ACTG 211, Chapter 1-3 Notes
ACTG 211, Chapter 1-3 Notes ACTG 211
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This 14 page Class Notes was uploaded by Ellen Hartley on Monday October 10, 2016. The Class Notes belongs to ACTG 211 at University of Oregon taught by Michael Tomcal in Fall. Since its upload, it has received 93 views. For similar materials see Into to Financial Accounting in Accounting at University of Oregon.
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Date Created: 10/10/16
Chapter 1 Accounting is: Identifying the information that you want to keep track of, recording this information chronologically, and communicating it in reports. Consists of external and internal users External – not directly involved in running the organization Lenders Shareholders Government Consumers Regulators Nonexecutive employee (in some cases) Internal – directly involved in running the organization Officers Managers Sales staf Budget officers Controller CEO Executive employee Production Manager Ethics and the Fraud Triangle For someone to commit fraud, there must exist: Opportunity, financial pressure, and rationalization. GAAP (Generally Accepted Accounting Principles) Concepts and rules that make information relevant, reliable, and comparable. The GAAP is set by the private sector group FASB (Financial Accounting Standards Board), while SEC (Securities Exchange Commission) has legal authority to do so. International Standards IASB (International Accounting Standards Board) Independent Group Involves parties from various countries Issues IFRS (International Financial Reporting Standards) IFRS outline desirable standard accounting practices. FASB and IASB are going through a convergence process and are working together to outline conceptual framework. http://image.slidesharecdn.com/bab2- conceptualframeworkunderlyingfinancialaccounting-120101003345- phpapp02/95/bab-2-conceptual-framework-underlying-financial-accounting- 9-728.jpg?cb=1325379119 Source above^ Principles, Assumptions and Constraints General Principles Framework for preparing financial statements – based of of accounting practices that have been used for years. Measurement Principle (Cost Principle) – info based on actual cost Full Disclosure Principle – companies must report details that would impact users’ decisions Specific Principles Detailed rules used when reporting business transactions – usually regulated by authoritative groups. Revenue Recognition Principle – measure revenue by expected amount (ex. Credit) Expense Recognition Principle – a company must recognize the expenses needed in order to generate revenue Assumptions (all pretty obvious) Going-Concern Assumption – that business will continue to stay in business Time Period Assumption – the life of a company can me segmented into months or years Monetary Unit Assumption – transactions are expressed in monetary units Business Entity Assumption – a business is accounted for separately from other businesses (proprietorship, partnership, or corporation) Constraints Materiality – no irrelevant information (info that would not influence the decisions of a reasonable person) Cost-benefit – Only information that’s benefits are greater than the costs of disclosing it need to be disclosed Sarbanes-Oxley Act (SOX) Prevent accounting scandals/ financial abuses Public companies should use accounting oversight Goal is more transparency and responsibility Dodd-Frank Wall Street Reform and Consumer Protection Act Promote accountability End bailouts In the interest of consumers Whistleblowers may receive part of sanction pay Accounting Equation Assets = Liabilities + Equity Equity = contributed capital (ex: owner purchases stock) + retained earnings Retained Earnings = Net Income - Dividends Net Income = Revenue – Expenses Assets: Cash Supplies Equipment Liabilities: Accounts Payable Notes Payable Equity: Common Stock Dividends Expenses Revenue Financial Statements Income Statement – net income or loss (revenues and expenses) Statement of Retained Earnings – changes in equity Balance Sheet – a company’s financial position at a point in time (whole accounting equation) Statement of Cash Flows – receipts and payments over a period of time Return on Assets Ratio: Net Income/Avg. Total Assets Bigger percentages are better. Chapter 2 Financial Statements: Identify, analyze, record Post info to ledger Complete a trial balance and financial statements Analyze these financial statements Source Documents: Checks Bills from suppliers Purchase orders Bank statements Sales tickets Employee earnings records Account: record of increases or decreases in a specific asset, liability or equity General Ledger: Contains all accounts Asset Accounts: Cash Accounts receivable Notes receivable Prepaid account Supplies Equipment Buildings Land Liability Accounts: Accrued liabilities Unearned revenue Notes payable Accounts payable Equity Accounts: Common stock Dividends Revenues Expenses T-Accounts represent ledgers. Left side assets debit (Dr.) increased Dr. is normal. Right side liabilities and equity credit (Cr.) increased Cr. Is normal. While Journalizing Transactions, be sure to include: The date Account titles (ex: “notes payable”, “supplies”) Amounts (without the dollar sign) Transaction explanation (“purchased supplies for cash”, “received cash from a consult”) https://www.cliffsnotes.com/~/media/6cb6d0b9e5204de7abb9ee3463a862f6. ashx?la=en source^ Preparing a Trial Balance List each account title and its amount Compute total debit and total credit balances Verify that they are equal Correcting Errors if it does not balance out: Make sure balances are added correctly Make sure balances were entered correctly from ledger Check if accounts