Chapter Summary (Chapters 1-11) PDF

[Chapter 1: Conceptual Framework and Financial Statements] ====================================================================== 1. Accounting Equation: Assets = Liabilities + Shareholders' Equity a. Assets b. Liabilities c. Shareholders' Equity 2. Conceptual Framework: Qualit...

[Chapter 1: Conceptual Framework and Financial Statements] ====================================================================== 1. Accounting Equation: Assets = Liabilities + Shareholders' Equity a. Assets b. Liabilities c. Shareholders' Equity 2. Conceptual Framework: Qualitative Characteristics, Constraints and Assumptions d. Relevance e. Faithful Representation f. Comparability g. Timeliness h. Verifiability i. Understandability j. Accrual Accounting k. Going Concern 3. Forms of Business Organization l. Proprietorship m. Partnership n. Corporation 4. Account Types o. Assets p. Liabilities q. Shareholders' Equity (Share Capital, Retained Earnings) r. Income s. Expenses 5. Financial Statements t. Income Statement i. Formula: Net Income (Losses) = Total Revenue and Gains -- Total Expenses and Losses u. Statement of Changes in Equity ii. Formula: Beginning Retained Earnings + Net Income -- Dividends = Ending Retained Earnings v. Balance Sheet iii. Formula: Assets = Liabilities + Shareholders' Equity w. Statement of Cash Flows iv. Formula: Net Cash Flow of (operating + investing + financing) + Beginning cash balance = Ending cash balance 6. Ethics in Business and Accounting Decisions x. The role of judgment in decision making y. Economic factors z. Legal factors a. Ethical factors [Chapter 2 Recording Business Transactions] ======================================================= 1\. Account 2\. Business Transaction 3\. T-account **ACCOUNT TITLE** ------------------- -------- Debit Credit       4\. Normal Balance 5 Account Type: a\. Asset. *1. Examples:* Cash, Accounts Receivable, Supplies b\. Liability *1. Examples*: Accounts Payable, Notes Payable, Accrued Liabilities c\. Shareholders' Equity *1. Examples:* Share Capital, Retained Earnings, Dividends d\. Income *1. Examples*: Sales Revenue, Service Revenue e\. Expenses *1. Examples:* Cost of Goods Sold (COGS), Salary Expense, Utility Expense 6\. Retained Earnings 7\. Dividends 8\. Double Entry Bookkeeping System. 9\. Rules of Debit and Credit **Account Type** **Normal Balance** **Increase** **Decrease** ----------------------- -------------------- -------------- -------------- **Asset** **Debit** **Debit** **Credit** **Liability** **Credit** **Credit** **Debit** Shareholders' Equity **Credit** **Credit** **Debit** **Income** **Credit** **Credit** **Debit** **Expense** **Debit** **Debit** **Credit** **Share Capital** **Credit** **Credit** **Debit** **Retained Earnings** **Credit** **Credit** **Debit** **Dividends** **Debit** **Debit** **Credit** 10\. Chart of Accounts (List of Commonly Used Account Names) 11\. Journal a\. Journal entry **Account and Explanation** **Debit** **Credit** ----------------------------- ----------- ------------ Cash 50,000   Share Capital   50,000 *Issued New Shares*     12\. Ledger a\. Posting **Account and Explanation** **Debit** **Credit** ----------------------------- ----------- ------------ ------------------- --- -------- Cash 50,000   Share Capital   50,000 *Issued New Shares*     **Cash** **Share Capital** 50,000   50,000         13\. Trial Balance a. Total debits = Total credits [Chapter 3: Accrual Accounting] =========================================== 1\. **Accrual basis of accounting:** the accountant records the transaction even if no cash is exchanged a\. required by IFRS 2\. **Cash basis of accounting:** cash receipts are treated as revenue and cash payments are treated as expenses 3\. **Accounting principles and concepts:** 4\. **Adjusting entries:** entries made at the end of the accounting period to update the account balances a\. **Deferrals:** an adjustment for an item that the business paid or received cash in advance 1\. Supplies 2\. Prepaid rent 3\. Prepaid Insurance b\. **Depreciation:** allocates the cost of each property, plant and equipment, other than freehold land, over its useful life i\. Journal Entry: Depreciation Expense, PPE XX Accumulated Depreciation, PPE XX iii\. Carrying amount (book value) of PPE: the net amount of property, plant and equipment **c. Accruals:** a\. Accrued Expense: an unpaid expense; it becomes a liability b\. Accrued Revenue: revenue that has been earned but is uncollected. 