AR Accounting

Chapter 1
The Financial Statements
Chapter objectives
use accounting vocabulary for decision making apply accounting concepts and principles use the accounting equation to describe an organization evaluate operating performance, financial position, and cash flows explain the relationships among the financial statements
Accounting & financial statements
Accounting is an information system that measures business activities, processes that information into reports and financial statements, and communicates the results to interested users. Financial statements are business documents that report financial information about a business entity to decision makers.
Dont confuse accounting with bookkeeping! What is it? The activity or profession of recording the money received and spent by a person, business, or organization
Also, we need an audit to validate the financial statements! What is it? Auditing is an independent assurance engagement done in order to make sure that the financial statements are fairly presented in accordance with established criteria.
Who uses accounting information?

individuals investors and creditors taxing authorities nonprofit organizations
Two kinds of accounting
Financial accounting is the branch of accounting that provides information to people outside the firm (external users). Management accounting is the branch of accounting that generates information form the internal decision makers of a business
Ethics in accounting: standards of professional conduct
.(A) CPA assumes an obligation of self-discipline above and beyond the requirements of laws and regulation.(and ) an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage. Excerpt, AICPA Code of Professional Conduct
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Business organizations
Proprietorship is a business with a single owner. Partnership is an association of two or more persons who co-owns a business for profit. Corporation is a business owned by stockholders / shareholders.
Stocks are shares into which the owners equity of a corporation is divided. Board of directors is group elected by stockholders to set a policy for a corporation and to appoint its officers.
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Accounting principles and concepts
Entity concept an organization or a section of an organization that, for accounting purposes, stands apart from other organizations and individuals as a separate economic unit. Reliability principle / objectivity principle accounting records and statements are based on the most reliable data available.
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Cost principle assets and services should be recorded at their actual costs. Going-concern concept an entity will remain in operation for the foreseeable future.
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Stable-monetary-unit concept the assumption that the monetary units purchasing power is relatively stable.
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Generally accepted accounting principles
Generally accepted accounting principles (GAAP) accounting guidelines that govern how accounting is practical. In the US, FASB formulates the GAAP.
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The accounting equation
Assets = Liabilities + Owners Equity
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The accounting equation
Assets are economic resources that are expected to produce a benefit in the future. Liabilities are economic obligations payable to an individual or an organization outside the business Owners equity claims of the owner/(s) of a business to the assets of the business. Also called capital, stockholders equity, or net assets.
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Assets
Assets can be classified into:
current assets expected to be converted to cash, sold, or consumed during the next 12 months or within the business operating cycle if longer than a year. noncurrent assets those with longterm economic benefits
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Assets
current assets

cash (and cash equivalents) short-term investments accounts and notes receivable inventories for merchandising type of business merchandise inventory for manufacturing type of business raw materials work-in-progress finished goods prepaid expenses and other current assets prepaid insurance, prepaid rent, supplies
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Assets
noncurrent assets
investments investments in debt financial instruments investments in equity financial instruments others property, plant, & equipment / plant assets / fixed assets (at cost) land building equipments furniture and fixtures intangible assets other assets
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Liabilities
Liabilities can be classified into:
current liabilities are debts due to be paid within one year or within the entitys operating cycle if the cycle is longer than a year. long-term liabilities those which are payable after a year.
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Liabilities
current liabilities

accounts payable income taxes payable short-term borrowings / short-term notes payable salaries and wages payable other current liabilities interest payable, utility payables
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Liabilities
long-term liabilities

long-term debt other long-term liabilities
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Owners equity
For proprietorships and partnerships
Capital Withdrawals
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Owners equity
For corporations
Paid-in capital the amount invested in the corporation by the stockholders. Common stock Preferred stock Additional paid-in capital - surplus on paid-in capital APIC on common stock APIC on preferred stock
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Owners equity
For corporations
Retained earnings amount earned by income-producing activities and kept for use in the business.
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The financial statements
Income statement
Statement of retained earnings
Balance sheet
Statement of cash flows

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Income statement
Income statement a financial statement listing an entitys revenues, expenses and net income or net loss for a specific period. Also called the statement of operations. Answers the question on how well did the company perform during a period? Revenues - Expenses =Net income / (net loss)
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Income statement
Example
YUM Brands, Inc. Consolidated Statements of Income Years Ended December 31, 2003 and 2002 (Figures are in millions USD) 2003 Revenues 1 Company sales 7,441 2 Franchise and license fees 939 3 Total revenues 8,380
2002 6,891 866 7,757
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Income statement
Example
YUM Brands, Inc. Consolidated Statements of Income Years Ended December 31, 2003 and 2002 (Figures are in millions USD) 2003 Expenses Company restaurants 4 Food & paper (CGS) 2,300 5 Payroll & employee benefits 2,024 6 Occupancy & other operating expenses 2,013 6,337
2002
2,109 1,875 1,806 5,790

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Income statement
Example
YUM Brands, Inc. Consolidated Statements of Income Years Ended December 31, 2003 and 2002 (Figures are in millions USD) 2003 7 General & administrative expenses 945 8 Franchise and license expenses 28 9 Other operating expenses (income) 11 10 Total expenses 7,321
2002 913 49 (25) 6,727
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Income statement
Example
YUM Brands, Inc. Consolidated Statements of Income Years Ended December 31, 2003 and 2002 (Figures are in millions USD) 2003 11 12 13 14 15 Operating profit Interest expense Income before income tax Income tax expense Net income 1,059 173 886 269 617
2002 1,030 172 858 275 583

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Income statement
Notes
reports revenues and expenses of the year. revenues and expenses are reported only in the income statement reports net income if total revenues exceed total expenses
if expenses exceed revenues, there is a net loss
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Statement of retained earnings a summary of the changes in the retained earnings of a corporation during a specific period. Answers the question on why did the companys retained earnings change during the year? Beginning retained earnings + Net income (or Net loss) - Dividends = Ending retained earnings
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Example
YUM Brands, Inc. Consolidated Statements of Retained Earnings Years Ended December 31, 2003 and 2002 (Figures are in millions USD) 2003 Retained earnings 1 Balance, beginning of year (203) 2 Net income 617 3 Less: Cash dividends declared ( 0) 4 Balance, end of year 414
2002 (786) 583 ( 0) (203)

