AccountingPlay.com Pee eee c uns Year ended 12/31/2014 eit rectit “Receive 1,000 investment for common stock ash 2,000 ‘Common stock 24,000 “Receive $500loan cash 500 Note payable 500 | | Equipment ash 200 J, | Accounts receivable Revenue 300 Collect $500 creditsale Cash 500 ‘Accounts receivable 500 Establish $90 Allowance for doubtful accounts Bad debt expense 90 ‘Allowance for doubtful 0 Record utilities expense $50 after receiving bil Utilities expense 50 ‘Accounts payable 50 Pay utlty company $50 in cash for priorbils ‘Accounts payable 50 cash 50 “Accrue $300inwageexpense ‘Wage expense 300 Wages payable 300 ShecrSsmce Interest expense Note payable 5 etsmatamnntnne Depreciation ‘expense ‘Accumulated depreciation 40 cash 30 Revenue 30 {Cost of goods sold 10 Inventory 10 "Repurchase $175 of company stock “Treasury account 175 cash 15 Revenue Bad debt 20 Cost of goods sold 10 Depreciation 40 Interest 5 Utilities 50 Wages 300 Income summary 435 “Close income summary to retained earnings Income summary Retained earnings 435 Retained earnings a Dividends payable 8 Pay SB dividend Dividends payable 8 cash 8 ‘www-AccountingPlay.com ItAccountingPlay.com Eee a ec ‘Statement of owners’ equity shows sources of capital (business funding), addtional paid in capital and common stock breakdown, changes in retained earnings, and treasury stock (stock repurchased) Mechanics The statement starts with beginning balances and reconciles to ending period balance ( Deeenberst8 © Nets fora 2s 35 eee 1200 a 015 015) ident wi te (Dente ae ae a aePec cyt Pere eee Even Revenue 930 Cost of goods sold (20) Gross profit 920 Expense Bad debt 90 Depreciation 40 Interest 5 Usilities 50 Wages 300 ‘Total Expense 485 [Net income (Profit) 435 Income statement (profit and loss) shows the performance (of a business by reporting revenue earned minus expenses Incurred to equal net income or lass (profit oF loss) Mechanics Reports the business activity fora specifi period ‘of time and results in net income or loss, which gets recorded to retained earnings at the end of the accounting period REVENUE AND EXPENSE Revenue recognition Recognize (book into accounting record) revenue when itis earned and realizable Expense recognition Expenses are recognized when incurred, {as goods are used and services received Net income or loss Revenue minus expenses results in net income or net loss also referred to as profit or loss Net income increases retained earnings and net loss decreases retained earnings STATEMENT OF CASH FLOWS FEATURES I ‘Statement of cash flows Shows the flow of cash in and out of the business Mechanics Starts with beginning cash from the prior period ‘and reconciles to ending cash in the current period showing the changes Usefulness Shows actual changes in cash on a cash basis, instead of the accrual basis which does not necessarily reflect the flow of cash Indirect method of preparation uses the changes in accrual basis accounts Direct method of preparation (uncommon) presents specific cash flows such as cash received from customers and paid to suppliers Accounting Cheat Sheet by John Gillingham, CPA All Rights Reserved STATEMENT OF CASH FLOWS FEATURES Year ended 12/31/2100 (200)AccountingPlay.com Preece | 1967 Balance sheet (statement of financial position) shows the tending balances of assets, liabilities, and equity atthe end of the ‘accounting period Mechanics Assets always equal liabilities plus equity, (which forms the accounting equation) TEMEN ASSETS ‘Current assets To be used within one year of the balance sheet date ‘or longer, ifthe operating cycle is greater ‘Current assets Cash and equivalents, accounts receivable, inventory, Prepaid expenses to be used within a year Long-term assets Expected benefit greater than one year Examples: property, plant, equipment, intangible assets (copyrights, trademarks, goodwill) ‘Accounts receivable (AR) Cash due from customers who have purchased goods or received services not yet paid for Inventory Goods for sale or manufacture, valued under GAAP at, lower of cost or market Prepaid expense Expenses paid in advance, considered an asset until Used (such as @ two year insurance policy) ‘Accumulated depreciation | amortization The sum of all prior ‘depreciation | amortization (contra asset) increases with a credit and offsets the value of depreciable assets reported at cost UmBILITIES Current liabilities Obligations due in one year or less. Long-term liabilities Debts owed to creditors, due in more than one year from the balance sheet date ‘Accounts payable (AP) Money owed to creditors and vendors Notes payable Debts owed to banks or other creditors based on. written agreements ‘Accrued expenses Expenses incurred before the end of the ‘accounting period, but not yet paid for Deferred revenue Cash received in advance, but not yet ‘earned Long-term bonds payable Money borrowed to finance company ‘operations, due in more than one year ‘SHAREHOLDERS’ EQUITY ‘Common stock Sold to investors for ownership of a ‘corporation Preferred stock Investors receive dlvidends before common stockholders and usually do not have voting rights ‘Additional paid-in capital Investment received by corporation, in excess of par value per share (APIC= Issuance price - Par value) Par (stated) value Per share amount on stack certificates, aso, referred toas legal capital (no relation to market value) Retained earnings Sum of all previous profit and losses, les dividends ‘Treasury stock Stock repurchased by company Dividends Corporate profits paid to shareholders