SURVEY OF ACCOUNTING
SURVEY OF ACCOUNTING ACCT 2000
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This 45 page Class Notes was uploaded by Arturo Hilll IV on Tuesday October 13, 2015. The Class Notes belongs to ACCT 2000 at Louisiana State University taught by L. Lowe-Ardoin in Fall. Since its upload, it has received 14 views. For similar materials see /class/223054/acct-2000-louisiana-state-university in Accounting at Louisiana State University.
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Study Guide Final Exam Accounting 2000 Spring 2013 V Exam is worth 78 points approx 60 new material tax chapters and approx 40 old material nancial accounting chapters 1 7 and managerial chapters 1418 and 20 All questions on the exam are multiple choice There is a 2 hour time limit on the nal exam VV Topics that will be covered on the nal exam from old and new material are Filing Status Taxable Income Deductions for AGI Tax Material Exemptions Itemized Deductions Tax Rates Tax Dates Standard Deductions Accounting terminology Forms of Businesses Business Chapter 1 Activities Financial Statements income statement stmt of retained earnings balance sheet Chapter 2 Classi ed Balance Sheet Chapter 3 Transaction Analysis Debit and credit procedures Chapter 4 Accrual accounting adjusting process Closing process Chapter 5 Perpetual inventory system and entries Chapter 7 Bank Reconciliation and bank rec entries Managerial vs Financial Accounting Management Chapter 14 functions Manufacturing Costs Product vs Period Costs Fixed vs Variable Costs Contribution Margin CM Ratio Chapter 18 Breakeven Concept Breakeven Calculations Target Income Budgeting Bene ts Essentials and Terms Sales Budget Chapter 20 Production Budget Direct Materials Budget Direct Labor Budget Cash Budget Chapter 1 Sole proprietorship A business owned by one person that is easy to set up and gives you the control Partnership is often formed when a single person lacks the funds to start a business on their own Corporation A business organized as a separate legal entity owned by stockholders Accounting is the information system that identi es records and communicates the economic events of an organization to interested users Internal Users Managers that run a business such as marketing managers production supervisors and company of cers External Users Investors who use the info to either buy sell or hold stock Creditors such as suppliers and bankers use the info to see if they company has credit to lend money to Business Activities Financing Money used to start a business be it from your pocket a bank investors etc Investing Money used to buy equipment to run a business Operating Using the materials bought to make product Financial Statements Income Statement reports the success or failure of the company s operations for a period of time consists of Revenues Expenses and Net Income Retained Earnings Statement Retained Earnings is the net income retained by the corporation The statement begins with the RE of the monthperiod before plus NI Dividends and the RE for the end of the monthperiod Balance Sheet Reports assets and claims to assets at a speci c point in time It begins with Assets in order of liquidity the other half is Liabilities and Stockholders Equity also in order of liquidity Add all L s then Add all SE s Add both totals together and it should equal the Assets Chapter 2 Classified Balance Sheet groups together similar assets and similar liabilities by using standard classi cations and sections Assets include Current Assets Long term Investments PPE and Intangible Assets which is patents and goodwill Liabilities and Stockholders Equity include Current Liabilities Long term Liabilities and SE All are in order of liquidity basically add up each individual section under either Assets or LampSE then get the grand total for each Chapter 3 Transaction Analysis is the process of identifying the speci c effects of economic events on the accounting equation Assets Liabilities SE The equation must always balance For each transaction there is a dual doublesided effect on the equation For Example if an Asset is increased one of the following must occur Decrease in another Asset Increase in a speci c Liability or Increase in SE EX You purchase a computer system for 10000 You pay 6000 cash and put the other 4000 as a note payable One Asset Equipment goes up 10000 another Asset cash goes down 6000 and a liability note payable goes up 4000 REVIEW WILEYPLUS HW FOR MORE EXAMPLESquot Understand basics of T Accounts Left side is Debit and Right is Credit Assets always have a Debit normal balance and Liabilities always have a Credit normal balance Chapter 4 Accrual basis