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What are dividends?
Dividends are distributions to stockholders of assets (usually cash) generated by net income. They are not expenses and they never affect the net income.
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Statement of retained Earnings
Notes
opens with the beginning retained earnings balance adds net income (or subtracts net loss), net income figure is taken directly from the income statement subtracts dividends reports the retained earnings balance at the end of the year
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Balance sheet
Balance sheet reports an entitys assets, liabilities, & owners equity as of a specific date. Also called the statement of financial position. Answers the question on what is the companys financial position as at a specific period of time? Assets = Liabilities + Owners Equity
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Balance sheet
Example
YUM Brands, Inc. Consolidated Balance Sheet December 31, 2003 and 2002 (Figures are in millions USD)
2003
2002
1 2 3 4 5 6
ASSETS Current assets Cash & cash equivalents Short-term investments Accounts & notes receivables Inventories
192 15 169 67
130 27 168 63
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Balance sheet
Example
2003
2002
7 Prepaid expenses & other current assets 363 8 Total current assets 806 9 Property, plant & equipment, at cost 5,606 10 Less: Accumulated depreciation (2,326) 11 Property, plant & equipment, net 3,280
342 730 5,201 (2,164) 3,037

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Balance sheet
Example
2003 878 184 472 5,620
2002 849 229 555 5,400
12 13 14 15
Intangible assets Investments Other assets Total Assets
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Balance sheet
Example
2003
2002
16 17 18 19 20 21
LIABILITIES Current Liabilities Accounts payable Income taxes payable Short-term borrowings Salaries and wages payable
439 238 10 257
417 208 146 258

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Balance sheet
Example
2003 517 1,461 2,056 983 4,500
2002 419 1,520 2,299 987 4,806

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22 23 24 25 26
Other current liabilities Total Current Liabilities Long-term debt Other long-term liabilities Total Liabilities
Balance sheet
Example
2003
2002
27 SHAREHOLDERS EQUITY (SHE) 28 Common stock 29 Retained earnings (deficit) 30 Other equity 31 Total Shareholders Equity 32 Total Liabilities & SHE
916 1,046 414 ( 203) ( 210) ( 249) 1,120 594 5,620 5,400
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Balance sheet
Notes
reports assets, liabilities, and SHE at the end of the year. the only financial statement that reports assets and liabilities reports that assets equal the sum of liabilities plus SHE, hence called the balance sheet reports retained earnings which comes from the statement of retained earnings
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Statement of Cash Flows reports cash receipts and cash payments classified according to the entitys major activities: operating, investing, and financing. Answers the question on how much cash did the company generate and spend during the year? Operating cash flows +/- Investing cash flows +/- Financing cash flows = Increase (decrease in cash)
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What are operating activities?
They are activities that create revenue or expense in the entitys major line of business. They also affect the income statement. Example: cash sales, collections of accounts receivable, payments for all types of operating expenses
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What are investing activities?
They are activities that increase or decrease the long-term assets available to the business. Example: Sales of fixed assets, purchase of fixed assets
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What are financing activities?
They are activities that obtain from investors and creditors the cash needed to launch and sustain the business. Example: Borrowings from financial institutions (i.e. banks), payments for borrowings, issues of stocks to shareholders for cash, payments of dividends to shareholders.
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Example
YUM Brands, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 2003 and 2002 (Figures are in millions USD) 2003 1 Cash Flows Operating Activities 2 Net income 617 3 Adjustments to reconcile net income to net cash provided by operations 436 4 Net Cash Provided by Operating Activities 1,053
2002
583 505 1,088

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Example
YUM Brands, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 2003 and 2002 (Figures are in millions USD) 2003 5 6 7 8 9 Cash Flows Investing Activities Purchases of fixed assets Sales of fixed assets Others, net Net Cash Used in Investing Activities
2002
(663) 46 98 (519)
(760) 58 (183) (885)

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Example
YUM Brands, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 2003 and 2002 (Figures are in millions USD) 2003 10 Cash Flows Financing Activities 11 Issuance of common stock 12 Payment of short-term loans and long-term debts 13 Other, net 14 Net Cash Used in Financing Activities
2002
110 (307) (275) 472
125 (467) 159 (183)

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Example
YUM Brands, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 2003 and 2002 (Figures are in millions USD) 2003 15 Net Increase in Cash & Cash Equivalents 16 Cash & Cash Equivalents, Beginning of Year 17 Cash & Cash Equivalents, End of Year
2002
62 130 192
20 110 130
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Notes
reports cash flows from operating, investing, and financing. Each category results in net cash provided (an increase) or used (a decrease) reports whether cash increased (or decreased) during the year. ending cash balance is reported on the balance sheet
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end of presentation
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answer exercises E1-9, E1-10, E1-11, page 33
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Chapter 2
Transaction Analysis
Chapter objectives

analyze business transaction understand how accounting works record business transactions use a trial balance analyze transactions for quick decisions
Transactions
Transaction is any event that has financial impact on the business and can be measured reliably.
The Accounts
Account the record of the changes that have occurred in a particular asset, liability or stockholders equity during a period. The basic summary device of accounting. Following the accounting equation, accounts are of 3 broad types, namely:

assets liabilities stockholders (owners ) equity)

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Assets are economic resources that provide a future benefit for a business.
Assets
Cash money and any medium of exchange including bank account balances, paper currency, coins, certificates of deposits, and checks. Marketable securities highly-liquid short-term investments Accounts receivable a promise for future collection of cash resulting from sale of goods and / or services on credit. Notes receivable a written promise (through a promissory note) for future collection of cash resulting from sale of goods and / or services on credit. Inventory goods for sale to customers
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Assets
Prepaid expenses certain expenses in advance such as insurance, rent, and supplies Investments long-term assets held by the business for long-term benefits, i.e. long-term investments in financial instruments Land the cost of land being used by the business in its operations Buildings the cost of office building, manufacturing plant and the like. Equipment, furniture, and fixtures receivable the cost of equipments, furniture and fixtures. Intangibles assets with no physical existence, i.e. copyrights, brand name, goodwill, trademarks, secret 7 formula, franchise, and the like
Assets
Intangibles assets with no physical existence, i.e. copyrights, brand name, goodwill, trademarks, secret formula, franchise, and the like. Other assets assets which are not classifiable in the above-mentioned
Liabilities are economic obligations that results in a future cost to a business.
Liabilities
Notes payable a written promise (through a promissory note) for future payment in cash resulting from purchases of goods and / or services on credit. Accounts payable a promise for future payment in cash resulting from purchases of goods (usually an inventoriable item) on credit. Accrued liabilities a liability for an expense that has not yet been paid, i.e. interest payable, salary payable, income tax payable. Current portion of long-term debts the part of a debt payable (usually) in the next year.
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Liabilities
Long-term debts loans, bonds which are payable in the long-term basis. Other long-term liabilities includes other longterm liabilities not classifiable as long-term debts, i. e. long-term contingent liabilities.
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Stockholders equity (or shareholders' equity, or owners equity) owners claims to the assets of a business.
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Stockholders equity (SHE)
Capital stock owners investment in a corporation.

Common stock Preferred stock
Retained earnings the cumulative profits of a business.

