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Cheat Sheet Owl tutoring 2015

Principles Of Accounting 1 (Florida Atlantic University)

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Interest expense/accrued interest – Principal x rate x fraction of year Amount/Cash due at maturity = interest expense + principle Credit Card Expense – either sales
discount or selling expense Direct write-off Method – record bad debt when company determines balance is uncollectible, does NOT work with matching principle,
works when amount is small (not material), debit bad debt expense credit accounts receivable Maker- pays the note Payee -receives the money Note Receivable –
written down, has interest so better if long credit period Promissory note – written promise to pay Maturity date – date to be paid Factoring – Selling your accounts
receivable to a Factor - Buyer of account receivable Receivables quality - probability of getting money Accounts Receivable turnover = net sales/avg accounts
receivable. Higher is better, measures number of times receivables are received and collected Matching Principle = allowance for bad debts Materiality – ignore baby
amounts GAAP Bad debt expense = % sales, % AR or Aging method Aging accounts receivable method – estimate bad debt by looking at days in AR, can be done in 2
ways - % of AR or by ages of AR, longer past due are less likely to be collected Percent of sales method for bad debts – credits sales x some percentage is assumed
uncollectible Allowance method – estimates bad debts , AR at expected cash collections/net realizable value, write-offs have NO EFFECT on income or assets, required
by both GAAP and IFRS, does not specify who isn’t paying bill, debit bad debt expense and credit allowance for doubtful accounts, after adjustment it reduces
Accounts receivable to net realizable value Honoring note - paying dishonoring - not paying For credit card sales problems –> cash received = credit sales x (1-% fee),
debit cash by this amount, debit credit expense, credit sales Factor problem example – company sells 5,000 of accounts receivable with 2% factoring fee? Debit cash
$5000 x (1 – fee) = 5,000 x 98. Debit factoring fee expense % x $5000 = .02 x 5,000 = 100, credit Accounts receivable full amount ($5,000) Accounts Receivable
turnover = net sales/average accounts receivable ALL ADA PROBLEMS – Identify what method to use, READ CAREFULLY, do NOT assume just because you see a table.
Accounts receivable method for ADA = Beginning ADA Balance (+ if credit, - if debit balance) + bad debt expense = Ending or target ADA balance. Example, ADA has
debit balance of 800, AR has debit balance of 10,000 and 10% assumed uncollectable. Beginning -800 + bad debt expense = 10% x 10,000. Bad debt expense = 1800.
Warning = watch out for DEBIT ADA balances, they become negative in formula Aging method for ADA/bad debt expense – step 1, multiply each % times amount of
AR and sum up answers to get target ending ADA (credit number) then use formula = beginning ADA (+ if credit balance, - if debit balance) + bad debt expense =
ending ADA Percentage of sales methods for Bad debt/ADA -> bad debt expense = uncollectible % x credit sales (ignore ADA balances in this method). Fixed (building,
equipment) = Depreciation Goodwill – company value less total sum of its assets and liabilities, basically equity, NOT amortized same as other intangibles Impairment
– both GAAP and IFRS require company to record these losses in value, occurs when an asset is suddenly not as useful anymore ex – find termites in building
Intangible Asset (copyright, patent, trademark, non-physical) = Amortization Copyright – exclusive right for creator life plus 70 years Patent – exclusive right for 20
years Amortization – allocation of costs of intangible assets over time Natural Resource –report as cost plus depletion, use Depletion – allocation of cost of natural
resources as they are used Plant Assets: used in operations, tangible, >1yr life Depreciations = can be revised – reflected only in future accounting, expense allocation
process, measures decline in book value over time, charge to an asset when sold in the middle of an accounting period, all methods give the same total for an asset’s
useful life Going Concern – show plant assets at book value (not market value) Useful life = productive usage time in operations, can be different than productive life