Accounting means that transactions that change a company s nancial statements are recorded in the periods in which they occur Periodicity Assumption Accounting time periods usually broken down into Month Quarter and a Year Revenue Recognition Principle requires companies to recognize revenue in the accounting period they were earned Expense Recognition Principle AKA Matching Principle says that efforts expenses match the results revenues Adjusting Entries ensure that the revenue recognition and expense principles are followed Closing Entries transfer net income or net loss and dividends to RE so the balance in RE agrees with the RE statement Income Summary is atemporary account used to transfer the resulting NI or net loss from the account to RE ONLY USED FOR REVENUE EXPENSE ACCOUNT S AND RE REVIEW WILEYPLUS HW FOR MORE EXAMPLESquot Chapter 5 Perpetual Inventory System companies maintain detailed records of the coast of each inventory purchase and sale These records continuouslyperpetually show the inventory that should be on hand for every item Sales Revenue primary source of revenues for merchandising companies is sales revenue Cost of Goods Sold COGS is the total cost of merchandise sold during the period FOB Shipping Point the seller places the goods free on board to the carrier and the buyer pays the freight Entry reads Inventory Debit and Cash Credit FOB Destination means the seller places goods free on board to the buyer and the seller pays the freight Entry reads Freightout Debit and Cash Credit Purchase Discounts incentive that offers advantages to both parties the purchaser saves money and the seller is able to shorten the operating cycle by converting the accounts receivable into cash earlier Credit Terms specify the amount of the cash discount and time period during which it is offered EX 210 n30 Sales Returns and Allowances These transactions where the seller either accepts the goods back from a purchase or grants a reduction in the purchase price so that the buyer will keep the goods REVIEW WILEYPLUS HW FOR MORE EXAMPLES Chapter 7 Bank Reconciliation is the process of comparing the bank s balance with the company s balance and explaining the difference to make them agree Per Bank Adjustments made to the bank balance Deposits in transit outstanding checks and bank errors Per Books Adjustments made to the book balance Notes collected by banks NSF checks check printing or other service charges and company errors REVIEW WILEYPLUS HW FOR MORE EXAMPLESquot Chapter 14 Managerial Accounting is a eld of accounting that provides economic and nancial info for managers and other internal users Used by internal users and managers internal reports special purpose very detailed doesn t use GAAP no independent audits VS Financial Accounting External users stockholders creditors and regulators nancial statements general purpose highly aggregated condensed uses GAAP audited by CPA Management Functions Planning requires managers to look ahead and to establish objectives Directing involves coordinating a company s diverse activities and human resources to produce a smoothrunning operation Controlling is the process of keeping the company s activities on track Manufacturing Costs Direct Materials Are materials evolved in the production of materials Those materials are called Raw Materials they are the basic materials and parts used in the manufacturing process Ex Steel plastic and tires used to make cars Indirect Materials they don t physically become part of the nished product Ex Lubricants or they re too small to associate with the nished product Ex Washers screws and nuts Direct Labor the work of factory employees that can be physically and directly associated with the converting raw materials into nished goods EX Bottlers at Coco cola Indirect Labor refers to the work of employees that has no physical association with the nished product or for which it is impractical to trace costs to the goods produced Ex Wages of maintenance people timekeepers and supervisors Manufacturing Overhead consists of costs that are indirectly associated with the manufacturing of the nished product Ex Indirect materials indirect labor depreciation on buildings machines insurance taxes and maintenance on factory facilities Product VS Period Costs Product Costs are a necessary and integral part of producing the nished product Period Costs are matched with the revenue of a speci c time period rather than included as part of the cost of salable product These are nonmanufacturing costs which include selling and administrative expenses Chapter 18 Fixed VS Variable Cost Fixed Cost are costs that remain the same in total regardless of change in the activity