U6200 – ACCOUNTING FOR

INTERNATIONAL AND PUBLIC AFFAIRS

Recitation 2 / 1 5 S e p 2023
Nanda Hutabalian
ndh2116@columbia.edu
Ø Housekeeping
Ø Review of Key Concepts:
Ø Contra accounts
Ø Depreciation, Amortization, Unearned Revenue
Ø Cash flows statement – Direct Method

Ø Case Review: Continue working on Sunshine Lite-Sticks case

Ø1st written assignment has been uploaded
ØHandwriting & spreadsheet are all acceptable (just make
sure it is easy to read)
ØSubmit your assignment in-person (printed version) before
class (if you could not come or switching section, inform
the assigned reader)
ØDo not forget to sign the attendance sheet every week
For manufacturing companies, cost of goods sold consist of several costs:
1. Raw Material
2. Direct Labor
3. Manufacturing Overhead cost
Thus, 200 worth of inventory used to produce the goods sold is supposed to
be written as raw material expense on income statement.
For merchandising companies, in general, there is only one component of
COGS è purchasing the inventory
§ Definition: A contra account offsets the balance in another, related account with which it is
paired.

§ If the related account is an asset, then a contra asset account is used to offset it with a right-hand side
balance. Ex. Account Receivable vs. Allowance for Doubtful Account.

§ If the related account is a liability or equity account, the a contra account is used to offset it with a left-
hand side balance. (less common)

§ Examples:
§ Accumulated Depreciation
§ Accumulated Amortization
§ Allowance for Doubtful Accounts
§ Allowance for Obsolete Inventory

§ Asset of liability? A contra-asset account is not classified as an asset, since it does not
represent long-term value, nor is it classified as a liability, since it does not represent a
future obligation
We depreciate Tangible Assets whose value decreases over time
§ Ex. Building, Vehicle. Machinery

Methods commonly used:

1. Straight Line (more widely used)
§ Commonly used for Book Accounting
§ The same amount is depreciated every year over the useful life of the asset
§ Depreciation expense per year = (Total Value – Salvage value) / Total Useful Life

2. Accelerated
§ Commonly used for Tax Accounting
§ An asset loses book value at a faster rate than the traditional straight-line method
§ Allows greater deductions in the earlier years of an asset and is used to minimize taxable
income (Intuition: More depreciation expense – less net income – less tax)
 § Bookkeep Depreciation using T Accounts:
§ Calculate the annual depreciation
§ Add the depreciation to the Accumulated Depreciation (Contra Asset Account)
§ Expense the depreciation in the Income Statement
Example:
11. How much of the machinery used to manufacture the Sunshine Lite-Sticks has been used up
(depreciated) over the twelve months ended December 31, 2018? Mary is comfortable with
using straight-line depreciation to spread the cost of the machinery over 12 years.

Accumulated Income •Straight-line depreciation:

Machinery Depreciation Statement Depreciation expense =
(Total Value - Salvage Value) / Total
+ - - + - + Useful Life
2. 300,000 11. 25,000 11. Depreciation on
Machinery
25,000
•This is the main method of depreciation and
amortization used in this course, and
salvage value is usually assumed to be zero,
unless otherwise specified.

•One year’s depreciation expense for

Note: the company can change the amortization rate if they have new
building & machinery: (300,000-0)/12 =
information. The way to do it is just simply subtract the value that has been
25,000
used up and divided the rest by remaining years.
§ Income Statement Accounts- Gains and Other Income

§ Gains occur when a company sells or disposes an asset at either a higher price than the
asset’s cost or a higher price than the asset’s remaining book value on the company’s
balance sheet
§ They are not revenues since it does not incur from normal business operations
§ Gains are RHS entry on the company’s Income Statement
§ We amortize Intangible Assets whose value decreases over time (same idea as
Depreciation)
Ex. Patents, Intellectual Property, Goodwill

§ Amortization accounting follows the same rules as depreciation:

• Calculate the annual amortization
• Add the amortization to the contra account
• Expense the amortization in the Income Statement
12. Although the patent that the Company has acquired has a legal life of 20 years, Mary
expects competitors to develop equivalent products in about five years, using different
chemical formulas from Sunshine’s patented method. What makes the most economic sense?
Using straight-line amortization, spread the cost of the patent over its protected legal life of
20 years or over its expected useful life of five years?

