1.

Money measurement - a
record is made only of
information that can be
expressed in monetary terms
2. entity - is any organization
or activity for which accounting
reports are prepared
3. going concern - an entity
will continue to operate for an
indefinitely long period in the
future (liquidity)
4. cost - record items at cost
value rather than fair value
5. dual aspect - Assets =
Liabilities + Owner’s equities
6. accounting period accounting measures activities
for a specified interval of time
7. conservatism - Revenues
are recognized only when they
are reasonable certain,
whereas expenses are
recognized as soon as they are
reasonably possible
8. realization - the amount
recognized as revenue is the
amount that customers are
reasonably certain to pay
9. matching - when a given
event affects both revenue and
expenses, the effect on each
should be recognized in the
same period: (1) costs
associated with activities of the
period are expenses of the
period and (2) costs that
cannot be associated with
revenues of the future are
expenses of the current period.
10. consistency - Use the
same method, unless there is a
sound reason to change
11. materiality - Insignificant
events may be disregarded,
but there must be full
disclosure of all important
information
--------------------------------Cash flow indirect meth
Net income
(+)Depreciation expense
(–)ΔAccounts receivable
(–)ΔInventories
(–)ΔPrepaid expense
(+)ΔAccounts payable
(+)ΔUnearned revenue
(–)Gain on disposal of plant,
property and equipment
(+)Loss on disposal of plant,
property and equipment
Operating cash
----------------------------------Cash Receipts from
Customers =
+Net Sales+ Beginning
Accounts Receivable−Ending
Accounts Receivable
Cash Payments to Suppliers
=
+Purchases+ Ending
Inventory−Beginning
Inventory+ Beginning Accounts
Payable−Ending Accounts
Payable
Cash Payments to
Employees =
+Beginning Salaries
Payable−Ending Salaries
Payable+ Salaries Expense
Cash Payments for
Purchase of Prepaid Assets
=

+Ending Prepaid Rent, Prepaid
Insurance etc.+ Expired Rent,
Expired Insurance etc.
−Beginning Prepaid Rent,
Prepaid Insurance etc.
Interest Payments =
+Beginning Interest
Payable−Ending Interest
Payable+ Interest Expense
Income Tax Payments =
+Beginning Income Tax
Payable−Ending Income Tax
Payable+Income Tax Expense
-----------------------------------Future
rev

Match
with
rev

Acc Meth

Land

Prob

No

Plant/eq
u
Patent

Prob
Prob

Depe
nds
Yes

Renewa
l license

Prob

No

R&D
Mainten
ance
New
Aqu/Bet
terment
Goodwil
l

Not Prob
Not Prob

No
No

Cap+not
amort
Cap +
dep
Cap +
amort
Cap +
not
Amort
Exp
Exp

Prob

Yes

Cap +
dep

Prob

No

Cap +
Amort +
Impair
test

----------------------------------------Depreciation methods systematic & rational
Straight line - (book value salvage value) / service life
Accelerated method
Double declining method =
straight line * 2 (no
salvage value deduction)
Years’ digits method
Units of production method =
(units produced / capacity in
units) * Book value
-------------------------------------------Inventory costing methods
Specific identification
Average cost
FIFO
LIFO
LIFO reserve
LIFO reserve = FIFO inv end LIFO inv end
Delta LIFO reserve = LIFO
reserve end - LIFO reserve beg
Delta LIFO reserve = FIFO
gross margin - LIFO gross
margin
-------------------------------------------Acct quality determined by:
relevance, objectivity,
feasibility
---------------------------------------Accounting boards
Jap GAAP - Acct Standards
board of Jap
US GAAP - Fin Acct Standards
board
IFRS - Int Acct Standards board
---------------------------------------Liquidity ratios
WC = Current assets - current
liabilities

Current ratio = current
assets / current liabilities
desirable

>2

Times Int earned = Pretax op
profit +interest / Interest

Acid test = monetary current
assets / current liabilities

---------------------------------------------Acquisition purchase
method

Day’s cash = (cash / cash
expense) * 365 - Period cash
would pay cash expenses

1.