level Ex Property taxes insurance rent supervisory salaries and depreciation on building and equipment Variable Costs are costs that vary in total directly and proportionally with changes in the activity level Ex Direct materials and direct labor Contribution Margin is the amount of revenue remaining after deducting variable costs CM Per unit Unit Selling Price Unit Variable Costs CM per unit CM Ratio CM per unit Unit Selling Price CM Ratio Breakeven Points Breakeven per unit FC CM per unit BEP units Breakeven in 35 FC CM Ratio BEP in 35 Target Income Target in Units FC Target Net Income CM per unit Required Units Target 35 FC TNI CM Ratio Required 35 Chapter 20 Essentials and Terms of Budgeting Effective budgeting requires a sound organizational structure They are based on research and analysis that should result in realistic goals that will contribute to the growth and pro tability of a company the effectiveness is directly relates to the acceptance by all levels of management Sales Budget is derived from the sales forecast it represents management s best predictions for sales revenue in the budget period Production Budget shows the units to produce to meet anticipated sales Direct Materials Budget shows both the quantity and cost of direct materials to be purchased Direct Labor Budget contains the quantity of hours and cost of direct labor to meet production requirements Cash Budget shows anticipated cash ows Tax Material REVIEW THE PROBLEMS SHE DID IN CLASS Gross income iPermitted deductions from gross income Above the line deductions Adjusted Gross Income AGI iStandard Deduction or Itemized Deduction Below the line deductions iPersonal and Dependency Exemptions Below the line deductions Taxable Income x Appropriate Tax Rates 10 15 25 28 33 and 35 Tax Liability iTax credits and Tax payments Tax Refund or Tax Due with Return Settle up I FILING STATUS 1 Single not married at end of year 2 Married ling jointly married at yearend or at time of death of spouse 3 Married ling separately married at end of year but choose to le separate of spouse 4 Qualifying widower with dependent child ie surviving spouse may use joint tax rates for the two years following the year in which the spouse died a Surviving spouse must have been eligible to le a joint return in the year of the spouse s death b Dependent son stepson daughter or stepdaughter must live in household with surviving spouse c Surviving spouse must provide more than 50 of costs of maintaining a household that was the main home of the child for the entire year 5 Head of household status applies to an unmarried person other than a qualifying widower with dependent child who provides more than 50 of costs of maintaining a household which for more than onehalf of the year is the principal place of abode for II EXEMPTIONS 3800 for 2012 a Full exemption even if birth or death occurred during the year b No personal exemption for taxpayer if eligible to be claimed as a dependent on another taxpayer s return III GROSS INCOME ON INDIVIDUAL RETURNS Gross income includes all income from whatever source derived unless speci cally excluded Exclusionsiincome items which are not included in gross income Deductionsiamounts that are subtracted from income to arrive at adjusted gross income or taxable income Creditsiamounts subtracted from the computed tax to arrive at taxes payable Exclusions from Gross Income not reported Support of minor children Child Support Property settlement Life insurance proceeds Certain employee bene ts Group term life insurance Damages for physical injury or physical sickness Gifts bequests devises or inheritances Interest income Interest on obligations of a state or one of its political subdivisions eg municipal bonds Items to Be Included in Gross Income Compensation for services including wages salaries bonuses commissions fees and tips rents dividends and Interest including earnings from savings and loan associations mutual savings banks credit unions etc Alimony and separate maintenance payments Social Security Prizes and Awards Gambling winnings Unemployment compensation IV Permitted Deductions from Gross Income ABOVE THE LINE DEDUCTIONS Business deductions of a selfemployed person Losses from sale or exchange of property Onehalf of selfemployment tax Moving expenses Time and Distance Contributions to selfemployed retirement plans and IRAs Deduction for interest on education loans Penalties for premature withdrawals from time deposits Alimony payments Expenses of elementary and secondary teachers 250 V STANDARD DEDUCTION OR ITEMIZED DEDUCTIONS BELOW THE LINE DEDUCTIONS Filing status a Married filingjointly or surviving spouse 11900 ASD 1150 b Married