Chapter 1

Midterms: oct 9, November 6

Case assignment: dec 8re

Form teams sept 20

Chapter 1

Identify uses and users of accounting

Purpose and content of each of the financial statements

Financial accounting: reports financial events that happen in a company or organization. Reports
economic activity and users make decisions off this info.

Users: internal and external

Internal: employees and management, use info to make decisions for the organization they work for.

External: don’t work for company, employees who don’t have access to accounting info, investors,
lenders, creditors, banks governments, labour unions, potential employees.

Users look at financial statements

Types of financial statements

Financial statements have 4 statements

Income, statement of changes and equity, statement of financial position (balance sheet), statement of
cash flows.

Income: covers a period of time. Revenues and sales, expenses. Revenue – expenses = net income

Changes in equity: report changes in each component of shareholders equity. Open balances to end
balances. Share capital (amounts contributed by shareholders, may include commone and preferred
classes), retained earnings / deficit, other shareholders accounts

Financial position: shows assets, liabilities and equity and a specific point in time

Cash flows: how company obtained cash and how cash was used for a period of time. Operating
activities, investing activities, financing activities.

Annual reports: public corporations must prepare one each fiscal year. Financial and nonfinancial info

End of fiscal year is Jan 31

Public corporation: international financial reporting standards

Private corporations: accounting standards for private enterprises.

Chapter 2
Shareholders equity: share capital and …

Assets = liabilities + shareholders equity.

Classified statement of financial position: Sub divided into current and non current, long term assets is
the same as non current.

Current assets: assets Expected to be converted to cash, sold or used in one cycle or one year,
whichever is longer. Listed in order of liquidity. Like cash, accounts receivable, inventory, supplies,
prepaid expenses.

Accounts receivable: money that customers owe.

2/10 not 30: if you pay in 10 days you get a 2% discount because it is more valuable to have a higher
liquidity.

Non current assets: they are not expected to be converted into cash, or used in the business within one
year. Takes more than a year to use or convert into cash.

Listed in order of permanency. Most permanent to least permanent

Examples: long term investments in things like debt securities, loans and such. Land (tangible asset with
a relatively long useful life that is expected to appreciate in value.

Property, plant, equipment (PPE): tangible assets used in operating the business with a relatively long
life expectancy that is expected to depreciate in value, like buildings, equipment and furniture.

Intagible assets: assets that have no physical form of substance but still posess value, like patents
copyrights and trademarks

Goodwill: results from the acquisition of another company when the price paid exceeds the book value
of the company acquired

Depretiation: cost of property, plant and equipment over (/) their estimated useful lives.

Amortization is used under ASPE

Cost of the asset: accumulated depreciation/ the carrying amount of the asset.

The depreciation goes to the income statement as an expense.

This is straight line depreciation.

Current liabilities: obligations that are to be paid withing the year or operating cycle. It is usually listed in
order of liquidity.

Examples are Bank indebtedness: amounts owed to creditors that are due withing 12 months.
Accounts payable: amounts owed to suppliers for purchases made on credit.

Unearned revenue: represents cash received in advance from a customer before revenue is earned, or
before product is delivered. When it is prepaid and the service hasn’t been supplied it is unearned
revenue, once the service happens it becomes revenue.

Notes payable: amounts owed that are supported with a written promise to pay.

Accrued liabilities: expenses incurred by the company but have not been paid in cash.

Income tax payable: amounts owed to the government for income taxes.

Current maturities of long-term debt: principal of long-term debt due withing the coming year.

Non current liabilities obligations expected to be paid or settled more that one year from now, usually
accompanied with notes to financial statement

Notes

Notes payable: amounts owed that are supported with a written promise to pay.

Lease obligations: amounts to be paid in the future on long term rental contracts used for equipment or
other.

Banks loans payable: amounts owed to creditors that are due after the next 12 months

Bonds payable : amounts owed to creditors that are due after 12 months

Deferred income tax liabilities: income tax related to the current years profit that is expected to be paid
in a late year / years when a company prepares its future corporate income return.

Retained earnings are shareholders equity.

Shareholders equity: ownership interest in the company.