are mistakenly places on trial balance Re-compute each account balance in the ledger Check to see that journal entries were entered correctly Verify that each original journal entry has equal debits and credits http://www.myaccountingcourse.com/accounting- dictionary/images/unadjusted-trial-balance-example.jpg source^ Financial Statements Income Statement – net income or loss (revenues and expenses) Statement of Retained Earnings – changes in equity Balance Sheet – a company’s financial position at a point in time (whole accounting equation) Statement of Cash Flows – receipts and payments over a period of time Presentation Companies usually round to the nearest dollar. Dollar Signs: Journal: No Ledger: No Financial Statement: Yes, on first and last #s in a column Trial Balance: Yes, on first and last #s in a column Commas within numbers: Journal: Optional Ledger: Optional Financial Statement: Yes Trial Balance: Optional Debt Ratio Debt Ratio = Total Liabilities/Total Assets High ratio = bad Chapter 3 Accrual Basis: Revenues recognized when earned Ex: credit Recognized by GAAP Paying $600 for a 6 month insurance plan all at once is still seen as paying $100 per month, because you are using it every month. Cash Basis: Revenues recognized when cash it received Ex: hot dog stand Not recognized by GAAP Paying $600 for a 6 month insurance plan is seen as a $600 expense for the first month, and then free for the next five months. Prepaid (deferred) expenses are paid for before receiving the actual benefit (ex: rent). Adjusting Accounts What the current account balance equals What it should equal Record an adjusting entry to get to what the current account balance should equal Referring back to the $600 for 6 months of insurance example: If the first month of insurance has expired… In assets we still see $600, because that insurance is an asset to the company that is worth the $600 the company paid for it. In expenses you will also see $600. Assets should equal $500, because now the company only has $500 worth of insurance left over. Also, the expenses column should be debited, which means negative expenses. ***Remember, when assets are credited, they decrease. When liabilities or equity are debited, they also decrease. And vice –versa. Expenses should be debited $100, because you have already paid for one month’s use of insurance. This will show up as a negative $100 in expenses. Yay! Assets should be credited $100, to reach that $500 discussed in maroon. Aw. Depreciation: A reduction in the value of an asset to a company due to wear and tear or better technology that is out there or being used by competition. An asset is useful when it aids in producing revenues. Salvage Value: (scrap value, residual value) The expected value of an asset at the end of its useful life. Useful life is usually in months. Straight-Line Depreciation Expense = (Asset Cost – Salvage Value) / Useful Life Straight-Line Depreciation Expense = (Net Cost) / Useful Life Record adjusting entry for equaled amount for one month (under depreciation expense). Unearned (Deferred) Revenues: Cash received in advance of providing products or services Earn payment as time passes. Unearned Consulting Revenue (Liability) decreases Consulting Revenue (Asset) increases Accrued Expenses: Costs incurred that are both unpaid and unrecorded (ex: salary) Expense and Liability both increase. Increased liability (positive) on one side + increased expense (negative) on same side Accrued Revenue: Revenues earned that are both unrecorded and not yet received Assets and Revenue both increase. Increased assets (positive) on one side + increased revenue (positive) on other side Preparing Financial Statements from an Adjusted Trial Balance 1. Prepare income statement referring to revenues and expenses from trial balance. 2. Prepare statement of retained earnings referring to retained earnings and dividends from trial balance, and using net income found previously. 3. Prepare balance sheet referring to assets and liabilities from trial balance. Use retained earnings found previously. 4. Prepare statement of cash flows. Recording Closing Entries 1. Close Cr. balances to income statement –revenue accounts 2. Close Dr. balances to income statement –expense accounts 3. Close income statement to retained earnings 4. Close dividends to retained earnings Post-Closing Trial Balance - List of accounts and their balances after closing entries Total debits and credits must equal. http://juliangooden.com/wp-content/uploads/2015/01/accounting-cycle-1.png source^ Classified Balance Sheet: A balance sheet presenting information about a subcategory of accounts, so that it is easier to read and only includes specific information that someone may be looking for. Can pertain to a certain period of time. Current Assets: Expected to be sold, or used within a year (or company’s operating cycle) Long-Term Investments: Expected to be held for over a year (or company’s operating cycle) Plant Assets: Tangible assets used in the production of goods/services Intangible Assets: Intangible assets used for the production of goods/services Current Liabilities: Obligations due within a year (or company’s operating cycle). Long-Term Liabilities: Obligations due later than a year (or company’s operating cycle). Equity: Owner’s claim on assets Profit Margin Ratio Profit Margin = Net Income / Net Sales High profit margin = Good indicator that a company is doing well. Basically what the company takes in per sale. Current Ratio – measures a company’s ability to pay its debts in the near future. Current Ratio = Current Assets / Current Liabilities The higher, the better, generally.
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