5\. **Adjusted trial balance:** a trial balance prepared after the adjusting entries have been journalized and posted. 6\. **Order of preparation of financial statements:** c\. Balance Sheet is prepared next. d\. Statement of Cash Flows is prepared last. 7\. **Closing Entries:** bring the temporary accounts to a zero balance prior to entering into the next accounting period a\. **Temporary accounts:** income, expenses, and dividends b\. **Permanent Accounts**: assets, liabilities, and shareholders' equity (other than income, expenses, and dividends) c\. **Three closing entries:** i\. Debit each income account and credit retained earnings ii\. Credit each expense account and debit retained earnings iii\. Credit dividends and debit retained earnings 8\. **Classified balance sheet:** assets and liabilities are classified as current or long term/non-current to indicate their relative liquidity b\. **Long term assets:** all assets that are not classified as current d\. **Non-current liabilities**: all liabilities which are not current e\. **Example of classified balance:** **Classified Balance Sheet** ------------------------------------------- ------- -- --------------------------------------------- ------ **Assets** ** ** **Liabilities and Shareholders\' Equity**   Current Assets: Current liabilities: Cash and cash equivalents xx Accounts payable xx Short - term investments xx Accrued expenses payable xx Accounts receivable xx Short - term notes payable xx Inventories xx Current portion of non-current xx Prepaid expenses and other current assets xx Unearned revenue xx Total current assets xxx Total current liabilities xxx Long term investments xx Non-current liabilities xx Property, plant and equipment, net xxx Other non-current liabilities xx Intangible assets xx Total liabilities xxx Other assets xx Shareholders' Equity: Total assets xxxx Share capital xx Retained earnings xxx Other Equity xx Total shareholders\' equity xxxx Total liabilities and shareholders\' equity xxxx [Chapter 4: Presentation of Financial Statements ] ============================================================== 1\. General presentation requirements prescribed by IAS 1: a. Complete set of financial statements b. Fair presentation and compliance with IFRS c. Going concern d. Accrual basis of accounting e. Materiality and aggregation f. Offsetting g. Frequency of reporting h. Comparative information i. Consistency of presentation [Chapter 5: Internal Control, Cash, and Receivables] ================================================================ 1.Definition of fraud a. It is an intentional misrepresentation of facts, made for the purpose of persuading another party to act in a certain way that causes injury or damage to that party. 2\. Common Types of Fraud a. Misappropriation of assets b. Fraudulent financial reporting 3\. The Fraud Triangle  4\. Internal Control: a. Plan of organization and procedures implemented to accomplish 5 objectives: - Safeguard assets - Encourage employees to follow company policy - Promote operational efficiency - Ensure accurate, reliable accounting records - Comply with legal requirements 5\. Internal Control Procedures a. Separation of Duties 6\. Bank Reconciliation: a. It is prepared to explain the differences between the book balance (company's cash records) and the bank statement balance (differences occur due to time lag in recording transactions). For examples on sources of differences, see below: **Bank side** - Deposits in transit **Accounting book side** - Service charge b. All items on the *accounting book side* of the bank reconciliation require journal entries. 