Inadequacy = asset doesn’t meet demands Obsolescence: asset not useful for making goods or services Straight and double declining depreciation method = same
amount total, different each year Total Asset Turnover: efficiency of assets, Net Sales/Average Assets, higher is better Straight-line depreciation – Cost less salvage
divided by useful life, same amount each year, most frequently used Units of production method of depreciation – charge differing amounts of depreciation based on
units used Revenue Expenditures – additional costs of plants that do NOT materially increase life or capabilities Capital Expenditures – additional costs of fixed assets
that increase capabilities or life, usually large and material, small ones can be treated as revenue expenditures because not material and do, also known as balance
sheet expenditure Ordinary repairs – expenses to keep asset in normal working condition Extraordinary repairs – expenses to extend life of asset Salvage Value –
estimate of asset value at end of useful life Cost Principle – asset recorded at cash amount given for it Gain on sale – asset sold above book value, normal credit
balance, like revenue, determined by value received less book value Loss on sale – asset sold below book value, normal debit balance, like expense, determined by
value received less book value Declining-balance = % x beginning book value Plant Assets - more than 1 year, long term investments, life is time used productively for
company Change in accounting estimate – affect current/future ONLY Accelerated depreciation – depreciate more now, less later so we pay taxes later, used by most
companies Land improvement – asset with limited life so its depreciated Asset Cost – all expenditures necessary and reasonable to get asset in place and ready for
use Lump sum purchase – buying property including building, land, and improvements Depreciation Expense straight line= (book value – salvage value)/useful life
remaining. Book value = Original cost – accumulated depreciation Revised depreciation expense problems: 1. Calculate depreciation expense using entire useful life,
2. Calculate book value at time of revision (original book value – annual depreciation expense x number of years until revision). 3. Revised depreciation expense =
(new book value – salvage value)/remaining years. Example: initial cost = 10,000 with 2,000 salvage value and 10 years. After 4 years, time revised to total of 7 years
and only $1,000 salvage. Starting depreciation =(10,000-2,000)/10 = 800. 4 years later book value = 10,000 – (4 x 800) = 6,800. New depreciation =(6,800 – 1000)/3 =
1933.33. Liability – can be divided into current & longterm, probably future obligated payment based on past event, not all expected payments are liabilities, amount
does NOT need to be known, all details of payment (amount, who, when) are NOT necessary to be liability, must sometimes be estimated, money received in advance
Contingent liability – potential future obligation based on past events, ex lawsuit, show bc of full disclosure Current liability – due in < 1 year or operating cycle, ex is
payroll Current portion of Long-term debt – part due in shortrun Debt guarantees – disclose these Deferred income tax liability – payments due later bc GAAP and
tax reporting differences Earnings report - cumulative record of an employee's hours worked, pay, deductions etc Estimated liability – known bill that can be
estimated, expected warranty payments, employee vacation benefits Federal Depository Banks – accept deposits payable to government FICA social = 6.2%, medicare
1.45%, (MATH), employers pay same as employees withholding FUTA - .8% on the first $7,000, make payment quarterly if amount exceeds $500 Form 940 – annual
federal unemployment tax returnForm 941 – FICA requires employers to file Form w2 – wage and tax statement given before 1/31 Form W-4, employee record of
withholding allowances Full Disclosure Rule – why we report contingent liabilities (if reasonably possible) Gross Pay – total pay before Uncle Sam (taxes, deductions
and other bs…start your own business and avoid most of this stuff…) Known liabilities – set by agreements and know amounts, basically all regular liabilities except for
contingent or estimated ones. Examples: unearned revenue, accounts payable, sales tax payable, salaries payable, rent payable Longterm liabilities – due in over 1
year/operating cycle Merit rating – determines unemployment taxes, higher = lower turnover, paying less unemployment taxes, measure of how good an employer is.
