Lesson 6,

Bond interest: Two year semiannual bond w/ par value of $500 and STUDY GUIDE through
Financial stmts
Lesson 4 | Inventory & Payables Primary advantage
a stated rate of 7% was priced to yield 8%. Lesson 1 | Accounting Concepts Inventory costing methods LIFO & FIFO is tax benefit
cont... Footnotes
-Calc the issue price, find the pres value of both lump-sum principle pymt of $500 Purpose of accounting: 1) Provide financial information
Auditors's report INCOME Current, higher acquisition Px Older, lower acquisition Px
and the interest stream of $35 per year. - Pres val of principle = $427 about 2) Reporting entities
Basic financial Mgmt's discussion
STMT
mtchd w/ curr, higher sales px matched w/ higher sales Px
BEGINNING INTEREST INTEREST ENDING - Pres val of interest stream = $64 statements (FOUR) to 3) Primary users
PERIOD BALANCE EXPENSE PAYMENT BALANCE - Issue price = $491 & analysis (MD&A) BALANCE
Inventory is valued using Inventory is valued using
1 $491.00 $19.75 $17.50 $493.25 Income Statement Capital market Sole proprietors
SHEET
older lower acquisition Px current (higher) acquisition Px
Record bond proceeds
2 $493.25 $19.75 $17.50 $495.50
1
Cash Revenues Product market Partnerships
3 $495.50 $19.75 $17.50 $497.75 -Expenses Government Corporations ACCT for Inventory BALANCE SHEET INCOME STATEMENT
491.00 Net Income
4 $497.75 $19.75 $17.50 $500.00 Internal users - execs LLC's ASSETS = LIABILITIES + EQUITY REVENUE - EXPENSES = NET INCOME
Bonds Payable Inventory -500
EFFECTIVE STATED 500.00 Stmt of Retained Earnings
RATE = 4%

Record first semi-annual interest payment

RATE = 3.5% Disc on Bonds Pyble
9.00
Beginning RE
+ Net Income 2
Ending Retained Earnings Balance Sheet 4
COGS Expense
Cash +1,000
-500 -500 =-500

Sales Revenue +1,000 +1,000 =1,000

Cash Disc on Bonds Pyble Interest Expense Stmt of Cash Flows --Assets-- --Liabilities & Equity-- Totals +500 +500 +1,000 -500 =500
17.50 bal 9.00 19.75 Cash A/P

3
Beginning Cash
2.25 Inventory LT Debt Lower of Cost or Market
Operating Activities
BALANCE SHEET INCOME STATEMENT PPE Equity Other inventory issues
ASSETS = LIABILITIES + EQUITY REVENUE - EXPENSES = NET INCOME MY SIDE Investing Activities
Financing Activities
Total Total
When future revenue-producing ability < purch Px
the inventory asset write down will reflect loss
Interest Expense -19.75 -19.75 =-19.75
Cash -17.50 Trial Balance Form
Net Change in Cash
Ending Cash 1Info
Relevance
capable of making
Lesson 5 | Fixed
& Intangible Assets
-Ensures inventory is not overvalued
-Accelerates future losses to current Inc Stmt
Bonds Payable +2.25 Debit Credit Property, Plant, Compare historical cost (balance sheet value)
Asset Amount Qualitative characteristics | primary qualities (TWO) a difference in a decision to Market Value. Report the lower of the two.
& Equip
Liability Amount -Predictive value -Market value is cost to replace inventory today
Issue 3000 shares of common stock for $15,000
Cash 15,000 Equity Amount 2InfoReliability
strives to faithfully represent the
-Predict outcomes of past,
present, & future events
1
Straight-Line Depreciation
Common stock 15,000 Revenue Amount -Confirming value Depreciation Expense = Asset Cost - Salvage Value
economic situation example Estimated Useful Life
Common Expense Amount -Feedback can be used
Cash -Completeness $10k asset has salvage of $1k, use life is 3 years
Assets = Liabilities + Equity Stock Dividends Amount -Includes all info necessary for user to understand to set expectations
+15,000 +15,000 15k 15k Totals Total DRs Total CRs -Materiality =(10000 - 1000)/3 = 3000 per year
-Neutrality
-Info cannot be manipulated; free from bias -Inclusion/omission would BALANCE SHEET ASSETS INCOME STATEMENT
Receive $2,000 for future services Unearned -Freedom from Error
influence judgement PP& E ACCUM. DEPR DEPR. EXPENSE
Cash 2,000 Assets = Liabilities + Equity Cash Revenue -Contains no errors/omissions Acquire PP&E +10,000
For info to be relevant, it
Unearned Revenue 2,000 +2,000 +2,000 2k 2k -Does not require perfect accuracy should have predictive or Year 1 depreciation -3,000 -3,000
confirming value, & be Year 2 depreciation -3,000 -3,000
Pay $250 for advertising Advertising Year 3 depreciation -3,000 -3,000
material for the
Advertising Expense 250 Assets = Liabilities + Equity Cash Expense Balances +10,000 -9,000 -9,000
Reliability, or faithful representation, is a reporting entity.
Cash 250 -250 -250 250 250
necessity for individuals who neither have
Increase on the
2 Double Declining Balance
Depreciation Expense = Net Book Value * 2
Do work and leave an invoice for $3,500 the time nor the expertise to evaluate
Accounts Service Revenues increase Equity Credit Side Estimated Useful Life
Assets = Liabilities + Equity the factual content of the information. OR
Accounts Receivable 3,500 Receivable Revenue Expenses decrease Equity Debit Side
+3,500 +3,500 3.5k 3.5k Determine by taking the straight-line rate of depreciation and
Service Revenue 3,500 DOUBLE-ENTRY ACCOUNTING