filing separately5950 ASD 1150 c Head ofhousehold 8700 ASD 1450 d Single 5950 ASD 1450 Additional Standard Deductions ASD An unmarried individual who is not a surviving spouse and is either age sixty ve or older or blind receives an additional standard deduction of 1450 The standard deduction is increased by 2900 if the individual is both elderly and blind The increase is 1150 for 2011 and 2012 for each married individual who is age sixty ve or older or blind Itemized Deductions Medical Expenses oor of 75 AGI Taxes state income or sales tax greater and real estate tax Mortgage Interest no personal interest expense allowed EX Car loan credit card interest Charitable Contributions ceiling of 50 AGI quali ed contributions are Church Synagogue or other religious organizations Casualty and Theft Loses oor of 10 AGI Miscellaneous Itemized Deductions oor 2 AGI unreimbursed employee expenses tax preparation fees safety deposit fee and dues and professional publications No oor Gambling losses to extent of gambling winnings VI EXEMPTIONS BELOW THE LINE DEDUCTIONS Personal exemptions for 2012 are 3800 Accounting 2000 Chapter 1 Class Notes Describe the primary forms of business organization Identify the users and uses of accounting information Explain the three principal types of business activity Describe the content and purpose of each of the financial statements Explain the meaning of assets liabilities and stockholders equity and state the basic accounting equation Describe the components that supplement the financial statements in an annual report UIhWNA an Forms of business organization NameDefinition Advantages Disadvantages 1Sole Proprietorship Simple to setup Personal Liability control tax advantages 2Partnership Simple to setup Personal Liability two or more More resources Tax advantages Our 3Corporation Easy to sell interest Taxes Focus Easy to raise capital Double Taxation separate legal entity No personal liability Accounting is the information system that identifies records and communicates the economic events of an organization to interested users Users of accounting information two categories amp examples of each Type Examples 1lnternal Managerial Accounting Managers CFO CEO within 2External Financial Accounting Stockholders Investors Customers outside GovernmentlRS Creditors Page 1 of 9 Accounting 2000 Chapter 1 Class Notes Effective financial reporting depends on sound Ethical Behavior Recent financial scandals led Congress to the pass the Sarbanes Oxley Act in 2002 Key Provisions 0 Top Management has to certify accuracy of financial reports 0 Severe penalties for fraud 0 lncreasedAuditor Duties Steps in Solving an Ethical Dilemma 1 Recognize the Situation 2 Identify Elements 3 Identify Alternatives Three types of business activities and examples of each Financing Activities Two primary sources of outside funds are 1 Borrow Money 0 Amounts owed are called Liability DEBT 0 Party to whom amounts are owed are creditors 0 Notes payable and bonds payable are different type of liabilities Accounts Payable 2 Issue Shares of Stock for Cash ShareholdersStockholders 0 Payments to stockholders are called Dividends eguality ShareholdersStockholders Investing Activities Purchase of resources a company needs in order to operate 0 Computers delivery trucks furniture buildings etc 0 Resources owned by a business are called assets Operating Activities Once a business has the assets it needs it can begin its operations 0 Revenue Amounts earned from the sale of products sales revenue service revenue and interest revenue 0 Inventory Goods available for sale to customers Page 2 of 9 Accounting 2000 Chapter 1 Class Notes 0 Account Receivable Right to receive money from a customerin the future as the result of a sale Expenses cost of assets consumed or services used Cost of goods sold selling marketing administrative interest and income taxes expense Liabilities arising from expenses include accounts payable interest payable wages payable sales taxes payable and income taxes payable 0 Net Income when revenues exceed expenses 0 Net Loss when expenses exceed revenues Companies prepare 4 financial statements to communicate financial information to users Name Definition Components Date Report Revenues Time Span Income Statement o Revenues Expenses 0 Weekly 0 Expenses Net incomeLoss 0 Monthly For a period of time o Quarterly Monthly quarterly o Yearly yea y Retained Earnings Net Income retained Beginning RE Same Statement in the corporation Net IncomeLoss abbreviated as Dividends RE End RE Page 3 of 9 Accounting 2000 Chapter1 Class Notes Illustration 14 SIERRA CORPORATION Income Statement For the Month Ended October 31 2012 Revenues Service