Net Pay – gross pay less deductions, take-home pay Payroll bank account – special account for payroll Payroll deductions – current liabilities, required are income
taxes and social security taxes Payroll register – shows pay dates, hours, deductions, gross and net pay, not cumulative just one period Promissory notes – can be
transferred Sales taxes payable – current liability of retailers Short term note payable – written promise to pay money <1yr or operating cycle (whichever is LONGER),
used to refinance an account payable, matching principle requires accrue interest expense Social security payments – Social Security and Medicare Taxes SUTA – state
unemployment, 5.4% Trade accounts payable - $ owed to suppliers Times interest earned – measures ability to pay interest expense, higher is better and means less
risky, formula = Net income + taxes, if drops or goes below 2.0 = increase in default rate Unearned revenue = liability, initial transaction is credit unearned & debit cash
Wage Bracket withholding table – compute federal income taxes Withholding allowances – reduce taxes owed Mortgages can secure loans Annuity - a series of
equal payments in equal time intervals, Present Value = PV of each payment summed up Accrued interest – paid anytime bond is sold other than a coupon date
Installment notes – promissory with payments of both interest & principal, payments decrease over time Carrying value = PV of all future cash flows(payments)
discounted by market rate, Par value + unamortized Premium, Par value – unamortized Discount, Premium – amount above par, increase liability Discount – amount
below par, decrease liability Bonds – issued ANY time, multiple buyers, need adjusting entries when interest period ≠ company’s accounting period, do NOT affect
owner control, must pay interest, interest payment = par value x stated contract rate Bond sale price = pv + accrued interest Lease – agreement between lessor &
lessee letting lessee use property and pay lessor Capital lease – long-term, no-cancel, lessee gets all risks/rewards (basically lessee owns) Debenture – longterm bond,
no collateral, low security, high risk to lender Sinking fund – money set aside to make final bond payment Callable bonds – issuer can buy back or retire early (done
when interest rates drop to reissue loan at lower rate) 103½ = bond price 1035 or 103.5% of par Secured bonds – have collateral Coupon Bonds – have interest
coupon to tear off Indenture – bond contract Serial Bonds – mature on different dates, repay total principal over time Baby bonds – par<$1,000 Amortizing bond
discount – spreading it out over interest payments, contra liability Effective method – uses same interest rate, market Rate at issuance x Fair Value (not par) for
interest expense, important, yields decreasing interest expense and increasing premium amortization Pension Plan – agreement employer provides benefits to

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employee after retirement Bond Market value or carrying value = PV of all future cash payments Premium = adjunct/accretion liability Bond Interest Expense
(Premium straight line) – first, cash payment = stated rate x par value / 2 (to make it semi-annual). Then premium portion is (Cash received – Par value)/years. This
premium amount is annual so divided by 2. Then interest expense = cash payment – amortized premium. Example – 10 year bond with cash received = 105,000; par
value 100,000 and stated rate 8% with semi-annual payments. Cash payment = 100,000 x .08 = 8,000/year but /2 = 4,000 per period. Then, premium = 105,000-
100,000 = 5,000/10years = 500 per year but /2 = 250 per period. Interest expense = 4000 cash payment - 250 amortization of premium = 3750 Bond Interest Expense
(Discount straight line) first, cash payment = stated rate x par value / 2 (to make it semi-annual). Then discount portion is (Cash received – Par value)/years. This
premium amount is annual so divided by 2. Then interest expense = cash payment + amortized discount . Example – 10 year bond with cash received = 95,000; par
value 100,000 and stated rate 8% with semi-annual payments. Cash payment = 100,000 x .08 = 8,000/year but /2 = 4,000 per period. Then, discount = 100,000-95,000
= 5,000/10years = 500 per year but /2 = 250 per period. Interest expense = 4000 cash payment + 250 amortization of premium = 4250 Bond interest expense using
effective amortization – market rate x cash received (fair market value) Ignore premium or discount, this is the easy one/our friend. Debt to Equity Ratio = Total
liabilities/total equity, assesses financial structure Cash equivalent – easily convertible to cash at known market value, close to maturity, not affected by interest rate
changes Cash dividends – paying stock holder is financing activity and reduces retained earnings, receiving dividends is an operating activity Cash flow on total assets
ratio – indicates earning quality, cash flows from operations divided by average total assets, helps estimate timing of cash flows, not affecting by accounting rules like
revenue recognition and matching principle Cash payments for merchandise – 1, find purchases = ending inventory – beginning inventory + cogs, then cash payments
for merchandise = beginning accounts payable + purchases – ending Accounts payable = Depreciation expense – included for indirect method, NOT used in direct
method Direct method – Separately lists Cash receipts from sales – cash disbursements from expenses, recommended but not required by FASB, more user friendly
because less accounting concepts, reports individual cash flows by activity, companies can use this or indirect method, same operating cash flow as indirect method
Financing Activity – issuing stock, paying debt, borrowing money, payment cash dividend to shareholders, reporting is identical for both direct and indirect methods,
