Notes - 9/17/2015

Accounting: Identification, measurement and communication of financial information of

economic entities and interested parties.
Income Statement: is the Revenues - Expenses = Net Income (covers a period)
Balance Sheets: Assets=Liabilities + Equities (snapshot - or one day in time)
Statement of Cash Flows: Your Change in the Cash Accounts throughout the period
Statement of Owners Equity: The Change in the Owners Equity Accounts throughout a period
What is wanted out of our financial statements?
Investors want to know if we are growing and their money will grow.
Managers want to see where we are weak and strong
Government wants to know if we are paying our taxes
Banks want to know our financial situation before they lend us money.
Notes - 9/22/2015
GAAP = Generally Accepted Accounting Principles
SEC: Stock and Exchange Commission
Developed due to Great Depression in 1929
Develops and Enforces GAAP rules
AICPA: American Institute of Certified Public Accountants
Doesnt carry as much weight because it had problems
Accounting Research Bulletins
APB Opinions
Industry Guides
Statements of Position
ACSEC Practice Bulletins
Accounting Interpretations
FASB: Financial Accounting Standards Board
FAF selects the member
Develops GAAP
7 members and theyre paid. 5 year terms
Standards (carry the most weight GAAP)
Interpretation
Staff Positions
Technical Bulletins
Financial Accounting Concepts (not really GAAP)
Emerging Issues Task Force Statements
GASB: Governmental Accounting Standards Board.
It is over the state and local governments
To establish and improve standards of financial accounting for state and local government
Not tax accounting.
IASB/IFRS: Independent Accounting Standards Board /

We havent adopted it because it is hard to enforce it without a world government

Objectives of Financial Accounting:
1.
Provide Info for investment, credit and similar decisions.
2.
Assess the amounts, timing and uncertainty
3.
clearly portray resources
Notes 9/24/2015
Qualitative: Have good quality, correct.
Primary Characteristics:
Relevance:
1. Predictive Value - can we use this information to forecast, what are our goals
2. Feedback Value - did we meet our goals?
3. Timeliness - Is it current? An old report is not relevant now.
Reliability:
1. Verifiability: Can it be checked by independent parties? Auditors?
2. Representational Faithfulness: numbers match what actually happen.
3. Neutrality: We arent going to skew anything to favor a certain party.
Secondary:
Comparability: Able to be compared to another company (similar helps)
Consistency: Last years books were prepared the same way as this year and we
dont flip flop.
Assumptions:
Economic Entity: We are assuming this business is an actual business. Think you
have a business account and not a personal account
Going Concern: Assuming this business is going to be open tomorrow.
Monetary Units $: The currency and limits. Philippines piso vs US Dollar
Periodicity: The company can divide its activities into artificial periods
Principles:
Historical Cost: We generally put things on the books at what we bought
something, and keep it at that.
Revenue Recognition:
1. Realized: We recognize income when its realized or realizable.
(realizable, sometimes cash isnt used, but things are that have a value.
Like a trade. Dad made a trade in lieu of paying cash for our braces.)
2. Earned: We recognize the income when its earned. A company has
substantially accomplished what it must do to be entitled to the benefits
represented by the revenues that is, when the earnings process is
complete or virtually complete.
Matching principle: Matching income and expenses within the same period so
that we are able to see the bottom line. Imagine a project where you do work over
several periods and incur costs along the way. At the time we are paid, you want
to line up your expenses and income to find the bottom line.
Full disclosure: We need the full amount that occurred within a period, but we do
not need a line by line of all the transactions that occurred in that period.