revenue Expenses Salaries expense 5200 Supplies expense 1500 Rent expense 900 Insurance expense Interest expense Depreciation expense Total expenses Net income 10600 Illustration 15 SIERRA CORPORATION Retained Earnings Statement For the Month Ended October 31 2012 Retained earnings October 1 Add Net income Less Dividends Retained eamings October 31 2860 2860 500 2360 Page 4 of 9 Accounting 2000 Chapter1 Class Notes Illustration 17 SIERRA CORPORATION Balance Sheet October 31 2012 Assets Cash 15200 Accounts receivable 200 Supplies 000 Prepaid insurance 550 Equipment net 4960 Total assets 21910 Liabilities and Stockholders39 Equity Liabilities Notes payable 1 5000 Accounts payable 2500 Salaries payable 1200 Unearned service revenue 800 Interest payable 50 Total liabilities El 9550 Sloeklioldei s39 equity ornmon stock 10000 Retained earnings 2360 Total stockholders equity 12360 Total liabilities and stockholders39 equity 219I0 Illustration 18 Page 5 of 9 Accounting 2000 Chapter 1 Class Notes SIERRA CORPORATION Statement of Cash Flows For the Month Ended October 31 2012 Cash ows from operating activities Cash receipts from optAutinil act ities 1 I 200 Cash payments for operating activities 5500 Net cash provided by opeluling activities 5 5700 Cash quotU39S iI UIH investing ztcth ities Purchased office equipment 5000 Net cash used by itn cslittu activities 5000 Cttsit Inn39s tum financing 11CliliCS h s li liicc oi cnntntnn stock 0000 issued note payable 5000 Pantnent oi dividend 500 Net cash provided by financing tCliYili s H500 Nel increase in cash 5200 Cash ztl beginning 0 period Cash at end 0 period of the Annual Class Problems BE12 s Idea 15 users Ufa mounting information SC 2 K Match each of the following types of evaluation with one of the listed users of accounting information Trying to determine Whether the company complied with tax laws Trying to determine Whether the company can pay its obligations Trying to determine Whether a marketing proposal will be cost effective Trying to determine Whether the company39s net income will result in a stock price increase Trying to determine Whether the company should employ debt or equity financing MrkWNt Investors in common stock Marketing managers Creditors Chief Financial Officer 99 9quot Page 6 of 9 Accounting 2000 Chamer1cmssNoms e Internal Revenue Service BE 16 Determine proper uau 61a sta temeut lquot P13B 1 Eskimo Pie Corporation markets a broad range of frozen treats including its famous Eskimo Pie ice cream bars The following items were taken from a recent income statement and balance sheet In each case identify whether the item would appear on the balance sheet BS or income statement IS Income tax expense Inventories Accounts payable Retained earnin 5 Property plant and equipment Net sales Cost ofgoods sold Common stock Receivables Interest expense nerveHaste Prepare an income sta temeut retained earnings sta temeut and balance sheet discuss results SO 4 5 AP Special Delivery was started on May 1 with an investment of 45000 cash Following are the assets and liabilities of the company on May 31 2012 and the revenues and expenses for the month of May its first month of operations Accounts receivable 6200 Notes payable 28000 Service revenue 10400 Salaries and wages expense 2000 Advertising expense 800 Equipment 56000 Accounts payable 2400 Maintenance and repairs expense 2900 Cash 15800 Insurance expense 400 No additional common stock was issued in May but a dividend of 1700 in cash was paid Instructions a Prepare an income statement and a retained earnings statement for the month of May and a balance sheet at May 31 2012 b Brie y discuss whether the company39s first month of operations was a success 6 Discuss the company39s decision to distribute a dividend SPECIAL DELIVERY Income Statement Page 7 of 9 Accounting 2000 Chapter 1 Class Notes SPECIAL DELIVERY Retained Earnings Statement SPECIAL DELIVERY Balance Sheet Page 8 of 9 Accounting 2000 Chapter 1 Class Notes On your own Do it Page 18 Comprehensive Do it Page 2324 SelfTest Questions Pages 2526 Page 9 of 9 INTRODUCTION TO FINANCIAL STATEMENTS Accounting Fourth Edition Study Objectives 1 2 3 4 Describe the primary forms of business organization Identify the users and uses of accounting information Explain the three principal types of business activity Describe the content and purpose of each of the financial statements 7 Explain the meaning of assets liabilities and stockholders equity and state the basic accounting equation Describe the components that supplement the financial statements in an annual report Forms of Business Organization Proprietorship Partnership Corporation 0 Generally owned Simple to o Easier to