includes gain or loss on debt retirement Full Disclosure – large noncash activities disclosed Indirect method – reports net income and adjusts back to cash, companies
can use this or direct method, for operating section add back noncash operating expenses, same operating cash flow as direct method Investing activities –
buying/selling equipment, land or long-term assets Non cash financing and investing activities – buying asset with stock or debt, example; buying land in exchange for
a note-payable would NOT be in investing section but disclosed in a footnote at bottom of statement (not in any particular section) Operating activities – paying
workers, buying products, receiving dividends, cash sales receipts , buying/selling securities, receiving interest, interest expense, cash paid for merchandise Statement
of cash flows - shows inflows/outflows as operating, investing and financing, required by accounting standards, reconciles balances of cash and equivalents, explains
difference between beginning and ending balance of cash, helps internal users plan daily activities, required by accounting standards to be in financial statements set,
first step is calculate net increase/decrease in cash Spreadsheet – organizes info to make statement of cash flows IFRS – interest expense either investing or financing,
must be consistent FASB – requires reconcile NI to cash when using direct method, recommends operating section be done with direct method Net Cash Provided by
operating activities – Net income + decrease in current assets – increase in current assets + increase in current liability – decrease in current liability + depreciation +
losses – gains. Current ratio - current assets/current liabilities; should be 2:1 Acid test - (cash + short term + current receivables)/current liabilities or quick
assets/current liabilities; should be 1:1 Accounts receivable turnover - net sales/ average accounts receivable; higher means collecting cash faster, higher is better
Inventory turnover - COGS/average inventory; higher means smaller investment in inventory, average number of times company's inventory is sold Days sales
uncollected - accounts receivable/net sales x 365; should not exceed 1.33x days in credit period Days Sales In Inventory - ending inventory/cogs x 365; time product
stays on shelf to sell, lower is better Total Asset Turnover - net sales/average total assets; ability to used assets to generate sales, indicates operating efficiency Debt
Ratio - total liabilities/total assets; measures % of assets funded by debt Equity Ratio - total equity/total assets; measures % of assets funded by equity Debt To Equity
ratio - total liabilities/total equity; measures dollars of debt per dollar of equity Times Interest Earned - income before interest & taxes/interest expense; higher
means less risk Profit Margin - net income/sales; measures dollars of net income per dollar of sales Gross Margin - gross profit/sales; measures dollars of gross profit
per dollar of sales Return On Total Assets - net income/average assets or profit margin x total assets turnover; measures dollars of net income per dollar of assets
Return On Common Equity - (net income - preferred dividends)/average common equity; measures success of reaching net income goal for stockholders Book Value
Per Common Share - common equity/common shares; dollars of equity on books per each share outstanding Basic Earnings Per Share - (net income - preferred
dividends)/weighted average common shares; basic dollars of earnings per each share outstanding Price Earnings Ratio - market price per share/earnings per share;
measures market value relative to earnings Dividend Yield - annual cash dividend/market price per share; percentage return from the dividend Business Segment –
part of company’s operation for particular line of business/class of customers Common Sized Financial Statement – express each amount as % of base amount,
comparative ones express amounts as %, reveal changes in relative magnitude of an account, percent = analysis amount/base amount x 100 Comparative financial
statement– reports placing financial amounts side by side for analysis purposes Efficiency – related with liquidity to meeting short-term obligations, measures
productive ability of company to use assets go generate revenue Extraordinary gains and losses – unusual and infrequent, examples expropriation, condemned
property, hurricane, new environment law, reported as part of continuing operations (not in regular sections) Financial reporting – communicating relevant info to
decision makers, includes financial statements, shareholder notes, SEC filings, management notes, audit reports etc. Financial statement analysis – application of
tools to make business decisions, used by companies and persons, can help improve efficiency and effectiveness of operations, should include table of contents,
reduces business uncertainty, standards based on prior years’ performance for company or industry set by the condition of the industry Horizontal analysis –
comparison across time, used to find patterns over several consecutive periods, percent = (analysis period – base)/base x 100 liquidity – ability to meet short-term
obligations, availability of resources to meet cash requirements, market prospects – ability to generate positive market expectations, profitability – ability to provide
financial rewards sufficient to attract and retain financing ratio analysis– measurement of key relations among financial statements Solvency – ability to generate
future revenues and meet-long term obligations, measured by times interest earned & debt/assets ratio Unusual gain or loss– related to extraordinary items Vertical
analysis – comparison of a company's financial condition to a base amount, evaluated financial items in terms of a base amount, can eliminate differences between
GAAP and IFRS Working capital – current assets – current liabilities;

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