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Midterm Accounting

Financial Accounting – provides information for external decision makers (customers, shareholders,
creditors) main purpose is to provide external reports (financial statements)
Managerial Accounting – provides information for internal decision makers (directly involved in
managing & operation, officers, managers)
External Reporting – generally accepted accounting principles (GAAP) are the underlying concepts that
make up acceptable account practices. GAAP are important in increasing the usefulness of financial
statements to users.

Forms of Organizations
Sole Proprietorship - one owner, not a separate legal entity from the owner, unlimited liability, limited
life, owner taxed on profits
Partnership – 2 or more owners, not a separate entity from the owner, unlimited liability, limited life,
owners taxed on profits
Corporation – One or more owners, separate legal entity from the owners, limited liability, unlimited
life, corporation taxed on profits

The Accounting Equation


A (assets) = L (liability) + OE (owner equity)
Assets - something that will provide future value. Some assets are very liquid (things that are convertible
to cash.)
Current (short term) assets = cash or close to cash.
Examples: Accounts receivable, inventory, supplies, cash
Long term tangible assets – equipment, buildings, property (land)
Intangible long-term assets – stocks, trademarks

Liabilities – debts that are payable to outsiders (creditors)


Accounts Payable falls under liabilities
- salaries payable (you pay your employees first)
- utilities payable
- inventory payable
these are also examples of current liabilities (have to pay within a year)
Long term liabilities – loans (notes), mortgages
If you sell a company, first have to pay the creditors.

Owner’s Equity – the amount of an entity’s assets that remains after the liabilities are subtracted (also
called net assets)

Owner’s equity is affected by investment and profit or withdrawal's and losses.

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owner’s capital, owner’s investment, owner withdrawal
Revenue – amounts earned by delivering goods or services to customers (did the company put any money
in) did I earn the right to be paid? When good or services are delivered
Expenses – costs that have been incurred to earn revenue (did the company take any money out,
examples: rent incurred, salaries and wages, utilities expenses) when external party has earned the right to
be paid by you
Net income(profit) = Revenues – Expenses

Financial Statements - organization’s primary means of financial communication.


The primary financial statements, in order of preparation, are:
Income statement – presents a summary of the revenues and expenses of an entity for a period of time.
Shows profit or loss
Organico's
IncomeStatement
For Month Ended March 31, 2017

Revenues:
Food services revenue $ 3,800
Teaching revenue 300
Total revenues $ 4,100
OperatingExpenses:
Rent expense $ 1,000
Salaries expense 700
Total operatingexpenses 1,700
Proft $ 2,400

Statement of owner’s equity – presents changes in OE for a period of time. Represents how much of the
assets belong to the owner. OE increases with owner investments and net income. OE decreases with
owner withdrawls and net loss.
Organico
Statement of Changesin Equity
For Month Ended March 31, 2017

Hailey Walker, capital, March 1 $ -


Add:
Investment by owner $10,000
Proft 2,400 12,400
Total $12,400
Less: Withdrawal by owner 600
Hailey Walker, capital, March 31 $11,800

Balance sheet (statement of financial position) – lists all the assets, liabilities, and owner’s equity of an
entity as of a specific date

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Organico
Balance Sheet
March 31, 2017
Assets Liabilities
Cash $ 8,400 Accounts payable $ 200
Supplies 3,600 Notes payable 6,000
Equipment 6,000 Total liabilities $ 6,200
Equity
HaileyWalker,capital 11,800
Total liabilities and
Total assets $ 18,000 equity $ 18,000

Cash flow statement – reports the cash coming in and the cash going out during a period

All accounting systems include:


Account – analyze the transaction to identify changes in accounts; for example, an account is required for
Cash (bank account) transactions
Journal – accountants record transactions first in a journal; chronological record of transactions

Ledger – copy (post) the data to the ledger; like a binder, with each page in the binder representing one
account
Trial balance – a list of all the ledger accounts and their balances

Transaction Analysis -- helps to determine which accounts are being affected, looks for key terms: paid,
collected, on account etc, which accounts increase or decrease, value of lefts = value of ritghts.
Double entry accounting - every transaction affects @ least 2 accounts. Sums of debits must equal total
credits
T Accounts – show effects of individual transactions on specific accounts

Normal Balance- where increases are recorded.