transfer by one person establish ownership 0 Simple to establish 0 Owner controlled 0 Tax advantages 0 Shared control 0 Easier to raise funds 0 Broader skills 0 No personal liability and resources Tax advantages SO 1 Describe the primary forms of business organization Users and Uses of Financial Information What is Accounting Accounting is the information system that identifies records and communicates the economic events of an organization to interested users Users are 0 Internal Users 0 External Users SO 2 Identify the users and uses of accounting information Users and Uses of Financial Information Who Uses Accounting Data External Internal Users H uma n Resources Users Taxing Labor V Management Regulatory Agencies 15 SO 2 Identify the users and uses of accounting information Marketing Users and Uses of Financial Information Questions Asked by Internal Users User Can we afford to give our employees a pay raise Human Resources What price for our product will maximize net income Marketmg Which product line is most Management profitable Is cash sufficient to a p y Finance dividends to the stockholders SO 2 Identify the users and uses of accounting information Users and Uses of Financial Information Questions Asked by External Users User 1 Is the company earning Investors satisfactory income 2 How does Disney compare in size and profitability with Time 39quotvestms Warner 3 V United Airlines be able to Creditors pay its debts as they come due 17 SO 2 Identify the users and uses of accounting information Users and Uses of Financial Information Ethics In Financial Reporting United States regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting 0 Recent financial scandals include Enron WorldCom HealthSouth AIG and others 0 Congress passed SarbanesOxley Act of 2002 0 Effective financial reporting depends on sound ethical behavior 18 SO 2 Identify the users and uses of accounting information Users and Uses of Financial Information Solving an Ethical Dilemma I Recognize an ethical situation and the ethical issues involved Use your personal ethics to identify ethical situations and issues Some businesses and professional organizations provide written codes of ethics for guidance in some business situations 2 Identify and analyze the principal elements in the situation Identify the stakeholders persons or groups who may be harmed or benefited Ask the question What are the responsibilities and obligations of the parties involved Illustration 13 Steps in analyzing ethics cases 3 Identify the alternatives and weigh the impact of each alternative on various stakeholders Select the most ethical alternative considering all the consequences Sometimes there will be one right answer Other situations involve more than one right solution these situations require you to evaluate each alternative and select the best one SO 2 Identify the users and uses of accounting information Business Activities All businesses are involved in three types of activity 9 financing 9 investing 9 and operating The accounting information system keeps track of the results of each of these business activities 110 SO 3 Explain the three principal types of business activity Business Activities Financing Activities Two primary sources of outside funds are 1 Borrowing money 0 Amounts owed are called liabilities Financing 0 Party to whom amounts are owed are creditors 0 Notes payable and bonds payable are different type of liabilities 2 Issuing shares of stock for cash 0 Payments to stockholders are called dividends 111 SO 3 Explain the three principal types of business activity Business Activities Investing Investing Activities Purchase of resources a company needs in order to operate 0 Computers delivery trucks furniture buildings etc 0 Resources owned by a business are called assets 112 SO 3 Explain the three principal types of business activity Business Activities Operating Activities Once a business has the assets it needs it can begin its operations mm o Revenues Amounts earned from the sale of products sales revenue service revenue and interest revenue 0 Inventory Goods available for sale to customers 0 Accounts receivable Right to receive money from a customerin the future as the result of a sale 113 SO 3 Explain the three principal types of business activity Business Activities Operating Activities 0 Expenses cost of assets consumed or services used cost of goods sold selling marketing administrative interest and income taxes expense 0 Liabilities arising from expenses include accounts payable interest payable wages payable sales taxes payable and income taxes payable 0 Net income when revenues exceed expenses 0 Net loss when expenses exceed revenues 114 SO 3 