Unappropriated Appropriated
Dividends a return to the owners on their investment.
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Stockholders equity (SHE)
Revenues increases in the SHE from delivering goods or services to customers. Expenses costs of operating a business which decreases SHE.
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Analysis of business transactions

Example: Dara Merchandise 1. Received $10,000 cash and issued common stock to the owners. 2. Paid $3,000 for land and $3,000 for building. 3. Purchased $1,500 worth of merchandise on account. 4. Sold $500 worth of merchandise for $750 on account. 5. Sold $500 worth of merchandise for $750 cash. 6. Paid cash expenses: rent, $100; salaries, $200; utilities,$ 150. 7. Collected $ 500 from transaction 4. 8. Paid $300 for transaction 3. 9. Paid $50 for family vacation in Kampong Som. 10. Paid and declared dividends of $30.
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Analysis of business transactions

Example: Dara Merchandise Requirements: 1. Analyze the effects of each transaction to the companys assets, liabilities, & SHE. 2. Disregarding taxes, prepare the following financial statements: a. income statement, b. statement of retained earnings, c. balance sheet.
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Double-entry accounting
Double-entry accounting is a system of recording of the dual effects business transactions on an entity.
Debit Credit Cash $10,000 Common stock $10,000
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Double-entry accounting
Note that each transaction affects at least 2 accounts! i.e. an asset & an equity i.e. an asset & a liability
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The T-account
Account title Debit Credit
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The T-account
Increases in assets are recorded on the debit side of the account. Decreases in assets are recorded on the credit side. Assets
Debit +
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The T-account
Increases in liabilities and SHE are recorded on the credit side of the account. Decreases in liabilities and SHE are recorded on the debit side. Liabilities (and also SHE)
Debit -
Credit +
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The T-account
Remember the following rules:

Asset accounts have debit balances Liability accounts have credit balances Capital stock accounts have credit balances. Retained earnings accounts have credit balances. Revenue accounts have credit balances. Expense accounts have debit balances.
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The flow of accounting data

1. Transactions occurs.
On 01 January 2009, Socheara Corp. issued stocks to investors for $1,000.
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2. Transactions are analyzed.
Analysis: Assets (cash) increased by $1,000 while SHE increased by $1,000
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3. Transactions are entered in the journal (journalizing).
Journal entry: 01/01/09 Debit Cash $1,000 Credit Common stock $1,000 Issued common shares to shareholders
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4. Amounts are posted to the ledger accounts (posting)
Cash $1,000 Common stock $1,000
$1,000
$1,000
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5. A list of all ledger accounts with their balances (trial balance) is prepared to show whether debits equal credits.
Socheara Corp. Trial Balance 31 January 2009 Balance Debit Credit $1,000 $1,000 $1,000 $1,000
Account Title Cash Common stock Total
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Error alert!
If the trial balance dont balance, do or remember the following: Search for missing accounts by tracing to and fro the journal to the ledger! Note that an errors doubles its amount, i.e. if you debited cash for $200 instead of crediting it, the out-of-balance will be $400. Divide it by 2 and you will find your error. If the out-of-balance is divisible by 9, there was a slide error (i.e. writing $81 as $810) or a transposition (entering $81 instead of $18).
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6. Financial statements are prepared, in the following order: Income statement Statement of retained earnings Balance sheet Statement of cash flows
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Recording transactions
Example: Dara Merchandise 1. Received $10,000 cash and issued stock to the owners. 2. Paid $3,000 for land and $3,000 for building. 3. Purchased $1,500 worth of merchandise on account. 4. Sold $500 worth of merchandise for $750 on account. 5. Sold $500 worth of merchandise for $750 cash. 6. Paid cash expenses: rent, $100; salaries, $200; utilities,$ 150. 7. Collected $ 500 from transaction 4. 8. Paid $300 for transaction 3. 9. Paid $50 for family vacation in Kampong Som. 10. Paid and declared dividends of $200.
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Recording transactions
Example: Dara Merchandise Requirements: 1. Prepare the necessary journal entries. 2. Post the accounts to the ledger accounts. 3. Prepare the trial balance. 4. Prepare the financial statements: a. income statement, b. statement of retained earnings, c. balance sheet.
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end of presentation
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answer exercises E2-7, E2-8, page 86.
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Chapter 3
Using Accrual Accounting To Measure Income
Chapter objectives

relate accrual accounting and cash flows apply the revenue and matching principles update the financial statements by adjusting the accounts prepare the financial statements close the books use the current ratio and the debt ratio to evaluate a business
Accrual accounting vs. cash-basis accounting
Accrual accounting accounting that records the impact of a business event as it occurs, regardless of whether the transaction affected cash. Cash- basis accounting accounting that records only transactions in which cash is paid or received.
Accrual accounting and cash flows
cash transactions recorded under accrual accounting

collecting from customers receiving cash from interest earned paying salaries, rent, and other expenses borrowing money paying off loans issuing stock
Accrual accounting and cash flows
non-cash transactions recorded under accrual accounting

purchases of inventory on account sales on account accrual of expenses incurred but not yet paid depreciation expense usage of prepaid rent, insurance, and supplies
The time-period concept
Time-period concept ensures that accounting information is reported at regular intervals, i.e.

calendar year fiscal year interim periods (monthly, quarterly, semiannually)
The revenue principle
Revenue principle the basis for recording revenues, i.e. It governs 2 things:
when to record revenue - revenues are recorded once earned (which in most cases refer to when a good has been delivered or a service has been performed). the amount of revenue to record the cash value of goods transferred to the customer.
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The matching principle
Matching principle the basis for recording expenses. It includes 2 steps:
identify all the expenses incurred during the accounting period (either paid in cash, or when an asset is used up, or when a liability is created); measure the expenses and match expenses against the revenues earned.
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Updating the accounts: the adjustment process
Categories of adjusting entries
Deferral an adjustment for which the business

paid or received cash in advance.
Accrual an expense or a revenue that occurs

before the business pays or receives cash.
Depreciation expense associated with
spreading (allocating) the cost of a plant over its useful life.
Other valuation accounts i.e. allowance