7\. Types of Receivables: a. Accounts receivable b. Notes receivable  8\. Account for uncollectible account receivables ("Bad Debts") a. Allowance Method: Estimate bad debts in advance - Set up contra-account against Accounts Receivable: **Allowance for Uncollectible Accounts** (which shows the amount the business expects not to collect) - Use *Age of Accounts Receivable* to determine the specific amount/level of allowance b. Direct Write-off Method: Recognize bad debts expense at the point an account receivable becomes uncollectible 9\. Evaluate a company's ability to collect receivables a. Receivable turnover and resident period [Chapter 6: Internal Control, Cash, and Receivables] ================================================================ 1\. Service entity vs. Merchandise entity 2\. Single Step Income Statement a\. Total Revenue and Gains -- Total Expenses and Losses = Net Income 3\. Multiple Step Income Statement a\. Sales Revenue -- Cost of Goods Sold = Gross Profit -- Operating Expenses = Operating Profit -- Interest Expense = Income Before Tax -- Income Tax Expense = Net Income 4\. Freight Terms a\. freight -- in b\. freight- out 5\. Inventory Systems a\. Periodic Inventory b\. Perpetual Inventory 6\. Purchases a\. Purchase Returns & Allowances b\. Purchase Discounts c\. Net Purchases 1\. Net Purchases = Purchases -- Purchase Returns & Allowances -- Purchase Discounts 7\. Sales a\. Sales Returns & Allowances b\. Sales Discounts c\. Net Sales 1\. Net Sales = Sales -- Sales Returns & Allowances -- Sales Discounts 8\. Ending Inventory Methods a\. Specific Identification b\. Average Cost c\. First in First out (FIFO) d\. Last in Last out (LIFO) 9\. Accounting Principles That Relate to Inventory a\. Lower of Cost or NRV 10\. Gross Profit Inventory Estimation a\. Gross Profit Percentage = [Gross Profit] Net Sales 11\. Inventory Turnover a\. Inventory Turnover = [Cost of Goods Sold ] Average Inventory 12\. Cost of Goods Sold Model a\. Beginning Inventory + Purchases -- Ending Inventory = Cost of Goods Sold [Chapter 7: PPE and Intangibles] ============================================ 1\. PPE (Fixed Asset) a\. Depreciation vs. Impairment 2\. Cost of an asset a\. Purchase Price b\. Taxes c\. Commissions and Fees d\. Costs necessary to get the asset ready for use 3\. Examples of PPE cost a\. Land b\. Building, Machinery and Equipment c\. Land Improvements and Leasehold Improvements 4\. Relative Sales Value Method a\. Lump-sum Purchase 5\. Expense Expenditures vs. Capitalize Expenditures a\. Significant or major repairs 6\. Depreciation a\. Cost b\. Estimated Residual Value c\. Estimated Useful Life 7\. Depreciation Methods a\. Straight Line 1\. Formula: Depreciation per period = [Cost -- Residual Value] Useful Life in Years b\. Units of Production (UOP) 1\. Formula: Depreciation per period = [Cost -- Residual Value] x Units Produced Useful Life in Units c\. Double Declining Balance (DDB) 1\. Formula: Step 1: Straight-line depreciation rate = 1 [ ] Useful Life in Years Step 2: DDB depreciation Rate = Straight-line depreciation rate x 2 Step 3: Depreciation per period = Period's beginning asset carrying amount (cost less accumulated depreciation) x DDB depreciation rate Step 4: Determine the final year's depreciation amount, that is, the amount needed to reduce period's beginning asset carrying amount to its residual value. 8\. PPE Transactions a\. Disposal of PPE b\. Sale of PPE 1\. Gain on Sale 2\. Loss on Sale 9\. Intangible Assets a\. Amortization vs. Impairment 10\. PPE Transactions on the Statement of Cash Flows a\. Investing Activities [Chapter 8: Investments and International Operations] ================================================================= 1\. Three Categories of Financial Asset Investments: a\. Financial Assets (short-term investment; ownership below 20%) 1.Trading securities b\. Investment in Associates (Long-term investment; ownership between 20% and 50%) c\. Investment in Subsidiaries (Long-term investment; ownership more than 50%) 2\. Accounting Treatments for Investment in Associates a\. equity method  3\. Accounting Treatments for Investment in Subsidiaries a\. consolidation method 1.parent company 2\. subsidiary company 3\. consolidated Balance Sheet 3.1. elimination entries a\. shareholders' equity of subsidiary b\. investment accounts c\. intercompany receivables and payables **Consolidation of a Wholly-Owned Subsidiary (100% Ownership)** 4\. Evaluation of a Company's Overall Performance a\. net profit margin ratio **=** [Chapter 9: **Liabilities**] ======================================== 1\. Current Liabilities a\. Current liabilities with known amounts 1. 