Explain the three principal types of business activity Communicating with Users Companies prepare four financial statements from the summarized accounting data l l l l Balance Sheet Income Statement Retained Earnings Statement Statement of Cash Flows SO 4 Describe the content and purpose of each of the nancial statements Communicating with Users Income Statement Illustration 14 SIERRA CORPORATION Income Statement For the Month Ended October 31 2012 Revenues Service revenue Expenses Salaries expense Supplies expense Rent expense Insurance expense Interest expense Depreciation expense Total expenses Net income 5200 1500 900 50 50 40 10600 7740 2860 116 0 Reports revenues and expenses for a specific period of time Net income revenues exceed expenses Net loss expenses exceed revenues Past net income provides information for predicting future net income SO 4 Describe the content and purpose of each of the nancial statements Communicating with Users Income Statement Illustration 14 Retained Earnings Statement Illustration 15 SIERRA CORPORATION Income Statement For the Month Ended October 31 2012 Revenues Service revenue Expenses Salaries expense Supplies expense Rent expense Insurance expense Interest expense Depreciation expense Total expenses Net income 5200 1500 900 50 50 40 10600 7740 2860 117 SIERRA CORPORATION Retained Earnings Statement For the Month Ended October 31 2012 Retained earnings October 1 0 Add Net income 2860 2860 Less Dividends 500 Retained earnings October 31 2360 Net income is needed to determine the ending balance in retained earnings SO 4 Describe the content and purpose of each of the nancial statements Communicating with Users Retained Earnings O Retained Earnings is the net income retained in the corporation Statement shows amounts and causes of changes in retained earnings during the period Time period is the same as that covered by the income statement Users can evaluate dividend Statement Illustration 15 SIERRA CORPORATION Retained Earnings Statement For the Month Ended October 31 2012 Retained eeu nings October 1 Add Net income Less Dividends Retained earnings October 31 58 0 2860 2860 500 2360 payment pracyggsoescribe the content and purpose of each of the nancial statements Communicating with Users Retained Earnings Balance Sheet Statement SIERRA CORPORATION Balance Sheet 439 Octnber 31 2012 SIERRA CORPORATION Retained Earnings Statement Assets For the Month Ended October 81 2012 C1511 15 Accounts receivable 39 4 Supplies 1000 Retalned earnings OCTOber 1 0 Prepaid insurance 50 Add Net income 2860 Equipment net 4960 2 860 Tulul assets 21910 Less DiViCIBDdS 500 Liabilities and Stockholders Equity Retained earnings October 31 2360 Liabili39 Notes payable if 5000 7 7 Accounts puvzlble 2500 Salmies payable 1200 Unem39ned service revenue 800 lilleresl payable ED l olal liabilities 51 9550 S ckholders39 equity Ending balance In retained mmnmk 10000 earnings Is needed In preparing Rimmed mm 71350 th b I h t Tulul sLockholLleis equity 6 a ance s ee 39 39lblnl liabilities and slockholders cquity 119 SO 4 Describe the content and purpose of each of the nancial statements Communicating with Users Illustration17 m s39 f 0 Reports assets and 339 October 31 2012 claims to assets at a Assets cash 15200 specnflc pomt In time Accounts rccclvablc 200 Supplies 000 Prepaid insurance 550 Equlpmeui net 4900 Total assets 21910 Stockholders Equity Liabilities and Stockholders Equity Liabilities Notes payable ii 5000 39 39 0 LIsts assets fIrst salaries payahl 1200 Unearned sewits levenue 800 Interest payable so 7 tom names 9550 stockholders equ Ity Stockholders equiiv Common slack 1 0000 Retained Earnings 2360 Total slockllolde s equity 12360 Total hnbililics and stockholders Equity 21910 120 SO 5 Explain the meaning of assets liabilities and stockholders equity and state the basic accounting equation Communicating with Users Balance Sheet Statement of Cash Flows Illustration 17 Illustration 18 SIERRA CORPORATION Balance Sheet October 31 2012 SIERRA CORPORATION Statement of Cash Flows For the Month Ended October 31 2012 Assets Cash l39lmt39s from operating activities Cash receipts from operating a Kities LZOU C115quot rib200 Cash pmmems I39or operating uelh ities 5500 39 1 7 cto iim like 113 l Net cash pl39OVlL ied b operating minutes 239 5700 n e Prgaid mqumnce 550 Cash ows from investing uctit ilies qufi pm n n l 4 560 Purchased office equipment 5000 e e t l l l t 1039 910 Net cash used by investing aelivilies 5000 onqsses t t Cash ms mm linancmg acln ilies Liabilities and Stockholders39 Equity Issuance oi common stuck 0000 L bl Issued note payable 5000 1111 5 1M q 000 Paymenl ol dividend 500 t W 39t C t 7 Accgmljls39 