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chapter 1


chapter 1 ACC 211

Principles of Financial Accounting
Seth Levine

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Principles of Financial Accounting
Seth Levine
Study Guide
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This 8 page Study Guide was uploaded by an elite notetaker on Friday August 28, 2015. The Study Guide belongs to ACC 211 at University of Miami taught by Seth Levine in Fall 2015. Since its upload, it has received 69 views. For similar materials see Principles of Financial Accounting in Accounting at University of Miami.


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Date Created: 08/28/15
Accounting 211 Study Guide Exam 2 Chapter 5 7 Emilie Croonenberghs 1 Who are the internal users of accounting information CHAPTER 5 Regulators a b Securities and Exchange Commission SEC to protect investors and maintain the integrity of the securities markets oversees the work of FASB amp GAAP the U government agency that determines the financial statements that public companies must provide to stockholders and the rules they must go by Financial Accounting Standards Board FASB sets generally accepted accounting principles GAAP the private sector body given the primary responsibility to work out the detailed rules that become generally accepted accounting principles GAAP Public Company Accounting Oversight Board PCAOB which sets auditing standards for independent auditors CPA s of public companies the private sector body given the primary responsibility to issue detailed auditing standards Managers a b c Chief Executive Officer CEO highest officer of the company Chief Financial Officer CFO highest associated with the financial and accounting side of the business Accounting Staff they prepare the details of the reports and also bear professional responsibility for the accuracy of the information Board of Directors elected by the stockholders to represent their interests a b Audit committee responsible for maintaining the integrity of the company s financial report s Electronic Date Gathering and Retrieval EDGAR companies file their SEC forms electronically through the EDGAR service which is sponsored by the SEC Auditors SEC requires publicly traded companies to have their statements controlled a b Independent Auditors follow established auditing standards to assess the fairness of the financial statements and related presentations Unqualified clean Audit Opinion CPA an auditors statement that the financial statements that the financial statements are fair presentations in all material aspect in conformity with GAAP InformationIntermediaries a Most investors rely on company websites information services and financial analysts to gather and analyze information b Companies actually file their SEC forms electronically through the EDGAR Electronic Data Gathering and Retrieval Service which is sponsored by the SEC c Financial Analysts receive accounting reports and other information about the company from electronic information services They also gather information through conversations with company executives and visits to company facilities and competitors The results of their analyses are combined into analysts reports Users of Information a Institutional Investors includes pension mutual endowment and other funds that invest on the behalf of others b Private Investors individuals who purchase shares in companies c Lenders or Creditors supplies banks commercial credit companies and other financial institutions that lend money to companies 2 Who are the external users of accounting information CHAPTER 5 3 The Triangle of Fraud CHAPTER 5 The three conditions are necessary for financial statements fraud to occur a Incentive the need perceived or real b Opportunity it s there for the taking it s so easy c Rationalization why not They can afford it No one will notice they all do it Incentive Rationalization Opportunity 4 What are current assets CHAPTER 5 Current Assets are assets that will be used or turned into cash within one year Inventory is always considered a current asset regardless of the time needed to produce and sell it Are listed in order of liquidity 5 What are intangible assets amp tangible assets CHAPTER 5 Intangible Assets have no physical existence and a long life Patents Trademarks Copyrights Franchises Goodwill Tangible Assets physical substance that is they can be touched The three longlived tangible assets are V Land used in operations V Building Fixtures and Equipment used in operations V Natural Resources used in operations Land buildings fixtures and equipment are also called property plant and equipment or fixed assets What are current liabilities CHAPTER 5 Current Liabilities obligations that will be settles by providing cash goods other currents assets or services within the coming year V On the balance sheet they are listed in order of maturity Annual Reports and Form 10K CHAPTER 5 Annual Reports simple documents photocopied on white bond paper They include V Income Statement Balance Sheet Stockholder s Equity or Retained Earnings Statement and Cash Flow Statement V Related Notes footnotes V Report of Independent Accountants Auditors Opinion if they are audited The SEC requires for publicly traded companies three main know reports a Form 10K the annual report that publicly traded companies must files for the SEC includes detailed information about the company b Form 10Q quarterly report that publicly traded companies must file with the SEC which DOES NOT have to be audited Information required is not as detailed c Form 8K used by publicly traded companies to disclose any material event not previously reported that is important to investors eg Auditor changes Mergers 8 Classified Income Statement CHAPTER 5 Net Sales Cost of Goods Sold Gross Pro t Operatlng Expense ncome from Operations 5 NonOperatlng RevenuesExpenses amp GalnsLosses Net Sales Income before Income Tax Income Tax Expense Net Income Gross Profit or Gross Margin is net sales less cost of goods sold COGS Regardless of whether a company reports a gross profit subtotal the income statement presents the same information Operating Income or Income from Operations equals net sales less cost of goods sold and other operating expenses Income before Income Taxes revenues minus all expenses except income tax expense Non Recurring Items that companies may report on their income statement are Discounted Operations