Constraints:
Cost Benefit: We as accountants can collect an immense amount of data, but at
a certain point the cost outweighs the benefit gained.
Materiality: Concerns an items impact on a companys overall financial
operations. $500 is nothing in a $5 billion company, but $500 is big in a $20,000
company. (A mistake of some sort). It doesnt only represent past events, but
future events as well. Think pending lawsuits. If it is a huge potential liability, it
needs to go on the books in a note.
Industry Practices: Different industries do things differently. Sometimes as an
industry we have to make an exception within GAAP to make things work.
Conservatism: Play it safe, overstate your liabilities if you dont know, but dont
overstate your income if you dont know.
NOTES 9/29/2015
1. Transactions are analyzed and recorded in the journal
2. Transactions are posted to the ledger
3. An unadjusted trial balance is prepared
4. Adjustment data are assembled and analyzed
5. An optional end-of-period spreadsheet work sheet is prepared
6. Adjusting entries are journalized and posted to the ledger
7. An adjusted trial balance is prepared
8. Financial statements are prepared
9. Closing entries are journalized and posted to the ledger
10. A post-closing trial balance is prepared
11. (reversing entries)x
NOTES 10/01/2015
Assets (Debit Balance)
Contra Assets (Credit Balance)
Liabilities (Credit Balance)
Equity (Credit Balance)
Expense and Draw (Debit Balance)
Adjusting journal entries are things that happened over the period that didnt get their own
transactions. We are using the matching principle and the revenue recognition principle when we
are doing a trial balance.
When we prepare a trial balance, we line up all of our accounts with our debits on the left and
credits on the right. Then we add it up to make sure it balances.
Then we need to figure out our adjusting journal entries. Add or subtract them into the trial
balance and try to do it again. This is called an adjusted trial balance.
We then close our nominal accounts every fiscal period, and prepare our financial statements.
Income summary is used to close out accounts.

(Net Income)/# Share of Common Stock = Earnings Per Share

Revenues Expenses = Net Income
Assets = Liabilities + Equity
NOTES 10/6/2015
Adjusting Inventories:
Inventory
2000
COGS
3000
INV EXP

5000

*THIS JOURNAL ENTRY IS WHAT SHOULD HAPPEN IF AT THE END OF THE

PERIOD WE HAVE A CERTAIN AMOUNT OF INVENTORY LEFT. THERE IS
ONLY 2 TIMES WE WILL EVER CREDIT AN EXPENSE ACCOUNT: WHEN WE
ARE CORRECTING A WRONG ENTRY OR CLOSING THE ACCOUNT.
LOANS:
ON 9/1 WE BORROWED 20000 AT 8% PAID YEARLY
CASH

20000
NOTES PAY

20000

WE ONLY JOURNALIZE INTERST PAYABLE, INTEREST EXPENSE AS AN

ADJUSTING JOURNAL ENTRY. Think of it as accruing interest.
=0.08/12 = 0.00667 * 4 = 0.02667 * 20000 = 533.33
INTEREST EXPENSE
INTEREST PAYABLE

533.33
533.33

WHEN WE PAY THIS INTEREST, WE CREDIT CASH AND DEBIT INTEREST

PAYABLE, AND NOTES PAYABLE
NOTES PAYABLE
20000
INTEREST PAYABLE
.
CASH
20.
CLOSING ACCOUNTS:
Dividends: We still close this account, however we DO NOT use Income Summary. We
close them against the Retained Earnings account. The reason for this is because the
Dividends accounts does not go on the Income Statement, and paying a dividend goes on
the history of the Retained Earnings account.
NOTES 10/20/2015
Enron got in trouble because they used creative accounting and hid their debt. Creative
accounting included understating most of their transactions. Then, they hid their debt
through adding assets to their books, but hiding their debts in offshore subsidiaries, thus
making it near impossible to track.
There are a lot of things we need to do to estimate different assets. This include Allowance for
Doubtful Accounts, and Depreciation accounts.
None of the statements are perfect. One big thing influencing our balance sheets that we cannot
account for is people. When Steve Jobs left Apple, the companys stock plummeted. Or when
Warren Buffet buys the stock of companies, people follow him and it artificially inflates the
market.
Solvency: Can we pay all of our debts??
Liquidity: How fast can we turn our assets into chedda, guap, dough??
If all of our cash is in foreign investments, we may have a hard time recovering that
money, but if we keep it closer than it may be easier to gather.
Goodwill: Is the value of the name of the company minus the assets, liabilities and owners
equity. If you bought Nike, youd have to also pay for the value of the name.
Current Asset: is going to get used in a year or an operating cycle. (Inventory, and
invest/securities that will be sold within a year. )
Trading Securities: are a current asset
Held to Maturity: Securities that need to be held until they mature. Bonds are a long
term asset.
Available for sale: (Another kind of securities) It is a current asset.
Assets Receivable is generally a current asset.
Notes Receivable is generally a long term asset.
Itemized Statements Formats:

Assets
Current Assets
Long-Term Inventory
Property Plant and Equipment
Intangibles (Franchised part of a company, Customer List,
Other Assets
Liabilities
Current (A/P, Unearned Revenues, Wages Payable,
Long-Term (Mortgage Payable
*The amount of a debt that is due within a year goes into the current liabilities,
the remainder goes into the long term payable.
NOTES 10/27/2015
Formulas:
Net Sales Formula
Gross Profit
Operating Expenses

Income before taxes formula

Net Income

Earnings Per Share

Sales (Returns and Allowances +

Deiscounts) = Net Sales
Net Sales COGS = Gross Profits
Operating Expenses Selling Expenses
Administrative Expenses = Total Operating
Expenses (Income from Operating Expenses)
Income from Operations
+ Other Gains & Revenue
- Other Losses & Expenses
Income before taxes
Income before taxes
- Income taxes
Net Income
(Net Income Preferred Dividends)/
Weighted shares outstanding=
EPS

Balance Sheet Statements

Operating Expenses
Selling Expenses
Administrative Expenses
Other Gains & Revenues
Interest goes in here
Gains and losses from investments will fall under here.
Selling an asset used in production at a gain or loss goes here
Notes 11/10/2015

Classified Balance Sheet order

Sales
- Returns
- Discounts
- (other contra accounts)
Net Sales
-COGS
Gross Profit
Operating Expenses
Selling (if applicable)
Admin (if applicable)
Total Op Expense
Income from Ops
Other Income
+Int Inco
Etc
Income before Tax
-Income Tax
Net Income
EPS
Statement of Cash Flows
2 methods, but we only learn 1.
- Its the only one used by both GAAP and International Accounting Standards
- We take three categories and record what happened in these 3 categories
Statement of Cash Flows is divided into 3 sections:
Operating +/Investing +/Financing +/In general, we will use income statement items for SOCF. Mainly our Net Income with
certain adjustments
In general, Financing and Investing categories are Balance Sheet items. Financing, put
simply, are our Assets. Investing is our Liabilities + Equity
We only analyzing transactions that directly involve the change of cash.
For example, if we bought machinery on a long term note, then we record this as a
non-cash investment. Not an investing activity.
NOTES 11/12/15
Statement of Cash Flows

Operating Section.
We pull information from our income statement plus some modifications.
Current Assets
Net Income and Adjusted Nominal Cash
Investing
What are we investing in for the company
Balance Sheet, Assets (Long Term Assets)
Financing
Balance Sheet
Liabilities & Equity
Long Term
NOTES 11/24/2015
FREE CASH FLOW FORMULA:
FREE CASH FLOW = (CASH PROVIDED BY OPERATIONS) (CAPITAL
EXPENDITURES [SALE OF PPE]) (CASH DIVIDENDS)
CURRENT CASH DEBT COVERAGE RATIO:
(CASH FROM OPERATIONS)/(AVERAGE CURRENT LIABILITIES)
CASH DEBT COVERAGE RATIO:
(CASH PROVIDED BY OPERATIONS)/(AVERAGE TOTAL LIABILITIES)
NOTES 12/3/2015
We talked about methods of recognizing cash earlier, but we are reviewing them again.
Some methods include:
Realized/Realizable vs. Earned
Before Delivery vs. After Delivery
Point of Sale vs At Date of Delivery
Other special cases
Channel Stuffing:
For example, a software maker sells a bunch of product at a deep discount to entice
distributors to overbuy, and then re-record sales as it left the loading dock.
Trade Loading:
Imagine you are buy from a wholesaler, and they sold you a bunch of product at a
cheaper price, so they could recognize sales. However, you cant sell all of this product
in a timely manner, so in reality it later bites the wholesaler in the butt. Its a process
used to inflate sales now by recognizing future sales now
Consignment:
Essentially similar to magazines at Wal-Mart. If you made a ring and took it to a place
where they sold it, but while it is there, you actually own it. Kind of like Ebay, but they
take a percentage.
Percentage-of-Completion Method:
(Costs Incurred to Date) / (Most Recent Estimate of Total Costs) = Percent Complete
For example an Estimated 5 Billion dollar mall is getting built
1. Year 1

2.

3.

4.

5.

a.
b.
c.
d.
Year 2
a.
b.
c.
Year 3
a.
b.
c.
Year 4
a.
b.
c.
Year 5
a.
b.
c.