pqv ble 2 00 Net msli provided by nancing activities H500 Salaries pa AUG 1200 Net increase in cash l5200 Unem ned service revenue 800 cum I l egin i 9 quotr WNW 0 interest payable 50 Cash at end ol period Total Liabilities 9550 Stockholders39 equity Common stock 10000 Retained earnings 2360 Total stockholders39 equin 12360 Total liabilities and stockholders39 equity 2 910 121 SO 5 Explain the meaning of assets liabilities and stockholders39 equity and state the basic accounting equation Communicating with Users Statement of Cash Flows Illustration 18 SIERRA CORPORATION 39 Statement of Cash Flows For the Month Ended October 31 2012 Answers Cash ows from operating activities Cash receipts from operating activities 11200 e Cash payments for operating activities 5500 Net cash provided by operating activities 5700 Cash ows from investing activities Purchased of ce equipment 5000 Net cash used by investing activities 5000 d U Cash ows from financing activities Issuance of comnlon stock 10000 Issued note payable 5000 Payment of dividend 500 Net cash provided by nancing activities 14500 Net increase in cash 15200 Cash at beginning of period 0 d u Cash at end of period 15200 a period 122 SO 5 Explain the meaning of assets liabilities and stockholders39 equity and state the basic accounting equation Other Elements of an Annual Report US companies that are publicly traded must provide shareholders with an annual report The annual report always includes 0 O O 0 123 Financial statements Management discussion and analysis Notes to the financial statements Independent auditor39s report SO 6 Describe the components that supplement the nancial statements in an annual report Other Elements of an Annual Report Management s Report 124 Management discussion and analysis MDampA covers the companies ability to pay nearterm obligations its ability to fund operations and expansion and its results of operations Management must highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these three factors SO 6 Describe the components that supplement the nancial statements in an annual report Other Elements of a Annual Report Management s Report Illustration 110 TOOTSIE ROLL INDUSTRIES INC Management39s Discussion and Analysis of Financial Condition and Results of Operations The Company has a relatively straightforward nancial stiucture and has historically maintained a conselvative nancial position Except for an immaterial amount of operating leases the Company has no special nancing arrangements or o ff balance sheetquot special purpose entities Cash flows from operations plus maturities of short term investments are expected to be adequate to meet the Company39s overall nanc ing needs including capital expenditures in 2010 SO 6 Describe the components that supplement the 125 nancial statements in an annual report Other Elements of an Annual Report Notes to the Financial Statements O Clarify the financial statements 0 Provide additional detail Notes are essential to understanding a company s operating performance and nancial position 1 Illustration 111 T it TOOTSIE ROLL INDUSTRIES INC Notes to Financial Statements Revenue recognition Revenue net of applicable provisions for discounts returns allowances and certain advertising and promotional costs is recognized when products are delivered to cus tomers based on a customer purchase order and collectibility is reasonably assured 126 SO 6 Describe the components that supplement the nancial statements in an annual report Other Elements of an Annual Report 127 Auditor s Report Auditor s opinion as to the fairness ofthe presentation ofthe financial position and results of operations and their conformance with generally accepted accounting standards 7 Illustration 112 TOOTSIE ROLL INDUSTRIES INC Excerpt from Auditor39s Report To the Board of Directors and Shareholders of Tootsie Roll Industries nc In our opinion the accompanying consolidated statements of nancial position and the related consolidated statements of earnings comprehens39 6 earnings and retained earnings and of cash ows present fairly in all material respects the Financial posi tion of Tootsie Roll Industries Inc and its subsidiaries at December 31 2009 and December 3 t 2008 and the results of their operations and their cash flows for each of the three years in the period ended December 3 2009 in conformity with accounting principles generally accepted in the United States of Americh Also in our opinion the Company maintained in all material respects effective internal control over financial reporting as of December 31 2009 based on criteria established in Internal Con troli Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission C080