for bad debts
Purposes of the adjusting process
Measure income Update the balance sheet
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Therefore, each adjusting entry affects at least one:
Revenue or expense to measure income Asset or liability to update the balance sheet
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Example: Kaka Company had the following unadjusted accounts from its trial balance as at 31, December 2009: Cash Account receivable Loans receivable Inventory Prepaid expenses Land Equipment Accounts payable Bank loan Common stock Sales Cost of sales Salary expense 700 300 1,000 200 1,800 4,000 2,000
3,500 1,150
650 2,000 5,000 7,000
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Additional information: a. On January 1, 2009, Kaka Company prepaid a 3 year rent for $1,500 (rent = $500/year).
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Additional information: b. On February 14, 2009, Kaka Company bought office supplies for $300. On December 31, 2009, only $100 worth of office supplies remained.
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Additional information: c. On January 1, 2009, Kaka Company bought an equipment with an expected useful life of 5 years for $2,000.
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Additional information: d. Kaka Company pays its employees half of their salary on the 15th and the other half on the last 5th day of the next month. Monthly salary is at $100.
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Additional information: e. On January 1, 2009, Kaka Company was granted a 1 year, $1,000 loan by Nana Bank at 20% interest. The other $1,000 loan from Nana Bank was non-interest bearing.
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Additional information: f. On December 20, 2009, Kaka Company received $500 advance from Layheng for goods to be delivered on February 14, 2010. This was recorded as sales.
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Additional information: g. On January 31, 2009, Kaka Company estimated that $50 in accounts receivable are doubtful for collection.
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Required: Prepare the adjusting entries and the adjusted trial balance
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Closing the books
Closing the process of preparing the accounts to begin the next periods transactions; consists of journalizing and posting the closing entries to set the balances of the revenue, expense, and dividends to zero amounts. Closing entries entries that transfer the revenue, expense, and dividends balances from their respective accounts to the Retained Earnings account.
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Closing the books
Temporary account the revenue and expense accounts that relate to a limited period and are closed at the end of the period, including dividends. Permanent account the asset, liabilities, and equity accounts that are not closed at the end of the period.
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Closing the books
Required:
a. Using the prior sample problem (Nana Company), prepare the closing entries for Nana Company as at December 31, 2009 b. Prepare Kaka Companys income statement and balance sheet as at December 31, 2009.
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Classifying assets and liabilities

Current assets Long-term assets Current liabilities Long-term liabilities
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Formats for the financial statements
Balance sheet
report format lists assets on top, followed by liabilities and SHE account format lists assets on the left and liabilities and SHE on the right
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Formats for the financial statements
Income statement
single step lists all revenues together under a heading, i.e. Revenues or Revenues and Gains and expenses in Expenses or Expenses and Losses multiple step lists subtotals to highlight important relationships between revenues and expenses.
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Balance sheet report format

Assets Current assets Non-current assets Total assets Liabilities and shareholders equity Liabilities Current liabilities Noncurrent liabilities Total Liabilities Shareholders equity Capital stock Retained earnings Total shareholders equity Total liabilities and shareholders equity
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Balance sheet account format

Assets Liabilities and shareholders equity Liabilities Current assets Current liabilities Non-current assets Noncurrent liabilities Total Liabilities Shareholders equity Capital stock Retained earnings Total assets Total shareholders equity Total liabilities and shareholders equity
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Income statement single step

Revenues and gains Less: Expenses and losses Net income
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Income statement multiple step

Net sales revenue Less: Cost of goods sold Gross profit Less: Operating expenses Selling & distribution General & administration Operating income Add/(Less): Other income/ (Other expenses) Net income before interest & income tax Add/ (Less): Interest income/ (interest expense) Net income before income tax Less: income tax expense Net income
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Using accounting ratios
Current ratio: calculated as total current assets / total current liabilities
Debt ratio : calculated as total liabilities / total assets
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Using accounting ratios
Required:
a. Using the financial statements of Nana Company, calculate 1. the current ratio 2. the debt ratio.
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Ethical issues in accrual accounting
Ethical challenges maybe encountered in the application of accrual accounting.
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end of presentation
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answer exercises E3-20, pages 151-152, Practice Quiz, pages 153-156
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Chapter 4
Internal Control and Cash
Chapter objectives
set-up an effective system of internal control use a bank reconciliation as a control device apply internal controls to cash receipts and cash payments use a budget to manage cash
Internal control
Definition Internal control organizational plan and
related measures adopted by an entity to safeguard assets encourage adherence to company policies promote operational efficiency ensure accurate and reliable accounting records.
Internal control
Designing a system of internal control
An effective system of internal control must have the following characteristics competent, reliable and ethical personnel assignment of responsibilities proper authorization supervision of employees separation of duties internal and external audits documents and records electronic and computer controls other controls
Internal control
Limitations
collusion red-tape costs-benefits
The bank account as a control device

Check Check a document instructing a bank to pay the
designated person or business the specified amount of money. Parties to a check includes:
the maker, who signs the check the payee, to whom the check is drawn; and the bank, on which the check is drawn.

Electronic fund transfer Electronic fund transfer (EFT) system that
transfers cash by electronic communication rather than by paper documents.

Bank statement Bank statement document showing the
beginning and ending balances of a particular bank account listing the months transactions that affected the account.

Bank reconciliation Bank reconciliation a document explaining the
reasons for the difference between a depositors record and the banks records about the depositor's cash.

Items for reconciliation
Items recorded by the company but not yet recorded by the bank deposits in transit outstanding checks Items recorded by the bank but not yet recorded by the company bank collections electronic fund transfers service charge and the cost of printed checks interest revenue earned on checking account nonsufficient (NSF) fund checks Errors by the company or the bank

Adjusting journal entries
Dr. Cash Cr. Accounts / notes receivables Cr. Interest revenue Collections made by bank or thru EFT of accounts or notes (with interest, in case of notes) Dr. Cash Cr. Rent revenue (or any applicable revenue) Collections made by bank or thru EFT other than accounts / notes receivables

Dr. Cash Cr. Interest revenue Interest revenue earned on bank balance Dr. Miscellaneous expenses Cr. Cash For bank service charges and cost of printing checks

Dr. Accounts receivable Cr. Cash For NSF customer check returned by bank to the customer Dr. Insurance expense (or any applicable expense) Cr. Cash For payments made by bank or thru EFT in behalf of the company

Dr. Cash Cr. Accounts payable For an error made by the company in recording payments to accounts payable, if the amount credited is more than what should have been credited. Example: a business wrote a check to pay a $15 account payable, check written was at $150, thereby understating cash by $135 and having an account payable with a debit balance of $135.