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Payroll Liabilities
Payroll Deductions – employers are responsible for making proper deductions from their employee’s
earnings.
- employee’s deductions as well as the employer’s contribution must be remitted to the receiver general
(government)
Employees Income Tax - tax id deducted based on wages earned and personal tax credits, no matching
by the employer
CPP – employer matches 1:1
EI: employer matches 1.4 times the employees contributions

Employee (Fringe) Benefit Costs – other payroll expenses such as worker’s compensation (mandatory),
vacation pay (mandatory), pension plans etc

Analyzing Financial Statements – purpose of financial statement analysis is to help users maker better
business decisions
- evaluates a company's past and current performance, current financial position, future performance and
risk.
- External users want information to make decisions such as whether or not to invest in, or loan money to
a company.
-Internal users, such as managers, use financial information to guide operations of their companies.

Standards for Comparison – to evaluate performance we need to have standards for comparison

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These standards include: intracompany, compeititor (or intercompan), industry, guidelines (rules of
thumb)

Tools of Analysis
Horizontal Analysis – comparison of a company’s financial condition and performance across time
(comparing year to year, across time)

compare with base year


Vertical Analysis – comparison of a company’s financial condition and performance to a base amount
(look at one year)

Ratio Analysis – determination of key relations among financial statement items. All kind of ratios –
profit margins (provide snapshot of organization), current asset/current liability = current ratio (common
ratio used, you want this to be larger preferably over 2. It is a measure of liquidity), debt ratio = total
liability compared to total assets wat this ratio to be less than 1. A company is insolvent = company’s
liabilities are as big as assets
Liquidity & efficiency – ability to meet short term obligations and to efficiently generate revenues
Current Ratio – measures the short-term debt paying ability of the company
Current ratio = Current Assets/Current Liabilities
Acid-test (Quick) Ratio - more rigorous test of liquidity than the current ratio. Excludes assets
that may be difficult to quickly convert into cash.
Quick Assets = Cash + Short Investments + Net current receivables
Days’ Sales Uncollected - a measure to evaluate how frequently a company collects its
receivables.
Merchandise Turnover Ratio - measures how long a company holds merchandise inventory
before selling it
Solvency – refers to a company’s long run financial viability and its ability to cover long-term
obligations. It is affected by operating, investing and financing activities
Debt Ratio - Measures the portion of assets contributed by a company’s creditors
Profitability – ability to provide financial rewards sufficient to attract and retain financing.
Profit Margin - reflects a company’s ability to earn a net income from sales
Return on Total Assets - provides an overall measure income as a % of total assets
Market – ability to generate positive market expectations. Share price reflects the market’s (public’s)
expectations for the company
Price Earnings Ratio – measures how investors judge the company’s future performance

Managerial Accounting
3 reasons for an increase in relevance and importance of managerial accounting information:
Expanded competitive boundaries - Globalization
Organizations need to find new ways of doing business
Ethical responsibility and corporate governance

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Lean business model – in order to eliminate waste, companies must adopt & implement one or more
management practices that focus on different aspects of the lean business model
Includes – just in time, total quality management, process re-engineering, theory of constraints
These management practices, or programs of continuous improvement, if properly implemented, can
enhance quality, increase efficiencies, eliminate delays, and reduce costs, thereby adding to the profits.

- reduced inventory costs, greater customer satisfaction, higher quality products, more rapid response to
customer orders, less warehouse space needed
Total Quality Management

- is a method by which management and employees can become involved in the continuous improvement
of the production of goods and services. Combination of quality and management tools aimed at
increasing business and reducing losses due to wasteful practices

- find the slowest part of your system, fix it and then your system will be more efficient
Corporate governance – is the system by which an organization is directed and controlled

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Cost Concepts
Behaviour of Cost (within the relevant range)
Cost In Total Per Unit

Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.

Direct Costs – costs that can be easily and conveniently traced to a unit of product or other cost objective
examples: direct material & direct labour
Indirect products costs – costs cannot be easily and conveniently traced to a unit of product or other cost
object example: manufacturing overhead

Opportunity Costs – the potential benefit that is given up when one alternative is selected over another.
(Leaving job to go to school)

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Sunk Costs – sunk costs cannot be changed by any decision. They are not differential costs and should be
ignored when making decisions (Once the money is spent is a sunk cost)

Manufacturing Costs – direct material (those materials that become an integral part of the product and
that can be conveniently traced directly to it ex: a radio installed in an automobile) direct labour (those
labour costs that can be easily traced to individual units of product (wages paid to automobile assembly
workers), manufacturing overhead -manufacturing costs that cannot be traced directly to specific unit
produced (indirect labout and indirect materials, example wages paid to plant employees who are not
directly involved in production work janitors etc lubricants and cleaning supplies used in the auto
assembly plant)
Non-Manufacturing Costs - Selling, marketing, admin/execs

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