Accumulated Income
Patent Amortization Statement
+ - - + - +
12. 40,000 12. Amortization on
Patent
40,000

•Choose what makes the most economic sense è Five years

•One year’s amortization expense for patent: (200,000/5 = 40,000)
Ø Conceptually:
§ Future revenues received earlier but that can only be accounted when the service or good is provided or consumed

Examples:
¡ Goods have been shipped to customer and paid for: EARNED

v LHS: Cash, COGS

v RHS: Inventory, Revenue

¡ Goods have been paid for by customer but not shipped: NOT EARNED - Unearned Revenue (Liability)

v LHS: Cash, COGS

v RHS: Inventory, Unearned Revenue

¡ Goods have been shipped to customer but not paid for: EARNED

v LHS: Account Receivable, COGS

v RHS: Inventory, COGS

13. In December 2018, the Company received a firm order from the committee
organizing the 2019 IAAF World Championships to be held in London in 2019. The
committee has placed a firm order with the Company for 60,000 Sunshine
Lite-Sticks at a price of $3.00 each. It is their intention to give a Sunshine Lite-
Stick to each person at the evening opening ceremony of the 2019 IAAF World
Championships and to have athletes and fans “light” their Sunshine Lite-Sticks,
symbolic of the opening of the games. Mary wonders how the Company should show
the order in its 2018 financial statements, if at all

The company does not need to record this, since the company has not received
cash for this order, nor can they recognize revenue.
Note : if they received cash for this order in Dec 2018, then this transaction is associated with
Unearned Revenue – it is a liability account, and is used when the firm receive payment prior to
the recognition of revenue, ex. plane tickets (will discuss more about it in Toddler Town) .
Do not forget to:
1. Record the tax payable

2. Close out Net income to retained earnings

§ 14. The corporate tax rate on profits before income taxes for Sunshine Lite-Stick,
Inc is 20%

Tax Payable Income Statement

- + - +
Expenses Revenue
14. 12,000
4. Adv. Expense 15,000
5. Direct Labor & Overhead 500,000
6. Salaries 60,000
900,000 7. Cash collected
100,000 7. Account Receivable
9. Interest Expense 10,000
10. Plastic and Chemical 200,000
11. Depreciation of Machinery 25,000
12. Amortization of patent 40,000

Subtotal 940,000 1,000,000

14. Income Tax Expense

(1,000,000 – 940,000)*20% = 12,000
§ 15. Closing out the difference of income statement to retained earnings

Retained Earnings Income Statement

- + - +
Expenses Revenue
15. 48,000
4. Adv. Expense 15,000
5. Direct Labor & Overhead 500,000
6. Salaries 60,000
900,000 7. Cash collected
100,000 7. Account Receivable
9. Interest Expense 10,000
10. Plastic and Chemical 200,000
11. Depreciation of Machinery 25,000
12. Amortization of patent 40,000

Subtotal 940,000 1,000,000

14. Income Tax Expense

(1,000,000 – 940,000)*20% = 12,000

15. Close out the difference to

Retained Earnings 48,000

1,000,000 1,000,000
1. Record revenue
2. Record COGS (raw materials, direct labor
and overhead, depreciation of machinery for
manufacturing companies)
3. Calculate Gross Profit=Revenue - COGS
4. Record other expenses (advertising, salary,
amortization, depreciation, etc)
5. Calculate EBIT (aka Operating
Income)=Revenue-COGS-expenses
6. Record interest expense
7. Calculate EBT=EBIT-interest expense FAQ: Where to put depreciation?
Product-related depreciation (usually manufacturing
8. Record tax expense companies): under COGS
Not product-related depreciation: under operating expense
9. Calculate Net Income=EBT-tax expense • Manufacturing company – Cost of Goods Sold (COGS)
• Merchandising company – Cost of Sales (COS) see p.191
1. Sum up each T Account, calculate ending balance

2. Record current assets (cash, accounts receivable, inventory, prepaid expenses, other current assets, etc.)

3. Record total assets

§ Current assets
§ Net fixed assets (gross fixed assets - accumulated depreciation)
§ Net intangible assets (intangible assets – accumulated amortization)
§ Other non-current assets
4. Record current liabilities (accounts payable, interest payable, taxes payable, note payable)