Illustration: bank reconciliation
As at November, 2009, Choroks checkbook lists the following Date 01 04 09 13 14 18 26 28 30 Check no. 622 623 624 625 626 627 Item Muan Dividends Chima Chikay Cash Chingoy Chingan Paycheck Check $19 $116 43 58 50 25 275 1,526 Deposit
:
$525 506 622 579 521 471 446 171 1,697
Balance

Illustration: bank reconciliation
As at November, 2009, Bank Statement shows Balance Add: deposits Deduct: checks
:
$525 116
no. 622 623 624 625
amount $19 43 85 50 8 12
(197)
Other charges NSF check Service charge Balance
(20) $424
Required: prepare Choroks bank reconciliation as at 30 November 2009, as well as the necessary adjusting journal entries
Controlling and managing cash

Internal control: cash receipts Over-the-counter receipts
POS terminal offers control company policy require issuance of a sales receipt so that each sale gets recorded cash drawer opens only when a clerk enters an amount on the keypad machine record each transaction manager compares the cash in the register with the machines record of the days sales at the end of the day company treasurer deposits the cash in the bank total amount of the cash goes electronically to the accounting department accounting department debits cash

Internal control: cash receipts Mail receipts
many companies use a lockbox system all incoming mails should be opened by a mail room employee mail room employee compare the check received with the attached remittance advice mail room clerk totals the remittance advices at the end of the day, control total is given to a responsible official for verification cash receipts goes to treasurer who prepares the bank deposit mail room employee forwards the remittance advices to the accounting department

Internal control: cash receipts Mail receipts
finally, the controller compares the three records of the days cash receipts: the control total from the mail room the bank deposit amount from the cashier the debit to cash from the accounting department

Internal control: cash payments Payment by check
purchase request is prepared purchasing department sends a purchase order to the supplier when supplier ships the goods, the supplier also sends the invoice, or bill as the goods arrive, receiving department checks them for damage and lists the merchandise received on the receiving report accounting department combines the purchase order, invoice, and receiving report and forwards the same to designated officers for approval and payment.

Internal control: cash payments Payment by check
before approval, controller or treasurer should examine the documents to ensure that all are in agreement after payment, the check signer can punch a hole through the documents.

Petty cash Petty cash fund containing a small amount of cash
that is used to pay minor amounts.
Imprest system a way to account form petty cash

by maintaining a constant balance in the petty cash account, supported by the fund (cash +payment tickets) totaling the same amount.

Internal control: petty cash
petty cash is opened with a particular amount of cash and for which purpose, a check is issued to petty cash. petty cash custodian cashes the check and places the amount in the petty cash box (or any similar device). for each petty cash payment, the custodian prepares a petty cash ticket to list items purchased. cash balance + total of the tickets = the opening balance of the petty cash at all times.

Using a budget to manage cash Budget a quantitative expression of a plan that
helps managers coordinate the entitys activities.

Using a budget to manage cash
start with the companys cash balance at the start of the period using the amount left over from the prior period add the budgeted cash receipts and deduct the budgeted cash payments the beginning balance plus receipts and minus payments equals the expected cash balance at the end of the period compare the ending cash balance to the budgeted cash balance at the end of the period for excesses or deficits for planning the companys future cash uses or additional financing.

Format: cash budget for the next period
Actual cash balance, end of a period Add: budgeted cash receipts Less: budgeted cash payments Cash available (needed) Budgeted cash balance, next period Cash available for additional investments (if +) / New financing needed (if -)

Reporting cash on the balance sheet Cash currency, coins and amounts on deposit in
bank accounts, checking accounts, and some savings accounts, reported in the balance sheet as current assets under the title cash and cash equivalents.
Cash equivalents time deposits and certificates of

deposits (CD) which are interest-bearing and can be withdrawn with no penalty, reported in the balance sheet as current assets under the title cash and cash equivalents.

Reporting cash on the balance sheet Cash pledged as collateral reported in the
balance sheet as a noncurrent asset
Cash under a compensating balance agreement a minimum balance in a checking
account to be maintained at all times by one who borrowed money from a bank until such loan is paid; reported in the balance sheet either as a current asset or noncurrent asset depending on the term of the loan.
end of presentation
Chapter 5 Short-Term Investments and Receivables
Chapter objectives
account for short-term investments apply internal controls to receivables use the allowance method for uncollectible receivables accounts for notes receivables use days sales in receivables and the acid-test ratio to evaluate financial position
Terminology
Creditor the party to whom money is owed. Debtor the party who owes money. Debt instrument a receivable or a payable, usually
some form of note. Equity security stock certificate that represents the investors ownership in a corporation. Maturity the date on which a debt instrument must be paid. Term the length of time from inception to maturity.
Short-term investments
Definitions and categories Short-term investments also called
marketable securities are investments that a company plans to hold for 1 year or less. A short term investment falls into one of 3 categories: chapter)
Trading current assets (covered in this Available for sale current assets only if the Held to maturity noncurrent asset
company plans to sale them in the following year (covered in chapter 10)
Trading investments Trading investments stock / debt
instrument investments that are to be sold in the near future with the intent of generating profits on the sale.
Journal entries
Dr. Short-term investments Cr. Cash Purchased short-term investment Dr. Cash Cr. Dividend revenue Received dividend
Journal entries
Dr. Short-term investment Cr. Unrealized gain on short-term investment Adjusted investment at current market value (year end) or Dr. Unrealized loss on short-term investment Cr. Short-term investment Adjusted investment at current market value (year end)
Journal entries
Dr. Cash Dr. Realized loss on sale of short-term investment Cr. Short term investment Sold investment at loss (if selling price {SP} is lesser than carrying value {CV}) or Dr. Cash Cr. Short-term investment Cr. Realized gain on sale of short-term investment Sold investment at gain (if SP is higher than CV)
Reporting on the balance sheet
Short-term investments are current assets. They appear on the balance sheet immediately after cash. They are reported at current market values.
Reporting on the income statement
Interest revenue (for short-term investment in debt securities) is reported in the income statement as financial revenue (or interest revenue). Dividend revenue (for short-term investment in equity securities) is reported in the income statement as other revenues. Realized / unrealized gains (or losses) for changes between carrying amount and current market values are reported in the income statement as other revenues (or losses).
Accounts and notes receivable

Receivables Receivables monetary claims against a business
or an individual, acquired mainly by selling goods or services, and by lending money.

Types of receivables Accounts receivables also referred to as trade
receivables.
Notes receivables - a written promise to pay a
definite sum at the maturity date. For this purpose, a debtor may be required to pledged security for the loan giving the creditor a collateral - a permission to claim certain assets if the debtor fails to pay the amount due. Short-term notes are reported as current assets

Types of receivables
Installment notes only the amount receivable in the following year is reported as current assets, the rests being reported as noncurrent assets. Long-term notes are reported as noncurrent assets (long-term investment) with the current portion (amount receivable in the following year) reported as current.
Other receivables miscellaneous category

that includes advances to employees, etc.

Establishing internal control over collections
The supervisor could open incoming mail and make daily bank deposits Bookkeeper should not be allowed to handle cash. Only remittance advices would be forwarded to the bookkeeper to credit customer accounts. Or A bank lockbox can be established. Customers can then send their payments directly to the companys bank which prepares a remittance advice. Bank then forwards the remittance advice to the companys bookkeeper who credits the customer account.

