Importance of Accounting

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Importance of Accounting
Accounting
Identifies
Records
Communicates
Relevant
Reliable
to help users make better decisions.
Comparable
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Generally Accepted Accounting Principles
Financial accounting practice is governed by
concepts and rules known as generally accepted
accounting principles (GAAP).
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Principles of Accounting General Principles
Source documents.
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Principles of Accounting
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Expanded Accounting Equation
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Double-Entry Accounting
Normal Balance
Normal Balance
Nomal Balance
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Double-Entry Accounting
Exh. 3.8
Equity
Normal Balance
Normal Balance
Normal Balance
Normal Balance
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Double-Entry Accounting

• When there is a debited account, there must be a
  credited account.
• The total amount debited must be equal to the
  total amount credited for each transaction.
• The left side is the normal balance side for
  assets, and the right side is the normal balance
  side for liabilities and equity.
• ?????,??????

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Analyzing and Recording Process
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After processing its remaining transactions for
December, FastForwards Trial Balance is prepared.
9,270
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Recognizing Revenues and Expenses

• Revenue recognition principle requires that
  revenue be recorded when earned, not before or
  after.
• Matching principle intends to record expenses in
  the same accounting period as the revenues that
  are earned as a result of these expenses.

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Adjusting Accounts
An adjusting entry is recorded to bring an asset
or liability account balance to its proper amount.
Framework for Adjustments
Adjustments
including depreciation
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FastForwardWork Sheet For Month Ended December
31, 2004
Prepare adjusted trial balance.
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Sort adjusted trial balance amounts to financial
statements.
FastForwardWork Sheet For Month Ended December
31, 2004
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Financial Statements

• Income Statement revenues and expenses together
  with the how much profit the firm makes.
• Statement of Owners Equity reports information
  how equity changes over the reporting period.
• Balance Sheet a companys financial position at
  a point of time.
• Statement of cash flows cash receipts and cash
  payments over a period of time.

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Temporary and Permanent Accounts
The closing process applies only to temporary
accounts.
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Accounting cycle
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Inventory Systems
Beginninginventory
Net cost ofpurchases

Merchandiseavailable for sale

Ending Inventory
Cost of GoodsSold

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Itemized Cost of Merchandise Purchased
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Accounting for Merchandise Sales
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Inventory Cost Flow Assumptions
First-In, First-Out(FIFO)
Assumes costs flow in the order incurred.
Last-In, First-Out(LIFO)
Assumes costs flow in the reverse order incurred.
Weighted Average
Assumes costs flow at an average of the costs
available.
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Sales of Merchandise

• On March 18, Diamond Store sold 25,000 of
  merchandise on account. The merchandise was
  carried in inventory at a cost of 18,000.

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Valuing Accounts Receivable

• Some customers may not pay their account.
  Uncollectible amounts are referred to as bad
  debts. There are two methods of dealing with bad
  debts
• Direct Write-Off Method
• Allowance Method

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Estimating Bad Debts Expense

• Two Methods
• Percent of Sales Method
• Accounts Receivable Methods
• Percent of Accounts Receivable
• Aging of Accounts Receivable Method

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Percent of Accounts Receivable
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Computing Maturity and Interest
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Factors in Computing Depreciation

• The calculation of depreciation requires three
  amounts for each asset
• Cost.
• Salvage Value.
• Useful Life.

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Depreciation Methods

• Straight-line
• Units-of-production
• Declining balance

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Disposals of Plant Assets
Update depreciation to the date of disposal.
Journalize disposal by
Recording cashreceived (debit)or paid
(credit).
Recording again (credit) or loss (debit).
Removing accumulateddepreciation (debit).
Removing the asset cost (credit).
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Determine Gain or Loss on Disposal
Selling Plant Assets
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Known (Determinable) Liabilities
Accounts Payable
Sales Taxes Payable
Unearned Revenues
Short-Term Notes Payable
Payroll Liabilities
Multi-Period Known Liabilities
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Estimated Liabilities

• An estimated liability is a known obligation of
  an uncertain amount, but one that can be
  reasonably estimated.

Warranty Sellers obligation to replace or
correct a product (or service) that fails to
perform as expected within a specified period. To
conform with the matching principle, the seller
reports expected warranty expense in the period
when revenue from the sale is reported.
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Corporation

• Issuing stocks common / preferred stocks
• Distribute dividends cash / stock dividends
• Stock splits
• Treasury Stock
• Earning Per Share

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Bond Discount or Premium
Prepare the entry for Jan. 1, 2005 to record the
following bond issue by Rose Co. Par Value
1,000,000Issue Price 92.6405 of par
valueStated Interest Rate 10Market Interest
Rate 12Interest Dates 6/30 and 12/31Bond
Date Jan. 1, 2005Maturity Date Dec. 31, 2009
(5 years)
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Issuing Bonds at a Discount
On Jan. 1, 2005 Rose Co. would record the bond
issue as follows.
Contra-Liability Account
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Issuing Bonds at a Discount
Make the following entry every six months to
record the cash interest payment and the
amortization of the discount.
73,595 10 periods 7,360 (rounded) 1,000,000
10 ½ 50,000
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Issuing Bonds at a Premium
On Jan. 1, 2005 Rose Co. would record the bond
issue as follows.
Adjunct-Liability Account
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Issuing Bonds at a Premium
This entry is made every six months to record the
cash interest payment and the amortization of the
premium.
81,145 10 periods 8,115 (rounded) 1,000,000
10 ½ 50,000
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Classes of and Reporting for Investments
Class of Investment
Held-To-Maturity
Available-For-Sale
Significant Influence
Controlling Influence
Trading
Consolidate
EquityMethod
Market ValueMethod
AmortizedCost
Reporting
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Classifying Cash Flows

• The Statement of Cash Flows includes the
  following three sections
• Operating Activities
• Investing Activities
• Financing Activities

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Analyzing the Cash Account
Lets use this Cash account to prepare BG
Companys Statement of Cash Flows under the
Direct Method.
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Indirect Method of Reporting Operating Cash Flows
Changes in current assets and current liabilities.
Losses and - Gains
Noncash expenses such as depreciation and
amortization.
97.5 of all companies use the indirect method.
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Tools of Analysis
Horizontal Analysis
Comparing a companys financial condition and
performance across time
Time
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Tools of Analysis
V e r t i c a l A n a l y s i s
Comparing a companys financial condition and
performance to a base amount
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Tools of Analysis
Using key relations among financial statement
items
Ratio Analysis
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Building Blocks of Analysis
Liquidity and Efficiency
Solvency
MarketProspects
Profitability
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Computing Break-Even Point
How much contribution margin must this company
have to cover its fixed costs (break even)?
Answer 30,000
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Computing Sales (Dollars) for aTarget Net Income
Exh. 22-14

• Target net income is income after income tax.

Fixed Target net Incomecosts
income taxes


Dollar sales
Contribution margin ratio
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Computing MultiproductBreak-Even Point
Exh. 22-19

• The resulting break-even formulafor composite
  unit sales is

Fixed costsContribution marginper composite unit
Break-even pointin composite units

Consider the following example
Continue
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Net Present Valuewith Even Cash Flows
Exh. 26-7
A positive net present value indicates that
thisproject earns more than 12 percent on the
investment.
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Internal Rate of Return (IRR)
The interest rate that makes . . .

• The net present value equal zero.

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Relevant Costs

• Costs that are applicableto a particular
  decision.
• Costs that should have a bearing on which
  alternative a manager selects.
• Costs that are avoidable.
• Future costs that differbetween alternatives.