Extraordinary Items 9 What is Gross Profit Gross Profit Percentage and how do you calculate both 10What are the tasks of the PCAOB 11What does GAAP DO 12What are the tasks of the SEC 13What are the tasks of the FASB 14Who has ultimate responsibility for the company s financial statements 15What are the responsibilities of the board of directors 16What are the responsibilities of the audit committee 17What are the tasks of the external auditors 18What is the purpose of an external audit 19 Return On Assets ROA CHAPTER 5 Return on Assets Net Income Average Total Return on Assets Net Profit Margln X Total Asset Net Income Net lncorgf Net Sales Average Total AssEts Net Sales Average Net Profit Margin Net Income Net Sales It can be increased by a Increasing sales volumes b Increasing sales price c Decreasing cost of goods sold and operating expenses Total Asset Turnover Net Sales Average Total Assets It can be increased by a Centralizing distribution to reduce inventory kept on hand b Consolidating production facilities in fewer factories to reduce the amount of assets 20What is FOB SHIPPING amp FOB DESTINATION CHAPTER 6 Free On Board Shipping Point FOB title changes hands at shipment and the buyer normally pays foe shipping Revenue from goods shipped FOB SHIPPING are normally recognized at shipment Free On Board Destination FOB title changes hands on delivery and the seller normally pays for the shipping Revenues from goods shipped FOB DESTINATION are recognized at delivery 21Sales Discounts to Businesses CHAPTER 6 Sales Discount Cash Discount a cash discount offered to encourage prompt payment of an account receivable 210 n30 read as quotTwo ten net thirty The first number represents the discount percentage 2 percent The second number represents the discount period 10 days The letter n stands for the word net the total sales less any returns The last number represents the maximum days in the credit period 22Measuring and Reporting Receivables CHAPTER 6 Accounts Receivable created when companies have sales to customers on open accounts Notes Receivables written promises from another party to pay with specified terms Trade Receivables amounts owed to the business for credit sales of goods or services Nontrade Receivables amounts owed to the business for other than business transactions 23Accounting for Bad Debts CHAPTER 6 Bad Debts result from credit customers who will not pay the amount they owe regardless of collection efforts a Matching Principles Bad Debt Expense Record in same accounting period sales revenue b Allowance Method Most business record an estimate of the bad debt expense with an adjusting entry at the end of the accounting period Bad Debt Expense normally classified as a selling expense and is close at year end Estimated Bad Debts Percentage of credit sales method Bad debt percentage is based on historical percentage of credit sales that result in bad debts The focus of the percentage of credit sales method is on determining the amount to record on the income statement as Bad Debt Expense Estimated Bad Debts Aging of Accounts Receivable The focus of the aging of accounts receivable method is on demining the desired balance in the Allowance for Doubtful Accounts on the balance sheet Credit sales x Bad debt loss rate Bad debt expense 24Receivables Turnover Ratio This receivables turnover ratio measures how many times average receivables are recorded and collected for the year Net Sales Average Net Trade Accounts Receivable Average Collection Period 365 Receivable Turnover Ratio reflects how many times average trade receivables are recorded and collected during the period 25Inventory Inventory tangible property held for sale in the normal course of business or used in producing foods or services for sale There are four types a Merchandise Inventory includes goods held for resale in the ordinary course of the business b Raw Inventory includes items acquired for the purpose of processing intro finished goods c Work in Process Inventory includes goods in the process of being manufactured d Finished Goods Inventory includes manufactured goods that are complete and ready for sale Cost Principle required that inventory be recorded at the price paid or the consideration given Should include the invoice price plus freightin inspection costs and preparation cost Any purchase returns and allowances and purchase discounts take are subtracted 26Cost of Goods Sold Beginning Inventory Illurchases of Merchandise during the year Goods Available for Sale Ending Inventory Cost of Goods Sold Goods Available for Sale refers to the sum of beginning inventory and purchases or transfers to finished goods for the period Cost of Goods Sold portion of goods available for that sale is sold BI P EI COGS 27Perpetua and Periodic Inventory System Perpetual Inventory System a detailed inventory record is maintained recording each purchase and sale during the accounting period Requires 2 entries to record a The retail sale b The cost of goods sold Periodic Inventory System ending inventory and cost of goods sold are determined at the end of the account period based on a physical count No uptodate record of inventory is maintained during the year Sales require one entry to record the retail sale Cost of goods sold is calculated 28What is FIFO LIFO Specific Identification and Weighted Average Method Specific Identification identifies the cost of the specific item that was sold Cost Flow Assumptions the choice of an inventory costing method is not based on the physical flow of goods on and off the shelves a FirstIn FirstOut FIFO assumes that the first good purchased the first in are the first goods sold the first out b LastIn FirstOut LIFO assumes that the most recently purchased units the last in are sold first the first out c Average Cost Method or Weighted Average uses the weighted average unit cost of the goods available for sale for both cost of goods sold and ending inventory Cost of Goods Available for Sale Number of Units 29What is LOCOM lower of cost or market and how do you calculate and apply it What are the components that eventually make up COGS cost of goods sold 30How do you calculate Retained Earnings Remember the format 31Be familiar with the manufacturing flow for a manufacturing company In other words Raw Materials to WorkInProcess to Finished Goods and what happens in between 32Remember the format for the formula to calculate COGS


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