2. 3. 4. 5. 6. 7. 8. b\. Current liability with estimated amount 1\. Provisions (warranties) 2\. entry to record estimation of liability Warranty Expense XX Provision for Warranty Repairs XX 3\. entry to record actual repair or replacement of defective merchandise Provision for Warranty Repairs XX Cash or Inventory XX 2\. Contingent liability a\. possible future obligation b\. present obligation that is unlikely to require outflow of economic benefits c\. present obligation that cannot be sufficiently reliably estimated 3\. Bonds a\. Bonds Payable 1\. stated interest rate 2\. principal 3\. maturity 4\. Sale of Bonds at Par a\. entry to record sale on issuance date Cash XX Bonds Payable XX b\. record semiannual interest payment Interest Expense XX Cash XX c\. record year end interest accrual Interest Expense XX Interest Payable XX 5\. Calculating the price of bonds a\. time value of money b\. stated interest rate c\. market (effective) interest rate 6\. Advantages and disadvantages of borrowing a\. advantages of financing operations with debt b\. disadvantages of financing with debt c\. advantages of financing with shares d\. disadvantages of financing with shares 7\. Evaluate a company's debt-paying ability a. b\. Interest-coverage ratio = **[Chapter 10: Shareholders' Equity]** 1\. Corporations a\. advantages 1\. separate legal entity 2\. continuous life 3\. easy to transfer ownership 4\. limited liability b\. disadvantages 1\. separation of ownership and management 2\. double taxation 3\. government regulations 2\. Four basic rights of corporation's shareholders (owners) a\. preemptive right b\. vote c\. receive dividends d\. proportionate share of assets in corporation's liquidation 3\. Shareholders' Equity a\. Share Capital (Paid-in Capital) b\. Retained Earnings 4\. Shares terminology a\. par value of shares b\. no par shares c\. authorized shares d\. issued shares e\. outstanding shares f\. issuance price of shares g\. market price of shares 5\. Sale of shares journal entries 6\. Treasury Shares a\. entry to record purchase of treasury shares Cash XX (\# of shares \* sale price) Treasury Shares (original cost) XX. (\# of shares \* cost per share) Paid-in Capital from Treasury Shares Transactions XX ("plug" figure) c\. entry to record the sale of treasury shares below cost Cash XX Paid-in Capital from Treasury Shares Transactions XX Treasury Shares (original cost) XX 7\. Retained earnings a\. dividend b\. date of declaration c\. date of record d\. date of payment 8\. Dividends a\. cash dividend on ordinary share b\. cash dividend on preference share 9\. Evaluating ratios a\. earnings per share Earnings = [Net income -- Preference Dividends] per share Average number of ordinary shares b\. return on equity Return = [Net income -- Preferred dividends ] on equity Average ordinary shareholders' equity **[Chapter 11: Cash Flows]** 1\. Statement of Cash Flow a\. three categories of business activities 1\. operating activities 2\. investing activities 3\. financing activities b\. Indirect method for operating activities  c\. Direct method for investing activities Example: compute to identify sale proceeds of PPE First, identify carrying amount (book value) of PPE sold: Beginning bal. Book value Ending bal. Second, calculate the sale proceeds: Sale proceeds = Book value of assets sold + Gain - Loss d\. Direct method for financing activities Example: compute to identify the amount of debt payments Long-term + of new -- of = Long-term debt debt debt debt