Depreciation shows up on the income statement.

Solvency ratios: measures a company’s ability to survive over a long period of time

Profitability ratio: measure a company’s operating success for a given period of time.

Accounting information systems: the system of collecting and processing transactions data and
communicating financial information.

Analyzing transactions: only those that change assets liabilities or shareholders equity will be reported
as an accounting transaction.

New warehouse: affects buildings (assets), decreases cash (current assets)

Transactions are recorded in chronological order. Usually in a general journal

T account
Debit and credit

Debit: on the left side of T account

Credit: right side of the T account.

For each journal entry all debits must be equal to all credits

Normal balance: Assets (debit increase), credit decrease.

Liabilities in normal balance: credit increases liabilities, debit decrease decreases liabilities.

Expenses: normal balance is debit balance,\

Assets: normal balance is debit

Dead: debit, expenses, assets, dividends declared

Revenue: normal balance is credit

Liabilities: credit

Dividends declared: normal balance is debit.

Shareholder’s equity normal balance is credit

To increase a normal account, you need to increase the corresponding account.

Most business fiscal year end is December 31

March 31+ end of first quarter

Quarters are 3 months

Cash basis accounting

Revenue is only recorded when cash is received: debit cash, credit revenue

Expenses are recorded only when cash is paid: debit expense credit cash

Accrual basis accounting: transactions are recorded in financial statements in the period the events
occur, not when they are paid.

Revenue recorded when earned not when paid: Debit? Credit revenue

Expenses are recorded when goods or services are consumed: debit expense credit?

Cash received before transaction: debit cash, credit un earned revenue.

Cash received at the time revenue is earned: debit cash, credit revenue

Cash received after revenue is earned: debit accounts reveivable, credit revenue, once cash is received:
debit cash, credit accounts receivable.

Revenue recognition: Merchanidse company: when merch is sold and delivered (point of sale), in a
service company when the service is performed.
Under ASPE: performance of obligation complete, revenue can be reliably measured, collection is
reasonably certain. Debit accounts receivable, credit revenue.

5 steps to measure and report revenue: identify contract, indentify perfoamce obligations, determine
transaction price, allocate transaction price to the performance obligations, recognize when company
satisfies the performance obligations.

Adjusting entries: entries to adjust accounts at the end of each accounting period

Types of adjusting entries: prepayments and accruals

Prepayments: expenses paid in cash and recorded as assets before they are used

Unearned revenue: cash received as liabilities before revenue is earned

Accrued revenues: revenues earned but not yet received in cash or recorded

Accrued expenses: expenses incurred but not yet paid in cash

Taking out a loan (journal entry when the loan is taken out): debit cash (because cash increases), credit
bank loan payable (bank loan payable goes up)

When the loan is repaid (along with interest): Credit cash, debit bank loan payable, for interest :credit
cash, debit interest expense

If it is to be paid in the same year, this is a current liability.

Final entry: debit bank loan payable, debit interest expense, credit cash

Expenses have normal debit balance.

Accounts receivable normal balance: debit.

Adjusted trial balance

Difference between adjusted and unadjusted: You go from unadjusted to adjusted after you prepare the
journal entries.

Adjusted: shows the balance of all accounts at the end of the accounting period, including adjusted
ones. Shows total debit and total credit balances.

Preparing the financial statements

Prepare the income statement (reports revenue, expenses for a specific period of time) (for the year
ended)

Prepare the statements of changes in equity (reports changes in each components of shareholders
equity during a specific period of time.)
Statement of financial position (shows assets, liabilities and shareholders equity at a point in time)

Statement of cash flows (how company obtained cash and how its used.)

Income statement:

Revenue (fees earned)

Expenses

Salaries

Rent

Depreciation (amortization)

Supplies

Insurance

Utilities

Total expenses not including income tax

Earnings (income) before income tax expense : revenues – total expense not including income tax

Income tax expense

Net income

Statement of changes in equity

For the year ended …

1 year prior (date) common shares Retained earnings total

Net income ++ ++

Dividends declared -- --

Balance on current date for statement of change in equity

Net income (adds to retained earnings and total equity) – dividends declared = retained earnings and
total
Balance sheet

Name of company

Balance sheet

As of (date)

Assets Liabilities

Current Current

Non current Non current

Shareholders equity

Common shares (R/E)

Income statement accounds are temporary and need to be closed at the end of every fiscal year via
closing entries. The temp account balances are transferred to retained earnings.

