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Financial Accounting Week 3 Notes

by: Emily Green

Financial Accounting Week 3 Notes ACC 2013

Marketplace > Mississippi State University > Accounting > ACC 2013 > Financial Accounting Week 3 Notes
Emily Green
GPA 3.44

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About this Document

These cover the end of chapter 2 and the beginning of what we learned on credits and debits
Principles of financial accounting
Nathan Berglund
Class Notes
financial accounting, Accounting, ACCT
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This 6 page Class Notes was uploaded by Emily Green on Wednesday January 27, 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 29 views. For similar materials see Principles of financial accounting in Accounting at Mississippi State University.


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Date Created: 01/27/16
• 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 • 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 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 Event 6: At the end of 2016, Cato recorded accrued salary expense of $5,000 (the salary expense is for courses the instructor taught in 2016 that Cato will pay cash for in 2017) *claims exchange transaction Event 7: Cato signed contracts for $42,000 of consulting services to be performed in 2017 *not recognized in the 2016 financial statements Comparing Cash Flow from Operating Activities with Net Income *the income statement will not always match the cash flow statement Accrual Accounting Cash Flow Consulting revenue $84,000 $60,000 Salary expense (16,000) (10,000) Advertising expense ( 2,000) ( 2,000) Net income $66,000 $48,000 Second Accounting Cycle Event 1: Cato paid $6,000 to the instructor to settle the salaries payable obligation *asset use transaction Event 2: Cato purchased $800 of supplies on account *asset source transaction Adjustment 1: After determining through a physical count that it had $650 of unused supplies on hand as of December 31, Cato recognized supplies expense *Asset use transaction Event 3: On March 1, 2017, Cato signed a one-year lease agreement and paid $12,000 cash in advance to rend office space. The one-year lease term begins March 1. * Adjustment 2: Cato recognized rent expense for the office space used during the accounting period. *asset use transaction Event 4: Cato received $18,000 cash in advance from Westberry Company for consulting services to be performed over a one-year period beginning June 1, 2017. *asset source transaction Adjustment 3: Cato recognized the portion of the unearned revenue it earned during the accounting period. $1,500 per month x 7 months = $10,500 *claims exchange transaction Event 5: Cato provided $96,400 of consulting services on account Event 6: Cato collected $105,000 cash from customers as partial settlement of accounts receivable Event 7: paid $32,000 for salary expense Event 8: incurred $21,000 of other operating expenses on account Event 9: paid $18,200 in partial settlement of accounts payable Homework Hints OA = Operating Activity everything else/ operations IA = Investing Activity land FA = Financing Activity cash transactions with lenders and investors loans, dividends, common stock dividends are not expenses, they are returning cash to investors Each transaction has a transaction type • asset source ◦ increase assets, increase claims on assets • asset use ◦ decrease assets, decrease claims on assets • asset exchange ◦ increase one asset, decrease another asset • claims exchange ◦ increase one claims account, decrease another Corporate Governance • the set of relationships between the board of directors, management, shareholders, auditors, and other stakeholders that determines how a company is operated • Debits Credits Assets = Liabilities + Equity Assets Liabilities Equity (Common) and (Retained) Stock Earnings normal debit balance normal credit balance normal credit balance debits increase assetss credits increase liabilities credits increase CS & RE credits decrease assets debits decrease liabilities debits decrease CS & RE Temporary Accounts Revenue has normal credit balance credits increase revenue expenses & dividends have normal debit balance debits increase expense & dividends credits decrease incurred = used accrued = something someone owes to you or something you owe


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