from retained ‘earnings (not an expense)Pec cyt Preece FOB shipping point ‘Buyer's books at year end, ttle passes when goods delivered FOR destination Seller's books at year end, title passes when goods received Raw materials Direct costs of materials manufactured such as steel Overhead costs Costs typically thought of as expenses that are added to cost of goods Work in process (WIP) ‘Goods in the process of being manufactured (assets) Debits and credits Debit cash, Credit realized gain, Credit stock Sell depreciated asset, gain Increase cash, Decrease asset, Decrease accumulated depreciation, Increase gain Debits and credits Debit cash, Creat asset, Debit accumulated depreciation, Credit gain on sale Bonds Financial instrument (agreement) issued by a company to borrow money from investors at specified term (time) and rate Issuer Company that is raising the money Face value Amount that Is repaid atthe end of term Stated coupon rate Interest that bond pays investor Effective interest Rate of interest investor receives if the bond is purchased ata discount or premium Premium Amount company is paid in excess of face value, often pald when coupon rate is greater than market rate Premium = Price paid for bond -face value Discount Amount below the face value paid for a bond often occurs when coupon rate is ess than market rate Discount = Face value ~ price paid for bond Ce Price paid for asset (may include costs to ‘stright line [Rate =(Cost- Savage value /Usel fe) install) Book value Cost Accumulated depreciation Accelerated methods Methods resulting in greater depreciation during earlier years [MACRS/ACRS/ DDB Accelerated depreciation methods Depreciation Expense taken on a physical asset over time ea , ‘Amortization Expense taken on an intangible asset over timeAccountingPlay.com ee eee Cy: Comparability Financial statements must be comparable period to period Conservatism Considers all sks | strict rules Consistency ‘Same accounting methods year to year Constraints Information has 3 cost/benefit and is material Cost principle ‘Keep costs at purchase price or lower (lower of cost or market) Economic entity Maintain separate records for each entity Faull disclosure Provides detailed information in addition to financial statements Going concern ‘Assume business is going to and has capability to continue Matching. Recognize cost the same time as benefit ‘Materiality Significance to the overall financial picture ‘Monetary unit Currency is used to record transactions and is assumed to be constant Relevance Financial reporting has predictive, feedback, and timeliness value Reliability Financial reporting is neutral, vali, and verifiable Revenue recognition Conditions of how an organization records revenue ‘Time period Report financial activity in specific time periods Disposition Sale, scrapping, or removal ofan item, typically an asset Goodwill Purchase price les tangible value of physical assets purchased Non-sulficient funds, typically a returned check Unrealized gain | loss Investment that has increased | decreased in value, but not yet sold Monthly interest Pxir/22) Sole Proprietorship One owner, no liability protection Compound interest A=P(L + (e/n))ant Partnership Two or more owners, no liability protection Limited Partnership Two or more owners, liability proteetion ‘A= Amount, P= Principal, r= Rate LLC Limited Liability Company Liability protection, flexible -ompoundings per period, t= number of periods Corporation Liability protection, double taxation issues BANK RECONCILIATION Balance per bank + Deposits in transit = Outstanding checks Errors, fees, returned items Balance per booksPNeee]s) ay PN Corona) oy Balance Sheet as of 12/31/2100 Assets = _Uibilties + Equity thee ud tot gf tee Income Statement, year ended 12/31/2100 $I as Revenue = _Expense AG sis eg flrs tla Be = Netincome increases RE + + Equation Journal Entry debit_creait cash 100 Common stock 100 Receive cash for common stock Cost of Goods Sold (COGS) Beginning inventory GrossProfit Revenue x ++ Purchases Revenue (1- Gross profit = Ending inventory -coas rate) Cost of Goods Sold (COGS) GrossProft “COGS Balance Sheet ‘Asset debit credit Contra asset credit. debit Contra assets: Accumulated depreciation, ‘Allowance for doubtful accounts _—— Liability debit SSS a Equity debit Contra equity fone eee ‘Contra equity: Treasury stock Income Statement Revenue credit. debit Most transactions: Typically credits SSIs] Expense debit credit “Most transactions: Typically debits ‘Accrual basis Follows the matching principle and recognizes ‘transactions as they occur (GAAP Method) ‘Cash basis Recognizes transactions when cash or equivalents hhave been exchanged (Not GAAP) US-GAAP Generally Accepted Accounting Principles system established by FASB that governs financial reporting {IFRS International Financial Reporting Standards Financial reporting standard adopted widely outside of US (No LIEO permitted, diferent FMV valuation permitted) win i et tc Ue ldo Non heoe FIFO First n First Out Early purchases come out of inventory first UFO Last in First Out Early purchases tend to stayin inventory ‘Average cost Total cost / Quantity = Cost per unit Perpetual inventory tracked in realtime Periodic inventory tracked by counting at end of period Net Income Comparison Price FIFO UFO Average Rising Higher Lower Middle Falling Lower Higher Middle Rule: In a period of increasing inventory costs, FIFO. ‘method results in higher net income compared to fFO Lower Higher Rising Falling Higher Lower Middle Middle