Statement of financial position accounts carry forward into the future, they are permanent accounts
To close revenue: debit each revenue account, credit the totals to income summary

To close expenses: debit income summary for the total, credit each expense account

To close income summary: debit or credit the balance, debit or credit the retained earnings

To close dividends declared account: debit retained earnings, credit dividends declared account.

Income summary normal balance :

Preparing a post closing trial balance: list all the permanent account balances after everything has been
done.

Proves that total debit and credit should be equal.

Chapter 5

Difference between service and merchandising companies

Service companies perform services

The operating cycle takes longer for merchandise companies because they have to purchase their
inventory before it can be sold whereas services can be done and received money right away.

Inventory systems

Inventory to begin with + cost of goods purchased= cost of goods available for sale (cost of goods
sold(income statement) or ending inventory (financial position))

Cost of goods sold are accounted for in either perpetual or periodic inventory systems.

Perpetual: updated continuously, at year end a physical count is done adjust perpetual to actual
inventory.
Periodic: there is no count during the periods only at the end of the accounting period where beginning
inventory + cost of purchases less ending inventory = cost of goods sold

Perpetual inventory keeping can lead to greater information and control over inventory but may be
more expensive.

Purchasing merch for resale: debit inventory, credit cash or accounts payable

This cost includes all costs to get merchandise ready for resale.

Returns by customer = inventory (debit), cost of goods sold (credit)

Cost of goods sold normal balance =debit

Inventory normal balance: debit

Accounts payable normal balance: credit

Sales normal balance = credit

Selling merch to customers = cash or ar (debit), sales (credit)

Cost of goods sold(debit), inventory (credit)

If terms n/30 it is AR not cash

If items are returned debit sales returns and allowances instead of directly reducing sales or sales
revenue.

Normal balance is debit for sales returns and allowances

Single step vs multiple step income statement

Single step: all data is in revenues and expenses

Multiple step: several steps in determining loss or income, net sales, cogs, gross profit, operating
expense, income from operations, income before income tax, net income.

Chapter 6 reporting and analyzing inventory

How inventory is accounted for affect the balance sheet and income statement

Inventory quantities

Physcial inventory must be counted at the end of the period to determine cost of goods sold as well as
inventory lost to shrinkage or theft (these will be in cost of goods sold)

Goods in transit: Included in inventory is company has legal ownership. During transit the seller or
supplier has ownership, therefore the buyer should not account for this in inventory. Once it is in your
warehouse from supplier you have legal ownership.

Consigned goods: One company is selling the goods that are owned by another company, ownership
stays with the supplier, the seller of the good should not account for ownership as if they do not sell
they will be returned to the supplier.

Goods taken on approval by a customer are still owned by the company: like a free trial.

Inventory cost formulas

Freight in should be included in inventory.

Which cost should be used to determine cogs: either specific id, first in first out (fifo), or average cost

Specific id: each item of inventory has specific cost and will be accounted with specific cost. Unique and
expensive items. Exactly matches costs and revenues, tracks actual physical flow of costs an goods.
Perpetual only.

Fifo: Purchased first will sell first, purchased first accounted for first. Ending inventory on financial
position includes most current costs (closest to replacement). Approximates physical flow. Cost of first
item purchased is the cost of first item sold.

Average cost: More current costs that fifo, smooths the effects of price changes by assigning all unit’s
same cost.

Choice of inventory cost formulas:

Balance: remaining inventory in units

Ending inventory: cost of goods available for sale – cost of goods sold
Inventory errors: quantity or cost assigned to inventory are incorrect.

Error in ending inventory will have a reverse effect on profit and net incomefor the next period

Lower cost of market: if inventory cost is higher than market value than the product.