Managing the risk of not collecting
Extend credit only to credit-worthy customers by running a credit check on prospective customers. Separate cash handling and accounting duties designed to keep employees from stealing cash collections. Pursue collection from customers to maximize cash flow by keeping an eye on their paying habits, send second, third , (or fourth?) statements, if necessary. Consider cost and benefits, however in doing the abovementioned.
Accounting for uncollectible receivables

Uncollectible-account expense Uncollectible-account expense cost to the
seller of extending credit. arises from the failure to collect from credit customers also called doubtful-account expense or bad debt expense. Accounting for uncollectibles can be: Allowance method Direct write-off method in certain limited circumstances

Allowance method Allowance method a method of recording
collection losses based on estimates of how much money the business will not collect form customers. percent-of-sales-method aging-of-receivables
Allowance for uncollectible account contra-
asset account, related to accounts receivable, that hold the estimated amount of collection losses, also called allowance for doubtful accounts, allowance for bad debts.

Journal entries allowance method
Dr. Uncollectible account expense Cr. Allowance for uncollectibles To set-up allowance Dr. Uncollectible account expense Cr. Allowance for uncollectibles To adjust allowance at end of period (to increase) Dr. Allowance for uncollectibles Cr. Uncollectible account expense To adjust allowance at end of period (to decrease)

Dr. Cash Cr. Account receivables Dr. Allowance for uncollectibles Cr. Uncollectible account expense To record subsequent collection after allowance was provided.

Dr. Allowance for uncollectibles Cr. Accounts receivable To write off account Dr. Cash Cr. Other revenues To record subsequent collection of previously written-off account

Percent-of-sales-method Percent-of-sales-method computes
uncollectible account expense as percentage of net sales. Also called the income statement approach because it focuses on the amount of expense to be reported on the income statement.

Illustration percent-of-sales-method
Chhroc Corp. had the following unadjusted balances, as at 31 December 2009. Accounts receivables $ 5,000 Allowance for uncollectible accounts 50 Credit department estimated that at year end, uncollectible accounts is at 1% of total revenues. Total revenues is at $10,000. Required: calculate allowance and prepare journal entries.

Aging-of-receivables Aging-of-receivables a way to estimate bad
debts by analyzing individual accounts receivable according to the length of time they have been receivable form the customer. Also called the balance sheet approach.

Illustration aging-of-receivables
Ek-ek Corp. had the following unadjusted balances, as at 31 December 2009. Accounts receivables $ 5,000 Allowance for uncollectible accounts 50 Per subsidiary ledgers, breakdown of account receivables are as follows: $2,900 (Sina, 25 days) $2,025 (Bopha, 33 days) $ 50 (Aka, 69 days) $ 25 (Sophea, 91 days) Credit department estimated that at year end, uncollectible accounts is at 1% for accounts from 1-30 days, 3% for accounts from 31-60 days, 20% for accounts from 61-90 days, and 80% for accounts from 91 days above. Required: calculate allowance and prepare journal entries.

Direct write-off method
Direct write-off method a method for accounting for bad debts in which the company waits until a customer account proves uncollectible.

Journal entries - direct write-off method
Dr. Uncollectible expense Cr. Accounts receivable Wrote off bad accounts by direct write-off method. Dr. Cash Cr. Other revenues To record subsequent collections after write-off.
Computing cash collections from customers

Items in the receivable account
Accounts receivables Beg. balance Sales revenue End. balance Collections Write-off
Notes receivable
Parties Creditor has a note receivable Debtor has a note payable
Notes receivable
Terms Principal amount borrowed by the debtor, lent
by the creditor
Interest borrowers cost of renting money from

the lender, a revenue to the lender and expense to the borrower.
Notes receivable
Journal entries
Dr. Note receivable Cr. Cash To extend a loan Dr. Interest receivable Cr. Interest revenue To accrue interest Dr. Cash Cr. Interest receivable To collect interest
Notes receivable
Journal entries
Dr. Cash Cr. Note receivable To collect note at maturity or Dr. Cash Cr. Note receivable Cr. Interest revenue Cr. Interest receivable To collect note at maturity together with latest interest revenue, + collection of previously uncollected interest receivable
Notes receivable
Speeding up cash flows Credit card / bank card sales merchant sales
merchandise and lets customers pay with a credit card / bank card.
Dr. Cash Dr. Financing expense Cr. Sales revenue
Notes receivable
Speeding up cash flows Selling receivables or factoring , in which the
company sells its receivable to another (called the factor).
Dr. Cash Dr. Financing expense Cr. Accounts receivable
Notes receivable
Speeding up cash flows Selling notes receivables or discounting , in
which the company sells its notes receivable to another
Dr. Cash Dr. Financing expense Cr. Notes receivable
Using ratios to make decisions

Days sales in receivables Days sales in receivables or the collection
period, is the ratio of average net accounts receivable to one days sales; indicates how many days sales remain in accounts receivables awaiting collection.
the shorter is the days sales in receivables, the better length of collection period depends on a companys credit terms

Formula
Net sales 365 days
One days sales
Days' sales in average receivables
Average receivables One days sales

Accounts receivables turnover Accounts receivable turnover captures the
same information with days sales in receivables; measures the speed of collection by the number of times of collections made during the year.

Formula
Net sales Average net accounts receivables
Account receivables = turnover

Acid-test (or quick ratio) Acid-test ratio ratio of the sum of cash plus
short-term investments plus net current receivables to total current liabilities, indicates whether the entity can pay all its current liabilities if they come due immediately.
the higher is the ratio, the easier it is to pay current liabilities 1.0 is safe

Formula
Cash + short term investments + Net current receivables Total current liabilities
Acid-test ratio
Reporting on the statement of cash flows

Important points
Collections of accounts receivables are operating cash inflows. Collections from notes are investing cash inflows as long as the notes are received other than the usual course of business (long-term notes, in most cases). Interest received from notes are treated as operating cash inflows.
end of presentation
Chapter 6 Merchandise Inventory and Cost of Goods Sold
Chapter objectives
account for inventory transactions analyze the various inventory methods identify the income and the tax effects of the inventory methods use the gross profit percentage and inventory turnover to evaluate a business
Terminology
Inventory the merchandise that a company sells to
customers.
Cost of goods sold the cost of inventory the

business sold to customers. Note that this accounts are not present in the financial statements of a service-type company.
Accounting for inventory

Accounting principles
Consistency Disclosure Conservatism

Sales price vs. cost of inventory Sales revenue in the income statements is
based on the sales price of the inventory sold based on the cost of inventory sold
Cost of good sold in the income statement is Gross profit also called the gross margin is
the excess of sales revenue over cost of goods sold. cost of goods still on hand.
Inventory in the balance sheet is based on the

Inventory accounting systems Periodic inventory system an inventory
system in which the business does not keep a continuous record of the inventory on hand. Instead, at the end of the period, the business makes a physical count of the inventory on hand and applies the appropriate unit costs to determine the cost of the ending inventory.
Perpetual inventory system an inventory
system in which the business keeps a continuous record for each inventory item to show the inventory on hand at all times.