Current Cost: 2B
Total to Date: 2B
Percentage Done: 40%
What we Report:
Current Cost: 500 M
Total to Date: 2.5B
Percentage Done: 50%
Current Cost: 1B
Total to Date: 3.5B
Percentage Done: 70%
Current Cost: 1.25B
Total to Date: 4.75B
Percentage Done: 95%
Current Cost: 250M
Total to Date: 5B
Percentage Done: 100%

NOTES
12/10/2015
Warranties and Accounting:
Say we sell:
1000 computers
And a warranty of $50/computer that are good for 4 years
1. We dont plan on fixing any in year one
2. We plan on 10 repairs in year 2
3. 15 in year 3
4. Year 4: 30
To determine how much we recognize yearly, we find a percentage. The total of
expected fixes across all 4 years is 55. So we divide the total expected in every
year by 55 to find a percentage. Then times that by $50000 (from the sales of
warranties) to find how much to recognize yearly.
NOTES 12/14/2015
CHAPTER 7 REVENUE RECOGNITION / CHAPTER 2 CONCEPTUAL FRAMEWORK
Revenue Recognition:
Point-of-sale (Delivery): This is the general rule. Occurs when selling product from
inventory and revenue from sales is recorded.
3 exceptions:

1. Buyback agreements that have a set price and covers all cost of
inventory plus related holding costs. It remains on sellers books,
meaning no sale until buyback period has expired or product is
completely sold.
2. Certain industries experience a high rate of returns, or a high ratio
of returns to sales. Publishing and magazines for example use
guaranteed sales or consignments. 3 methods:
a. Not recording a sale until all privileges expire
b. Recording the sale, but reducing sales by an estimated
future return
c. Recording sales and adjusting as returns occur
3. Trade Loading and Channel Stuffing
a. Some companies record sales at POS but dont allow
buyback nor unlimited return provisions.
b. Trade Loading: Induce wholesale customers to overbuy so
the distributor can load the sales
c. Channel Stuffing: Distributors offering deep discounts to
prompt overbuying then record revenues at the time it
leaves the loading dock.
d. Both should be discouraged!!
Before Delivery: Most commonly used by construction contract accounting using the
percentage of completion method.
Some contracts allow for installments, as a project reaches a certain interval.
(Construction). A company may transfer title and may bill at stated stages of
completion.
2 methods:
1. Percentage Completion: recognize revenue and gross profit based on
progress
2. Completed Contract: recognize product at completion of contract.
Rationale used for Percentage Completion: Buyer and seller have rights to
specific performance (buyer) and progress payments that prove buyers ownership
interest (seller). Recognize revenue according to progression.
Companies must use percentage completion method when all revenues and costs
are dependable and 3 criteria are met:
1. Contract clearly specifies enforceable rights regarding goods and services,
consideration to be exchanged, manner and terms of settlement.
2. The buyer can be expected to satisfy all obligations under contract.
3. The contractor can be expected to perform the obligations in contract.
Companies only use completed-contract if:
1. Companies have primarily short term contracts.
2. When a company cannot meet condition for percentage of sales
3. These are inherent risks and hazards beyond normal, recurring business
risk.
Percentage of Completion Method Steps: This method is used so efforts (costs) and
accomplishments (revenues) arent misrepresented. A company needs a basis or standard
fro measuring progress toward completion at particular dates.

Cost-to-Cost Basis: Compares costs incurred to most recent estimate of total cost
to complete contract.
1. This percentage is then applied to total revenue or estimated gross profit:
a. (% Complete) * (Estimated Total Revenue) = Recognized Revenue
2. To find the gross profit and revenues for each period, we would subtract
the revenue or gross profit from prior periods.
a. (Revenue to be recognized) (Prior periods revenue) = Current
Period Revenues.
Completed Contract Method: Recognized revenue and gross profit only at point of sale
or when contract is complete
Costs accumulate under this method, but companies do not record interim charges
to income statement for revenues, costs, and gross profit.
Major advantage, reported revenue is based on final results rather than periods,
Cons, if contract extends across accounting periods, income becomes distorted.
*Under both the Percentage of Completion Method and the Completed Contract Method,
if we incur a loss, it must be recognized in that period in full.*