Day’s receivable =
(Receivables / Sales) X 365
Inventory turnover = COGS /
Inventory
Day’s Inventory = (COGS /
inventory) * 365
Days’ payable = (op payables /
pretax cash exp ) * 365
-------------------------------------------Profitability ratios
Gross Margin = Gross
Profit/Sales
Operating Margin =
EBIT/Sales
Net Margin = Net
Income/Sales
-------------------------------------------Overall performance
measures
Return on Assets (ROA) =
(NI +(1-Tax Rate)*Interest
Expense)/Average Total Assets
Return on Beginning Equity
(ROBE) = Net
Income/Beginning Equity
Return on Equity = NI/
Average Equity
Return on Invested Capital
(ROIC) = (NI+(1-Tax
Rate)*Interest Expense)/
( Average Long term liabilities
+ Average Equity)
Pretax Return on Invested
Capital = EBIT/Interestbearing Debt + Equity
Return on Investment = NI /
Investment
Return on Equity = Pretax
margin % * Asset turnover
ratio * Financial leverage
ratio * Tax retention rate
NI/equity = (Pretax
profit/rev)*(rev/Assets)*(Assets
/Equity)*(1-tax %)
---------------------------------------------Test investment Utilization
Asset turnover = rev/assets
Inv cap turnover = rev/IC
Equity turnover = rev/equity
---------------------------------------------Test Financial condition
Financial leverage = Assets /
equity

Revalue acquiree’s
tangible assets and
applicable intangible
assets (e.g, patents,
licenses) to fair value.
Intangible assets need to
be a) Entitled, 2)
Seperable 3) Salable.
2.
Revalue acquiree’s
liabilities assumed by the
acquirer to fair value.
Report asset goodwill for the
excess of purchase price over
the revaluated net assets (i.e.,
total assets – total liabilities)
---------------------------------------------Consolidation of financial
statements
1.
Eliminate inter-company
transactions.
a.
Accounts
receivable and
accounts payable
b.
Revenue and
costs of sales
c.
Dividend and
dividend revenue
2.
Report minority interest
above owners’ equity on
balance sheet, and above
income on income
statement.
---------------------------------------------Pooling method
Under pooling treatment the
balance sheets of A and B
would simply be added
together to arrive at the new
consolidated balance sheet for
A, which is the surviving entity.
------------------------------------------Further definitions
Journal
Chronological record of
accounting transactions “Diary
of accounting”
Must maintain double-entry
system
Adjusting entry
Journal entry for accounting
transaction without
accompanying clear transfer of
goods (services) or money
Revenue recognition
Delivery (earned)
o
Substantially performed
task
o
Transfer risk and reward
Reliable measurement
Realization
o
Readily convertable to
cash
Adjust revenue to
realizable amount
discount
bad debt
returns

Conservatism makes accounting numbers credible. Conservatism allows for this. . therefore.Allowance for bad debt methods % of sales = % * acc rec = % *gross rev Aging schedule ------------------------------------------Inventory calculation Periodic method Inv beg + purchase – ending balance = COGS Perpetual method Inv beg + purchase – COGS = ending balance ------------------------------------- Why is conservatism important in accounting? .Establishes the internal control system through which transactions are properly authorized. and recorded Why is objectivity important in accounting? .Allows for consistency in financial information among the different firms. .Accounting requires certain estimates and judgments.Allows investors to better trust the information contained in the financial statements. . lenders would like to get the bad news more timely. credit unrealized gain) As rev Investee income reported as rev (credit). .Conservatism improves investor believability of public companies’ financial statements. Outside investors demand independently audited financial information. . ------------------------------------------ statements and forward estimates. .Lenders bear the downside risk without upside potential.Information produced by managers alone is not believable. Analysts and investors can then compare various companies on the basis of their financial Ownership <20% Influence not signif Fair value Not determinable Acc Method Cost meth (available for sale) Fair value (available for sale) <20% not signif Determinable 20-50% 20-50% not signif Signific Not determin -- Cost/fair value Equity (investment) >50% Control -- Consolidate (acquisition “purchase” method) ---------------------------------------- Revaluation N/A Div As rev Applicable (debit available for sale. Debit invest on BSN Consolidated statement + goodwill impairment Decreases (credit) investment N/A . reported. .Important for the auditors that review the financial statements. Conservatism improves the process of estimation by allowing accountants to assign values to certain transactions.