Inventory accounting systems Perpetual
keeps a running record of all goods bought and sold inventory counted at least once a year used for all types of goods
Periodic
does not keep a running record of all goods bought and sold inventory counted at least once a year used for inexpensive goods

Journal entries periodic system
Dr. Inventory Cr. Cash / Accounts payable Purchased inventory Dr. Cash / Accounts receivable Cr. Sales revenue Sold inventory

Journal entries perpetual system
Dr. Inventory Cr. Cash / Accounts payable Purchased inventory Dr. Cash / Accounts receivable Cr. Sales revenue Sold inventory + Dr. Cost of goods sold Cr. Inventory Sold inventory
Inventory costing
What goes into inventory cost?
Purchase price + Freight-in - Purchase returns - Purchaser allowances - Purchase discounts
Inventory costing
Inventory methods Specific-unit-cost method based on the
specific cost of particular units of inventory. See exhibit 6-6.
Average-cost method based on the average

cost of inventory during the period. Average cost is determined by dividing the cost of goods available by the number of units available. Also called the weighted average method.
Inventory costing
Inventory methods FIFO method the first costs into inventory are
the first costs out to cost of goods sold. Ending inventory is based on the cost of the most recent purchases. Offers a more up-to-date inventory figures. In periods of rising prices, taxes are highest.
LIFO method the last costs into inventory are

the first costs out to cost of goods sold. Ending inventory is based on the oldest costs. Offers a more realistic net income figure. In periods of rising prices, taxes are lowest. Other countries dont allow its use, i.e. UK, Australia.
Inventory costing
First-In, First-Out (FIFO)
Oldest Costs
Costs of Goods Sold
Recent Costs
Ending Inventory
Inventory costing
Last-In, First-Out (LIFO)
Recent Costs
Costs of Goods Sold
Oldest Costs
Ending Inventory
Inventory costing
Illustration of costing methods
Inventory on January 1, Year 2 40 @ $500 Inventories purchased during the year 60 @ $600 Cost of goods available for sale 100 units
$ 20,000 36,000 $ 56,000
Note: 30 units are sold in Year 2 for $800 each.
Inventory costing
Illustration of costing methods
Beginning Inventory $20,000 $20,000 $20,000 Net Purchases = $36,000 = $36,000 = $36,000 = Cost of Goods Sold $15,000 $18,000 $16,800 Ending Inventory $41,000 $38,000 $39,200
FIFO LIFO Average
+ + + +
+ + + +
With sales of $24,000 for the period, then gross profit under each method is: Sales - Cost of Goods Sold = Gross Profit FIFO $24,000 - 15,000 = $9,000 LIFO $24,000 - 18,000 = $6,000 Average $24,000 - 16,800 = $7,200
Inventory costing
LIFO liquidations
When LIFO is used and inventory quantities fall below the level of the previous period, a company has to dip into older layers of inventory costs to be matched against current selling prices. In periods of rising prices, dipping into lower cost layers can inflate profits.
Inventory valuation
LCM
Inventory must be reported at market value when market is lower than cost.
Defined as current replacement cost (not sales price).
Can be applied three ways: (1) (2) separately to each individual item. to major categories of assets. to the whole inventory.
Dictated by the conservatism principle.
(3)
Inventory valuation
Illustration on inventory valuation
Units on Total Inventory Items Hand Total Cost Market Items Categories Cycles: Roadster 20 $ 160,000 $ 140,000 $ 140,000 Sprint 10 50,000 60,000 50,000 Category subtotal $ 210,000 $ 200,000 $ 200,000 Off-Road Trax-4 Blaz'm Category subtotal Total
LCM Applied to
Whole
8 $ 40,000 $ 52,000 40,000 5 45,000 35,000 35,000 $ 85,000 $ 87,000 85,000 $ 295,000 $ 287,000 $ 265,000 $ 285,000 $ 287,000
Inventory valuation
Illustration on inventory valuation
Dr. Cost of goods sold 8,000 Cr. Inventory 8,000 Wrote down inventory to LCM (highest figure between per item, per category, by whole)
Inventory and the financial statements

Analyzing financial statements Gross profit percentage = GP / net sales
revenue
Inventory turnover = CGS / average inventory
Additional inventory issues

CGS model
beginning inventory + purchases = goods available - ending inventory = cost of goods sold See exhibit 6-14

Estimating inventory using the GP method
beginning inventory + purchases = goods available - cost of goods sold = ending inventory See exhibit 6-15

Effects of inventory errors
See exhibit 6-15
Read: Accounting Alert Cooking The Books Page 281-282
end of presentation
Chapter 7 Plant Assets, Natural Resources, and Intangibles
Chapter objectives
determine the cost of plant asset account for depreciation select the best depreciation method analyze the effect of plant asset disposal account for natural resources and depletion account for intangible assets and amortization report plant assets transactions on the statement of cash flows
Terminology
Plant assets or fixed assets are long-lived assets,
such as land, buildings, machinery and equipment, furniture and fixtures, land improvements, and natural resources used in the operations of a business. Except for land, plant assets are depreciable.
Intangible assets assets with no physical form,

carrying special rights to current and expected future benefits, such as patents, copyrights, trademarks, and goodwill. Except for goodwill, intangible assets are amortizable.
Valuation of plant assets

Land
The cost of any asset is the sum of all the costs incurred to bring the asset to its intended use. The cost of land includes the following: purchase price (cash plus any note payable given, if any) brokerage commission survey fees legal fees any back property taxes that the purchaser needs to pay expenditures for grading and clearing the land and for demolishing or removing unwanted buildings.

Land
Land is not expensed over time because its usefulness does not increase.

Buildings
The cost of a constructed building includes the following: architectural fees, building permits, contractors charges, payments for material, labor, and overhead, plus any interest related to money borrowed to finance the construction if the company constructs its own building.

Buildings
The cost of a purchased building whether old or new, includes the following: purchase price, brokerage commission, sales and other unpaid taxes, and all expenditures to repair and renovate (in case of an old one) the building for its intended purpose.

Buildings
Building is to be depreciated over its estimated economic life.

Machinery and equipment
The cost of machinery and equipment includes the following: purchase price (less any discounts) plus transportation and insurance while in transit sales and other taxes, purchase commission, installation costs and any expenditures to test the asset before it is placed in service, any special platforms After the asset is up and running, any insurance, taxes, and maintenance costs are recorded as expenses.

Machinery and equipment
Machinery and equipment is to be depreciated over its estimated economic life.

Land improvements
This account includes costs for such other items as: driveways, signs, fences, sprinkler systems Although these assets are located in the land, they are depreciable hence their cost should be depreciated.

Leasehold improvements
This account includes costs of improvements for such items embedded in a leased (rented) asset. The cost of leasehold improvements should be depreciated over the term of the lease. Most companies call the depreciation on leasehold improvements as amortization.

