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Financial Accounting Week 2 Notes

by: Emily Green

Financial Accounting Week 2 Notes ACC 2013

Marketplace > Mississippi State University > Accounting > ACC 2013 > Financial Accounting Week 2 Notes
Emily Green
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About this Document

Finsihes up Chapter 1 and beginning of Chapter 2. Preparing Financial Statements and Cash Basis vs Accrual Accounting
Principles of financial accounting
Nathan Berglund
Class Notes
Accounting, financial accounting, acc 2013




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This 4 page Class Notes was uploaded by Emily Green on Friday January 22, 2016. The Class Notes belongs to ACC 2013 at Mississippi State University taught by Nathan Berglund in Summer 2015. Since its upload, it has received 35 views. For similar materials see Principles of financial accounting in Accounting at Mississippi State University.


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Date Created: 01/22/16
Closing Process • will make more sense in Chapter 3 ◦ permanent accounts ‣ assets, liabilities, and equity accounts ‣ carry out through the year ◦ temporary accounts ‣ revenues, expenses, and dividends ‣ track activity from the first day but close out at the end of the year ‣ start over/reset at the next new year ‣ only one year of activity at a time ◦ Net Income = Revenue - Expenses ◦ • Event 4 ◦ RCS obtained $85,000 cash by leasing campsites to customers 1. Income Statement A. Revenues-Expenses=Net Income 2. Balance Sheet A. Assets=Liabilities+Equity B. Always notice the date a. "As of December 31st, 2016" 3. Statement of Stockholder's Equity A. Details changes in equity accounts over the accounting period a. Equity accounts include common stock and retained earnings B. Notice the date a. "For the Year Ended December 31st, 2016" 4. Statement of Cash Flows A. Details changes in the cash account over the accounting period a. Operating 1. everything outside of investing and financing 2. revenue - expenses b. Investing 1. land (long-term assets) c. Financing 1. cash transactions with bankers and investors • Retained Earnings ◦ Revenue (asset increases) ◦ Operating Expenses (asset decreases) ◦ Totals the Net Income The four financial statements (income statement, balance sheet, stockholder's equity, and cash flows) are the basics for every 10K company • Chapter 1 Recap ◦ Balance Sheets ‣ permanent, carry over from year to year • "For the ___ Ended _____" • "For the Year Ended _____" • "For the 3 Months Ended _____" • 10-K is an annual balance sheet • 10-Q is a quarterly balance sheet ‣ Assets: what the company owns or has legal claim to ‣ Liabilities: what the company owes, claims to assets by creditors ‣ Equity: what is left over, claims to assets by investors ◦ Income Statement ‣ temporary, statement is just for the accounting period of time ‣ Revenues: ‣ Expenses ‣ revenues - expenses = net income Chapter 2 • Cash Basis vs Accrual Accounting ◦ Fundamental Question: In which period should we report revenues and expenses on the income statement? ◦ Cash-Basis ‣ Report revenues when the cash comes in ‣ Report expenses when the cash goes out ◦ Accrual Accounting ‣ Report revenues in the period that they are "earned" • "earned" meaning: fulfilled all obligations to customers • Revenue Recognition Principle ◦ Calvin pays $900 for a cruise in February 2011 (Quarter 1), but the cruise is not scheduled to sail until June 2011 (Quarter 2) ‣ What period does Carnival report revenue from the ticket sale? • Quarter 2 ◦ Calvin takes the cruise in June 2011, the bill was sent in August (Quarter 3) ‣ What period does Carnival report revenue? • Quarter 2 • Carnival should wait to report revenues after all aspects of the cruise have been fulfilled ◦ does not matter when the cruise was paid for when reporting revenue ◦ there's no time limit on how long the company has to report ‣ Report expenses in the same period as the revenue they are related to • Matching Principle ◦ cash basis accounting can sometimes distort net income because expenses and revenues don't "match" or go in the same quarter ◦ Carnival pays cash to stock its ship with supplies in February 2011 (Quarter 1). The supplies are going to be used for Calvin's in June 2011 (Quarter 2). ‣ What period does Carnival report expenses for these supplies? • Quarter 2 ◦ Carnival pays cash to its employees in July 2011 (Quarter 2). The payroll is for work that the employees did during Calvin's June 2011 cruise (Quarter 2). ‣ What period does Carnival report expenses for these supplies? • Quarter 2 ◦ the cost of generating revenue in Quarter 2 should be reported as expenses in Quarter 2 even though the cash flows occur in Quarters 1, 2, and 3 ◦ Recognition ‣ formally recording an economic item or event in the financial statements ◦ Realization ‣ collecting cash, generally from the sale of products or services Examples: Event 1: Cato Consultants was started on January 1, 2016, when it acquired $5,000 cash by issuing common stock. *asset source transaction Event 2: During 2016, Cato Consultants provided $84,000 of consulting services to its clients but no cash has been collected. *asset source transaction Event 3: Cato collected $60,000 cash from customers in partial settlement of its accounts receivable. *asset exchange transaction Event 4: Cato pain the instructor $10,000 cash for teaching training courses (salary expense) in the same quarter. *asset use transaction Event 5: Cato paid $2,000 for advertising costs. The advertisements appeared in 2016. *asset use transaction • The Conservatism Principle ◦ when faced with a recognition dilemma, conservatism guides accountants to select the alternative that produces the lowest amount of net income ◦ when in doubt ‣ recognize revenues later ‣ recognize expenses earlier


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