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Introduction to Financial Accounting midterm 2 study guide

by: anonymous112

Introduction to Financial Accounting midterm 2 study guide ACCT2301

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This study guide covers cash flow statement, long term assets, depreciation, inventory, sales discount, and bad debt and chapters 4, 8, 7, and 6 in the textbook Financial Accounting (Libby, Libby, ...
Introduction to Financial Accounting
Ruihao Ke
Study Guide
Accounting, financial, finance, introduction to financial accounting, smu, southern methodist university
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This 5 page Study Guide was uploaded by anonymous112 on Wednesday March 2, 2016. The Study Guide belongs to ACCT2301 at Southern Methodist University taught by Ruihao Ke in Spring 2016. Since its upload, it has received 33 views. For similar materials see Introduction to Financial Accounting in Accounting at Southern Methodist University.


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Date Created: 03/02/16
Midterm 2 study guide Introduction to Financial Accounting Cash flow statement Cash flow for financing: liabilities and equity, loans, dividends, stock Cash flow for investing: PPE, interest/dividends, acquiring companies Cash flow for operating: regular, repeatable core business activities (nature of business determines classification of business activities) Non-cash activities: direct issuance of common stock/debt to purchase assets, conversion of bonds to common stock, and exchanges in plant as sets Direct method: list cash flow item by item Income statement items Cash inflows: From sale of goods or services From interest received and dividends received Cash outflows: To suppliers for inventory To employers for services To gov. for taxes To tenders for interest To other for expenses Net cash provided for operating activities Indirect method: Net income/loss 1. + Depreciation or amortization (non cash expense) 2. + Loss on sale of assets or – gain (investment activity, not included for operating) 3. Δ Current assets (+ decrease in current assets, - increase in current assets) 4. Δ Current liability (+ increase in current liability, - decrease in current liability) Long term assets Acquisition: purchase price and expenditures needed to prepare assets for long term use - All cost associated with purchase of machine will account for cost - Goodwill: paid premium for things purchased « Purchase price – market value = goodwill « Intangible part of purchasing items Use cash/note payable to pay Use straight line method for amortization For assets with indefinite life, do not amortize, use asset impairment Asset impairment: test if value of asset has changed over time - Only if net book value is less than cash flow and market value - Net book value – market value - Dr. depreciation expense, cr. accumulated depreciation Account for additions and improvements (infrequent, require large sums of money, increase productivity or useful life) in asset value Do not account for regular maintenance Asset disposal - Gain/loss = selling price – net book value - Journal entry: « Cash (receive) dr. « Lower asset cr. « Accumulated depreciation/amortization dr. « Gains (cr.), losses (dr.) Impact on financial statements: balance sheet, income statement, income statement, cash flow statement Depreciation Matching principle: decrease in asset value is associated with generating revenue Depreciation: PPE Depletion: natural resources Amortization: intangible assets, e.g. copyright 1. Straight line depreciation : usage continuous over time (purchase cost – residual value) / useful life 2. Units of production: usage varies over time Unit cost = (purchase cost – residual value) / total estimated production costs Depreciation expense = unit cost x usa ge 3. Double declining depreciation (acceleration depreciation, value depreciates faster in early life) Beginning net book value x (2 / useful life) Beginning net book value = cost – beginning depreciation Net book value changes over time - If net book value is lower than residual value, make adjustments - Work backwards, assigning residual value to net book value (residual value is lowest the net book value can go, assign residual value to net book value) Inventory Periodic system: count inventory and record costs at end of period (used in this course, homogenous and large quantities sold, e.g., Ford, Walmart) Perpetual system: count inventory and record COGS after each sale (for non-homogeneous products not many sold (e.g., art gallery) COGS = purchase - Δ inventory (i.e., ending – beginning) Valuing ending inventory 1. First in first out (selling oldest inventory first) - Sold: oldest inventory (older purchase + remaining value from newer purchases) - Left: newest inventory (newest purchase + what’s remaining from newer purchase) 2. Last in first out (selling newest purchase first) 3. Average cost Value of inventory for sale / total units for sale = (Units older purchase x older purchase price + newer purchase x newer purchase price, et c.) / units Inventory left x average value - Does not include units sold FIFO COGS < LIFO COGS FIFO ending inventory > LIFO ending inventory Revenue is the same for each method As price increases over time … FIFO LIFO Balance sheet Assets + - Liability no change no change Equity + - Income statement Revenue no change no change Expenses - + Net income + - Cash flow statement Payment to suppliers no change no change Tax + - Net CF - + Vice versa for decrease in price over time FIFO ending inventory approximat es current replacement cost LIFO better matches current costs in cost of goods sold with revenues Average cost smooth out price changes FIFO average unit price is higher (newer purchases in inventory) as opposed to LIFO (older purchases in inventory) Sales discount Quantity discount: e.g., Costco, buy high quantity to receive discount Sales/cost discount: two ten, net thirty (2/10, n/30) - 2: discount percentage - 10: number of days in discount period - n: number of days - 30: max number of days in credit period Annualized interest rate : Amount saved / amount paid = days in year / (m ax days in credit period – number of days in discount period) - If you can borrow somewhere for less than annualized interest rate, then take discount (compare your interest rate to what suppliers offer you) Recording sales discount - At sales: Dr. accounts receivable Cr. sales Journal entry Dr. cash 98 Dr. sales revenue/discount 2 Cr. accounts receivable 100 - If returned: Dr. sales 100 Cr. accounts receivable 100 Aging method not on exam Debt expense Expense from credit sales that customers cannot pay back Period 1: credit sales, identify bad debt expense Period 2: identify customers that cannot pay back , reducing allowance for bad debt Recognize expense when incurred to generate revenues Debt expense estimates future events but record for current (in perio d 1), reserve for future bad things Period 1 recording: Dr. bad debt expense Cr. allowance for bad debt (doubtful accounts) - Allowance for bad debt is a negative asset account , credit balance Period 2 write off Dr. allowance for bad debt Cr. accounts receivable Balance sheet: Accounts receivable 1000 Allowance for bad debt (50 ) Net A/R 950 * Only net A/R is recorded, only when recording expenses does net A/R change Estimate bad debt expense : Percentage of credit sales = Percent (given) x amount of credit sales Ratios Fixed asset turnover = sales / average net fixed assets Return on assets = net income / average total assets Inventory turnover = COGS / average inventory - Average inventory = (beginning – ending) / 2 Gross profit percentage = gross profit / total revenues Gross profit margin: (gross profit, net sales – COGS) / (net sales, sales – returns – sales discounts) Receivable turnover = (net sales, sales – returns – sales discounts) / (average net A/R) - Records how fast you are collecting cash from customers, the higher the number the faster/beter


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