Lump-sum purchases of assets Relative-sales-value method - if several
assets are purchased for a single amount, the cost for each asset is calculated based on their respective relative sales / market values.
Capital expenditure vs. immediate expense

Capital expenditure Capital expenditure is an expenditure that
increases an assets capacity, or its efficiency, or extends its useful life. This kind of expenditures are additions to the particular asset account.
Capital expenditure vs. immediate expense

Immediate expense
This kind of expenditure do not extend an assets useful life, nor make it more capable or efficient. It merely maintain the asset (maintenance expense) or restore it to working order (repair expense), hence recorded as ordinary expense.
Measuring plant asset depreciation

Meaning and causes of depreciation Depreciation is the process of allocating a
plant assets cost to expense over its life. Depreciation is caused by: Physical wear and tear Obsolescence

Factors necessary in measuring depreciation
Cost of the asset Estimated useful life Estimated residual value An assets depreciable cost is equal to its cost less any residual value.

Depreciation methods Straight line
Cost Residual value Useful life in years
Depreciation per year =

Depreciation methods Units-of-production
Depreciation per year = unit of output
Cost Residual value Useful life in units of production

Depreciation methods Double-declining-balance
Declining book value Depr. per year = x Straight-line depreciation rate x 2
Other issues in accounting for plant assets

Depreciation for tax purposes
For taxation purposes, most companies use an accelerated depreciation method. Note that financial accounting differs from taxation, hence a company may use straight-line for accounting purposes (i.e. preparing financial statements for shareholders), while using an accelerated method for taxation purposes.

Depreciation for partial year
The technique is to first compute for the depreciation for a whole year and prorate the figure by the number of months passed divided by 12 months.

Changing the useful life of an asset
Remaining book value (New) Estimated useful life remaining
(New) Annual depr. =

Fully depreciated plant assets
A fully depreciated asset is an asset that has reached the end of its estimated useful life (where cost = accumulated depreciation) An asset with zero value does not mean that it is useless or worthless, hence if still being use, can be reported in a companys balance sheet. If not, it should be taken out from the balance sheet.

Disposing a plant asset
Dr. Acc. depc. Cr. Machinery To dispose a fully depreciated asset xxx xxx
Dr. Acc. depc. xxx Dr. Loss on disposal of machinery xxx Cr. Machinery xxx To dispose an asset that is not fully depreciated

Selling a plant asset
Dr. Acc. depc. xxx Dr. Loss on sale of machinery xxx Cr. Machinery xxx To record sale of an asset at a loss (book value higher than selling price) Dr. Acc. depc. xxx Cr. Gain on sale of machinery xxx Cr. Machinery xxx To record sale of an asset at a gain (selling price higher than book value)

Exchanging plant assets
Dr. Machinery (new) xxx Dr. Acc. depr. (old) xxx Cr. Machinery (old) xxx Cr. Cash xxx To record trade-in of an old asset with a new one.
Accounting for natural resources

Natural resources Natural resources are plant assets of a special
type, i.e. iron ore, petroleum, timber, etc.
Accounting for natural resources

Depletion of natural resources
Natural resources will be depleted eventually, hence the computation of depletion expense and accumulated depletion. Depletion is calculated in the same way as the unitof-production method of depreciation.
Accounting for intangibles

Intangibles
Intangibles includes: Patents Copyrights Trademarks and trade names Franchises and licenses Goodwill
Accounting for intangibles

Amortization of intangibles
As a rule, identifiable intangibles are to be amortized over the shorter of their useful lives or legal lives, but not to exceed 40 years. Conflicts however shall be noted: Patents amortized over its useful life, or legal life of 20 years (US) Copyrights - amortized over its useful life, or legal life of 70 years (US) Trademarks and trade names amortized over its useful life or not at all if expected to generate cash flow indefinitely Franchises and licenses useful life in most cases is indefinite hence need not be amortized. Goodwill to be tested for impairment annually and not amortized
Others
Research and development costs
R&D costs are expensed when incurred, except in limited circumstances, i.e. R&D is made in behalf of a client who guarantees that such costs will be recovered from him/her.
Others
Reporting plant assets transactions in the cash flow statement
Depreciations, amortizations, depletions, gains and losses on sale or disposals are adjustments in calculating cash flow from operations (using indirect method). Acquisitions in cash are investing cash outflows Sales in cash are investing cash inflows.
end of presentation
Chapter 8
Current and Long-Term Liabilities
Chapter objectives
identify current liabilities and long-term liabilities record bonds payable transactions record interest expense understand the advantages and disadvantages of borrowing report liabilities on the balance sheet
end of presentation
Chapter 9
Stockholders Equity
Chapter objectives

identify the advantages and disadvantages of a corporation measure the effect of issuing stock on a companys financial position account for dividends and measure their impact on a company identify different stock values in decision making evaluate a companys ROA and ROE report SHE transactions on the statement of cash flows
2
end of presentation

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Chapter 1

The Financial Statements

Accounting & financial statements

Who uses accounting information?

individuals investors and creditors taxing authorities nonprofit organizations

Two kinds of accounting

Ethics in accounting: standards of professional conduct

Accounting principles and concepts

Accounting principles and concepts

Accounting principles and concepts

Generally accepted accounting principles

The accounting equation

Assets = Liabilities + Owners Equity

The accounting equation

Assets can be classified into:

Liabilities can be classified into:

long-term debt other long-term liabilities

For proprietorships and partnerships

The financial statements

Statement of retained earnings

Statement of cash flows

2002 6,891 866 7,757

2,109 1,875 1,806 5,790

2002 913 49 (25) 6,727

2002 1,030 172 858 275 583

if expenses exceed revenues, there is a net loss

Statement of retained earnings

Statement of retained earnings

2002 (786) 583 ( 0) (203)

What are dividends?

Statement of retained Earnings

342 730 5,201 (2,164) 3,037

2003 878 184 472 5,620

2002 849 229 555 5,400

Intangible assets Investments Other assets Total Assets

439 238 10 257

417 208 146 258

2003 517 1,461 2,056 983 4,500

2002 419 1,520 2,299 987 4,806

Statement of cash flows

What are operating activities?

What are investing activities?

What are financing activities?

Statement of cash flows

583 505 1,088

Statement of cash flows

(760) 58 (183) (885)

Statement of cash flows

110 (307) (275) 472

125 (467) 159 (183)

Statement of cash flows

Statement of cash flows

answer exercises E1-9, E1-10, E1-11, page 33

assets liabilities stockholders (owners ) equity)

Liabilities are economic obligations that results in a future cost to a business.

Stockholders equity (SHE)

Capital stock owners investment in a corporation.

Common stock Preferred stock

Retained earnings the cumulative profits of a business.

Dividends a return to the owners on their investment.

Stockholders equity (SHE)

Analysis of business transactions

Analysis of business transactions