Chapter 8 reporting and analyzing receivables

Amounts due to a business expected to be collected in cash

Accounts receivable

Notes receivable: formal credit instrument which is a written promise to pay. Can charge interest on
this.

Other receivables: amounts that do not result from operations (like interest, loans, advances to
employees, recoverable sales tax, income tax receivable)

Revenue recognition: recognized when the goods and services are exchanged for cash or claims to cash
(accounts recievable)

Under aspe :sale or service is substantially complete, the revenue amount is measurable, the collection
of revenue can be reasonably assured.

Accounts receivable subsidiary ledger: a subsidiary ledger is a group of accounts that share a common
characteristic (they are all receivable accounts) can exist for other accounts.

Control account: account receivable account in the general ledger.

Some accounts receivable become uncollectible when customers are unable to pay their obligations.
These are a cost of doing business on credit and should be accounted for as expenses in the same period
that the related revenue was generated to ensure it matches. They are accounted for under Bad debts
expense as a debit.

Allowance method: estimates the uncollectible accounts at the end of each period.

AFDA: a contra asset to accounts receivable and is netted against accounts receivable to determine the
amount.
AFDA normal balance is credit

Write off: when they don’t pay. Debit afda, credit accounts receivable

Interest formula: amount x rate x terms of the year

When notes are paid: debit cash to increase it, credit interest receivable to lower it, credit notes
receivable to lower it.

Note is not paid on time: transfer balance to accounts receivable (debit), credit notes receivable.

Liquidity ratios

Average collection period:

Chapter 9

Property plant equipment: long lived assets, multiple accounting periods. Non current assets. They are
tangible, controlled by company but don’t have to be owned, used in operation, not for sale to
customers.

PP&E is recorded at cost: purchase price (including non refundable taxes or duties less discounts or
rebates) + expenditures necessary to bring in the asset + estimated cost of future obligations to move
dismantle or store asset etc = total cost

of land: purchase price + closing cost+ additional costs to prepare land for intended use- any proceeds
from salvage = cost of land. Land is not depreciating.

Land improvements: cost of structural additions made to the land (paving, fence, etc.), these items
depreciate over time so they are recorded separately from land. Does not include cost of getting land
ready for use.

Buildings (purchase): purchase price + closing costs + costs required to make building feasible for use=
cost of purchased building.

Buildings (constructed): contract price+ architects fees + building permits + excavation cost + interest
costs during construction= cost of constructed building.

Equipment: purchase price+ freight charges and insurance during transit+ assembling+ installing and
testing= cost of equipment
Expenditures

Operating expense: benefit only current period, maintain assets In normal operating condition, recorded
on income statement, rent salaries

Capital expense: benefits for the future accounting periods, increase life of an asset, included / added to
cost of the non current asset, recorded on balance sheet and depreciates with asset

FOB shipping point: buyer is liable once it leaves supplier

Depreciation: allocates cost from balance sheet to income statement

Journal entry: DR Depreciation expense

CR accumulated depreciation : contra asset

Doesn’t use or provide cash, non cash expense

Asset cost(gross asset value, before taking depreciation) – accumulated depreciation: carrying value of
asset or net asset value

Residual value: estimated amount to be received at end of useful life.

Useful life: period of time that the asset is expected to be available for use,or number of units of output
expected to be obtained by the unit.

Calculating depreciation

Straight line: depreciation expense is constant for each year of the assets useful life.

Straight line method: cost of asset – residual value / useful life

Diminishing balance method: decreasing depreciation over the useful life.

Derecognition of ppe

Removal of ppe from accounting system of property. At end of useful life, sometimes earlier when it is
sold.

Update depreciation: fraction for the year to the date of disposal must be recorded.

Carrying amount: cost – accumulated depreciation

Gain or loss: proceeds – carrying amount = gain or loss

Proceeds or gains are credit

Loss is debit.
Chapter 13

Statement of cash flows

Operating activities: principal revenue, not investing or financing

Investing activities: non current asset accounts, investmens not held for trading, PP and E and intangible
assets.

Financing activities: changes in non current liability and equity accounts

Direct method of preparation: cash receipts and cash payments listed directly. For operating activities.