5. Record total liabilities (current liabilities + long-term liabilities)

6. Record shareholders’ equity (common stock + retained earnings)

7. Balance check: total assets = total liabilities + shareholders’ equity

CASH FLOW: A FLOW CHART – IDENTIFY TYPE
No
Does the item affect cash? Not considered
• For Cash Flow statement: Only one T
Yes Account is involved: The CASH T-ACCOUNT

Will the item appear on the

income statement as either No
Incoming cash flow or
a revenue or an expense
outgoing cash flow?
either now or in the
future?

Yes Outgoing Incoming

Operating Cash Flow Investing Cash Flow Financing Cash Flow

• Related to Income • Related to long-term • Related to long-term

Statement
• Example: Salaries, Direct
labor, Sales, Rent,
Advertising…(The interest
expense/income is
considered as an Operating
Cash Flow!) *GAAP/IFRS
assets section of Balance
Sheet
• Example: acquisition of plant
and equipment, intangible
assets, investment in other
company’s shares or debt
liabilities and
shareholders’ equity
section of Balance Sheet
• Example: Issuing stock,
borrowing money, pay back
principals/loans
 § a. 1,000,000 shares of Sunshine Lite-Stick common stock were issued at $1 per share
Cash (Not on I/S, incoming – Financing)

§ b. Purchased the patent from Mary Davis for $200,000 (Not on I/S, outgoing – Investing)
+ -
F a.1000,000 § 1. Borrowed $100,000 from Central National Bank (Not on I/S, incoming – Financing)

b. 200,000 I § 2. Spent $300,000 for the machinery that would be used to produce the first
commercial models (Not on I/S, outgoing – Investing)
F 1. 100,000
§ 3. Purchased $300,000 worth of plastics and chemicals, still owed one of the suppliers
2. 300,000 I $25,000 (On I/S – Operating)

§ 4. Spent a total of $15,000 on television and trade journal advertising (On I/S –
3. 275,000 O Operating)
4. 15,000 O § 5. Expended $500,000 on direct manufacturing labor, and on manufacturing-related
overhead (On I/S – Operating)
5. 500,000 O
6. 150,000 O § 6. An additional $150,000 was paid for corporate salaries and other corporate
expenses. Corporate salaries and expenses are not associated with the direct
O 7. 900,000 manufacturing (On I/S – Operating)
8. 10,000 O § 7. Sold $1,000,000 of Sunshine Lite-Sticks. On December 31, 2018, the largest single
purchaser, an auto parts distributor still owed Sunshine Lite-Stick, Inc., $100,000. All
other customers' accounts were paid in full by year-end (On I/S – Operating)
§ 8. Made a rent payment of $10,000 to pay for the Company’s rent for the month of
January, 2019 (Will be on I/S – Operating)
Ø Identify and Group:
§ Operating cash flow items
§ Investing cash flow items
§ Financing cash flow items

Ø Sum each category separately

Ø Final step:
§ Calculate net increase/decrease in Cash (sum of the 3 categories)
§ Put beginning cash balance
§ Calculate ending cash balance = Beginning cash balance + net change of cash
in this period
§ BASE Principle: Cash, Inventory, PPE, etc.
Usually negative

Check beginning cash

balance! (not necessarily
zero)
§ Interest expense is an Operating Cash Flow - GAAP

§ A principal repayment is a Financing Cash Flow, because it was

initially a money inflow (getting money from the loan)
§ Return on Equity (ROE)
This ratio indicates how profitable a company is by comparing its net income to its
average shareholder equity. The ROE measures how much the shareholders earned
for their investment in the company. The higher the ratio percentage, the more
efficient management in utilizing its equity base thus providing a better return to its
investors.
“Accounting Decisions will have impacts on the net income,

but it wont affect the cash flow”

Net Income ≠ Cash!!!!

§ First half: Read class note 7

vIndirect Cash Flow Statement

§ Second half: Start working on the Overlook Inn Case

§ Class note 8 (Rev. recognition)

§ Class note 9 (A.D.A)