount of available net income or loss. The sum of the amounts allocated to the various partners MUST equal the TOTAL net income to be allocated, no more or no less.
4.In the absence of an agreement, profits and losses are equally allocated to each partner.
Par Value
The nominal value which is printed on the certificate. It is NOT the fair value of the stock. Some stocks do not have a par value.
Stated Value
An arbitrary amount established by the Board of Directors when there is no par value for the stock.
Common stock
A residual security. It is entitled to dividends and assets after preferred stockholders have received their share.
Liquidation value for common stock
The amount which a stockholder is entitled to receive if the corporation goes out of business, disposes of its assets at their book value, pays its liabilities, and distributes the remaining assets to its stockholders.
Preferred Stock
Entitles its holders to a dividend at a stipulated rate on par, or to a stipulated amount per share in the case of nopar stock, before any dividend can be paid on the common stock.
Cumulative preferred
Must receive all dividends in arrears (i.e., not paid when they should have been) and the current year's dividend on preferred stock must be paid before dividends can be paid on common stock.
Non-cumulative preferred
is not entitled to receive dividends omitted in previous years.
Fully participating preferred
is entitled to proportionately share in dividends with common after common stock has received dividends at a defined amount (usually based on the par/stated value of the initial preferred dividend rate).
Partially participating preferred
is entitled to receive its basic preferred dividend rate plus it may be entitled to a limited additional rate after common has received dividends at a defined amount (usually based on the par/stated value of the initial preferred dividend rate).
Nonparticipating preferred
is entitled to receive its stipulated preferred dividend but no more.
Stock preferred as to assets in the event of dissolution and liquidation
is entitled to payment in full before any distributions are made to the common stockholders.
Convertible preferred stock,
at the option of the stockholder, may be convertible into shares of common stock of the issuing corporation. The conversion ratio will be stated in the certificate and may change with time.
Callable preferred
at the option of the corporation, may be redeemed at a set price by the corporation.
Fixed Cost
does not change in response to a change in volume of activity for a given relevant range of activity during a given period of time.
The fixed cost will change over time or due to other factors besides volume.
The fixed cost per unit decreases with an increase in activity.
Variable Costs
will vary in total as the volume of activity changes.
The variable cost per unit remains unchanged for a relevant range of activity.
Mixed Cost
contains both fixed and variable costs.
Example: Telephone bill with basic fixed monthly charge plus variable cost of long distance calls.
Manufacturing Cost Elements
Direct Material, Direct Labor, and Manufacturing Overhead
Product Costs
are those costs related to the manufacturing of a product (e.g., direct material, direct labor, and manufacturing overhead).
Period Costs
are those costs related to a particular accounting (time) period. Those costs which cannot justifiably be allocated to the cost of a product (e.g., president's salary, advertising, office supplies, personnel department salaries)
Joborder System
Costs "captured" for each unit produced.
Used where units are separately identifiable: specialized machinery, locomotives, TV's, computers, houses (construction), madetoorder items.
Process Cost System:
Costs "captured" by department (cutting, assembly, refining, packaging) and divided by the number of units (pounds, gallons, etc.) to arrive at a unit cost.
Used where individual units are not separately identifiable (e.g., oil, fertilizer, grains, cereal, etc.).
Classification of Inventory in a manufacturing business
Raw Materials, Works in process, Finished goods
Standard Costing
Uses carefully predetermined (budgeted) costs and inputs to value inventory. It calculates quantity and price variances from the standards in order to evaluate the performance and efficiency of the manufacturing operation
Ex: Construction industry
Total actual cost =
Good units produced(Actual hours worked per unit)(Actual cost of labor per unit)
Total Standard Cost =
(Good units produced)(Standard usage of labor per unit)(Standard cost of labor per hour)
Unfavorable Variance =
Total Actual Cost - Total Standard Cost
Labor Rate Variance =
(Actual Rate - Standard Rate) x Actual Hours
Labor Efficiency Variance
(Actual Hours - Standard Hours) x Standard Rate
Accounting Entry to Record Labor
Dr.
Work in Process (standard) 50,000
Labor Rate Variance 1,500
Labor Efficiency Variance 10,000
Cr.
Wages Payable (Actual) 61,500
To record purchase of materials
Dr.
Raw Materials Inventory
Cr.
Materials Price variance
Accounts payable
Material price variance
(Actual price - standard price)Actual purchase
Material usage variance
(Actual Quantity - Standard Quantity)x Standard Price
To Record Usage
Dr
Work in process
Material usage variance
Cr
Raw Material inventory
Static Budget
Prepared for a given level of activity
Flexible Budget
Prepared for a various levels of activity
Total Variable Costs =
variable costs per unit times the activity level
Total fixed cost =
will normally be the same for the various levels
Capital Budgeting is used for
long-lived assets
How do you select projects for capital budgeting?
Use the increment cash flows (exclude sunk costs)
Contribution margin
is the difference between revenues and variable costs
Contribution margin can be expressed three ways
Per Unit: Sales price per unit - variable cost per unit.
Percentage: (Sales Dollars - Variable Cost Dollars)/Sales Dollars
Total: Total Sales - Total Variable Costs
The Breakeven Point (BEP)
is the volume where the sales revenue exactly equals the Expenses (both fixed and variable).
BEP (in units) =
Fixed Cost/Contribution Margin per unit
BEP (in dollars) =
Fixed Cost/Contribution Margin Percentage
Target Sales (in units) =
(Fixed Cost + Target Profit)/Contribution Margin per unit
Target Sales (in dollars) =
(Fixed Cost + Target Profit)/Contribution Margin Percentage
Revenues or costs are relevant for decision making if
they differ among any of the alternatives; otherwise, the revenues or costs can be excluded from the analysis. In other words, incremental costs are included but sunk costs and cash flows that do not change are excluded from the analysis.
Fixed costs will not always be
irrelevant, e.g., insurance on a big car versus a small car.
Variable costs will not always be
relevant, e.g., the cost of gasoline used in operating a purchased car versus leasing the same car.
Opportunity cost
is the revenue foregone by accepting the next best alternative. It is generally an inputted cost and not a recorded cost.
When evaluating a "special order,"
the incremental revenue must exceed the incremental costs for acceptance.
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