Indirect method: start with net income: makes adjustments to it to arrive at cash provided by operating
activities.

Adjustments:

For non cash items: add them back

Add decreases in current asset accounts and increases in current liability accounts or deduct increases in
current assets accounts.

Chapter 10

Accounts for current liabilities

Accounts for instalment notes payable

Current liabilities need to be payed within the next year. Other liabilities are non current or long term.

Operating line of credit: agreement between company and lender to allow to borrow up to an agreed
upon amount, help manage temporary cash shortfalls. Variable interest. Collateral may be required.
Short term liability. Journal :dr cash, cr band indebtedness.

Sales tax payable: when sale occurs : dr. accounts receivable or cash, cr. Sales / revenue, cr. Sales tax
payable.

When tax is paid: dr. sales tax payable, cr. Cash

Payroll: gross pay – deductions= net pay

Dr. salaries expense

Cr. Cpp payable

Cr. Income tax payable

Cr. Salaries payable

Cr. Pension payable

Dr. salaries payable

Cr. Cash

Employer portion

Dr. benefits expense

Cr. Cpp payable

Cr. EI payable

Dr. cpp payable

DR. EI payable

DR income tax payable

Cr. cash

Payroll obligations:

Mandatory deductions: cpp, EI, federal and provincial taxes.

Voluntary deductions: health and pensions, union dues, charitable donations

Instalment notes payable: periodic payments called instalments.

Each payment is : interest + reduction of principal

Instalment payments : either fixed principal plus interest or blended principal and interest.

Principal amount : total note payable / total # of payments

Net note payable outstanding : total note payable – total principal payments made.

Total payment stays the same for blended payments.

DR. interest payable

DR. Note payable

DR. Interest expense

Cr. Cash

Fiscal year end journal

Dr. Interest expense

Cr. Interest payable

Bonds payable: promise to repay a specified amount of money to repay a specified amount of money at
a specified future date with specified interest

Market rate for discount

Journal entry for bond issued at par

Dr. Cash

Cr. Bonds payable

Bond issued at a discount

Dr. Cash amount issued – discount

Dr. Discount on bonds payable

Bonds payable are always credited for face value

For premium

Dr. Cash + premium

Cr. Premium on bonds payable

Cr. Bonds payable amount issued

Amortization of bond premium or discount

Calculate interest expense (carrying amount of bonds at beginning of period x market interest rate)

Bond interest paid (face amount of bonds x coupon interest rate) = amortization amount

Pv of bond = PV (principle) + PV (interest payments)

JOURNAL ENTRY

DR cash pv bond

DR. discount on bond payable

CR. Bond payable at face value

Chapter 14

Return on investment = benefit / cost

Return on equity: net income / average stock holders equity (beginning shareholders equity add new
shareholders equity and divide by 2)

Horizontal analysis: percentage change: current year amount – past year amount / past year amount.
Comes out as a percentage. Higher percentage is better

Vertical analysis

Income statements items: percent of revenues

Balance sheet items: percent of total assets

Profitability ratio: net income / sales

Total asset turnover ratio: sales / avg total assets (beginning total assets + ending total assets /2)

Total assets : accounts receivable + inventory + fixed assets

Dupont analysis : decompose return on equity (ROE) = net income / average shareholder equity

Gross margin: gross profit / sales

Operating margin: operating profit (EBIT)/ sale

Net profit margin : net income / sales

Turnover ratios

Accounts receivable turnover ratio credit sales / average receivables

Inventory turnover ratio: sales or cogs/ average inventory, higher is better

Fixed assets turnover ratio: sales / average ppe

Days in inventory: 365/ inventory turnover, lower is better

Receivables turnover : credit sales / average receivables, higher is better

Average collection period: 365/ receivables turnover, lower is better

Fixed asset turnover : net sales / average non current assets.

Leverage for debt to equity: total liabilities / stockholders equity

Financial debt to equity ratio: financial debt/ stockholders equity

Operating liabilities to equity ratio: payables for operations/ stockholders equity

Dupont analysis : profit margin(%) x asset turnover x financial leverage