DETAILED EXAMPLES
Lesson 2 | Accounting Building Blocks double it. Example: Asset w/ 4-year life = straight-line rate 25%,
Pay $1,500 in dividends Recording transactions accounting equation Assets = Liabilities + Equity calc'd by 100%/4years. The straight-line rate doubled = 50%.
Asset w/ a 5-year life would = 20% straight-line * 2 = 40%.
Dividends 1,500 Assets = Liabilities + Equity Cash Dividends Adjusting entries D C D C D C Doubled rate is then multiplied by Net Book Value:
-1,500 -1,500 1.5k 1.5k Accrual Cash
Cash 1,500 Recognizes economic Recognizes economic
Depreciation Expense = Depreciation rate * Net Book Value
events in the period events when cash has Ignores revenue recognition & matching principles -DO NOT REDUCE! cost by = (Straight-line rate *2)
Serviced pre-paid client ($2k) Unearned SVC salvage value * (Cost - Accumulated Depreciation)
in which they occur been exchanged Not in conformity with GAAP
Unearned Revenue 2,000 Assets = Liabilities + Equity Revenue Revenue -STOP DEPRECIATING
-2,000 +2,000 2k 2k DETAILED EXAMPLES when salvage value is reached
Service Revenue 2,000
Lesson 3 | Revenue & Receivables Realized example BALANCE SHEET ASSETS INCOME STATEMENT
Equipment depreciation of $600 per month Depreciation Accum Revenue recognition recognized/recorded when BOTH Seller has received cash or will at
PP& E ACCUM. DEPR DEPR. EXPENSE

Depreciation Expense 600 Assets = Liabilities + Equity Expense Deprec Acquire PP&E +10,000
some point in the future (AR)
Accumulated Depreciation 600 -600 -600 600 600 Earned Year 1 depreciation -6,667 -6,667
Goods/services are delivered & related obligs *General Rule Year 2 depreciation -2,222 -2,222
Balance sheet: Reports a company's resources & claims against @ a given point in time. are complete Recognition @ time of sale provides Year 3 depreciation -111 -111
Income Stmt: Rev & Exp over period. Stmt of RE: Shows RE over period. Stmt of Cash Flows: use of $$ Seller has performed duties under terms of a uniform/reasonable test Balances +10,000 -9,000 -9,000
sales agreement- title has passed to buyer Recognition Principle: Revenue should be
HANDY FORMULAS
Net income = Revenue - Expenses R=revenue
E=expense
Assets = Liabilities + Equity w/o right of return or contingencies recorded when a resource has been earned
Natural Resources
Net Book Value = $1,000
Intangible Assets
Retained Earnings = Net Income - Dividends
Receivable = Asset
D C D C D C -As extracted the asset is depleted -Lack physical existence
A=asset
Net sales = Credit sales - Sales returns & allowances L=liability
Receivables and transferred to inventory -Not financial instruments
Net Book Value = Cost - Accumulated Depreciation SE=Stock-
hld eq Net realizable value D C -As sold the expense is Xferred to -Normally classified as long-term
ITEMS, STATEMENTS, & ACCOUNTS Amount the company expects to collect (GAAP Requirement) income statement as COGS Exp assets
IS=income statement | RE=retained earnings | BS=balance sheet Income Stmt Balance Sheet
EXAMPLES Allowance method | Bad Debt Expense (BDE) Estimate results in Percentage of sales method Lesson 6
ITEM STATEMENT ACCOUNT Percentage % of current credit Allowance does not
Recognize BDE in the period of sale by estimating doubtful accounts Bad Debt Expense Bad debt is estimated as a % of credit sales that
Retained Earnings BS, RE SE sales is matched with necessarily reflect the
of credit current sales revenue receivables that are -Record estimate in contra-asset acct "Allowance for Doubtful Accts" occured during the period
Equipment BS A sales as bad debt expense -Estimate results in balance of -Percent is based on historical trends
uncollectible Aging of AR method allowable account
Common Stock BS SE Estimate how much of the ending balance of AR is bad debt & company policies
Unearned Revenue BS L Aging of Bad debt expense is a Allowance for Bad
-Amount becomes ending balance of Allowance for Bad DebtBALANCE SHEET
-Bad Debt Expense is a "plug"

EXAMPLES
plug to force Debts is calculated INCOME STATEMENT Effective/stated rates
Sales IS R Accounts allowance for bad based on balance in -Based on the age of account making up ending bal of AR ASSETS = LIABILITIES + EQUITY REVENUE - EXPENSES = NET INCOME -Effective = market rate, or yield
Rent Expense IS E Receivable debt to the proper Accounts Receivable Allow. for Bad Debt -4,500 -Stated = Specified on the face of
balance the bond.
Inventory BS A Bad Debt Exp -4,500