Accounting Review Notes Ch.

7 Revenue Principle- recognize revenue when risk and reward transferred to buyer future economic benefits are flowing back to the company cost and benefit can be measured reliably Long-term Contracts- so need a way to deal with it. percentage of completion- base the revenue off of % complete completed contract- when contract complete % reflect year better, but completion good when only paid if requirement met. Sales Returns and Allowances- allow returns of damaged and unsuitable goods, have a contra account set against sales so its debit account Credit Card Discount- Card company charges the company. Contra account to sales or and expense. Same effect NI Sales Discounts- On account for some buyers and they get discount for paying quickly. Contra of expense. Bad debt- receivables ppl not always pay. Time lag figure out who not paying sales and AR overstated. So to not affect next year we estimate how much not collected so bad debt to have accurate NI and assets. Have bad debt expense and Allowance for Doubtful Accounts Percentage of Credit Sales- determine bad debt rate from experience Aging of Trade of Receivables- base the estimate off of how overdue and change percentage base on experience. Gives the total balance of the AFDA account. Too many writeoffs and AFDA can be debit Control of Cash Level of cash- make sure have enough for current operations, liabilities and emergencies. Invest idle cash and make a profit. Internal controls- BOD reasonable assurance of reliability of financial reporting and compliance with law. Cash rules also. Bank reconciliation- banks give statement of all transactions. Compare bank statements to those of the company and look for discrepancies. Differences because of outstanding cheques, deposits in transit, bank services charge, NFS cheques, interest, errors Ch. 8 Inventory- product plan to sell or use to produce other goods for sale Merchandise- goods acquired ready for sale. Purchase and it becomes and asset. COGS Manufacturing- used to make a product. Raw materials to work in progress, add other costs like labour and factory overhead. Supplies- used for daily operations are expenses eventually.

 Cost Flows- Beginning inventory and cost of purchases give you Cost of goods available for sale. Then sold or not so Ending inventory and Cost of Sales Tracking Inventory Perpetual- track of every purchase and sale in quantity and cost Periodic- add to inventory when bought. But at end you count inventory to get COGS. Perpetual better control over lost, stolen and broken. But its costly to maintain and tech make it easier. Bar codes. Invest for the information and control. Count in both to check it its right. Costing Methods- how keep track of inventory in terms of costs FIFO- first in first out- first cost is the oldest cost time wise and goes out to COGS first Weighted average- average cost for each specific good. Weighted meaning the amount matters too. This is done at end of period Specific identification- track cost of the individual unit LIFO- last in first out- not allowed in Canada, but is in US Companies generally pick one method and stick, but can change. If prices are rising- FIFO gives higher profit, WA better for cash floes b/c less tax. Vv. What care more about, inflation if profit then FIFO, cash flow then WA. Specific for cars and jewellery store. Can combine methods for different products. Lower of Cost or NPV- pick the lower deviate for faithful representation Historical Cost Principle- value we put on inventory generally record at he historical cost. Net Realizable Value- what the inventory can be sold at cosy incurred in sale(transport) Debit Cost of Sales and Credit Inventory Impact- write down so decrease asset and cost increase so income decrease. If sell next period then the income in next increase and the net effect over the two periods cancel out. Ch. 9 PPE- Property, Plant, Equipment Cost principle applies so all costs incurred in acquisition are capitalized to asset account (not interest). Repair before use is inc. in cost. Basket Purchase- many in lump sum. Divide cost of each based on proportion of total market value Repairs and Betterments- ordinary repairs are expenses (maintenance to keep functioning). Extraordinary are capitalized (increase life, efficiency or capacity) Depreciation- allocate the acquisition cost of an asset over its lifetime. It is based off of an estimate so it can change when they do. An asset can be impaired and written off if Carrying amount>recoverable amount Straight line- equal amount each year (cost-res)/life

Units of Production- allocate base on unit each year. (cost-res)/life Unit depletion rate = acq & dev cost res/ units Declining balance- allocate more in early years. % of NBV each year. 10 year life then 1/10 = 10% double decline then 20%

Choose method based on the asset. Capital cost allowance is the amount of cost for tax purposes. Disposal do depreciation until the date and then record loss or gain of sale. Intangible assets- goodwill. Amortize shorter of econ or legal life. Ch. 10 & 11 LiabilitiesCompany finances by debt and equity. Balance of current and non-current liab. Current liability- due within a year. Balance b/c there is a risk need cash to pay off within year. There is urgency and can be formal or informal Liquidity- look at CA and CL and see if have enough to cover debt. Working Capital- CA-CL simple +ve better depends on company size Present Value of Single Sum Present Value of an Annuity Bonds Debenture- unsecured bond Secured bond- pledge assets Callable- may be retired early Convertible- can turn into shares Bond Price- depending on market interest rate it can be bought or sold at a discount, par of premium. Amortize Bond Effective Interest Method- amort schedule for prem or disct Straight-line- equal each time. Defined Contribution Pension plan- contributions are planned out already. Independent of company. Employee gets percentage. Base off of how well invested. After contribute then done. Defined benefit plan- formula for what employee gets liability and obligation to give amount Leases- record in two ways. Operating- rent expense as pay bills Capital- treat it like purchase and account as if own Ch. 12 Proprietorship, Partnership, Corporation- legal entity Adv- limited liability, share profit loss with owners, large amount of resources, efficient control structure, unlimited lifetime Disadv- less control, managers can be independent

 Shares Common- basic, get through dividend, liquidate get leftovers Preferred- given preference, like div and residual no vote Share Transactions Issue of Shares- owners get and founders. Give for assets or instead of salary Initial Public Offering- sell share private or trade public on exchange. Hire underwriter, find ppl interested in buying, make public statement, road show gauge demand and set price base on supply and demand. Underpricing IPO- common to start low and have them increase right away Share Transactions Seasoned Equity Offerings- another offer later. Issue little at IPO and do another later Trade on the stock market NE on fin state Repurchase Shares- reduce OE and assets for employee stock options not want create so buy. Or have excess cash so do something with it. Dividends Cash Dividends- declare and pay. Div on Pref Share- cumulative and pay first Dividend policyStock DividendStock Split- divide shares outstanding shares double changes distribution of SE Split so that they can buy blocks of 100 or multiples to bring price down Stock Options- give holder the option to buy stock at fixed price in the future given time limit. Benefit may get chance to buy at lower price. Employee compensation- can grant to anyone usually part of employee compensation. Motivate employees b/c option only good if price go up so think like owners. Can pay less salary. Accounting changed- b4 didnt need to record expense and now you do. Ch. 13 Analyzing Financial Statements Cross-Sectional- other in same industry and averages Trend- Compare same company over time Component %- pick base amount to use (IS net sales revenue) ROE break up with NPM, Asset Turnover and Financial Leverage ROE= ROA x Financial Leverage Ratio

 Articles Small Firms Big Customers are Slow to Pay- big companies hold cash for own capital. Ppl take longer to pay toll on company that needs it to expand. Big companies have power over them they need them. Use market power to strong arm. So need to ask suppliers for more time and take out lines of credit stunt the growth How Zynga, Facebook and Groupons Go-To Auditor Rewrites Accounting Rulestalk about how Zynga and Facebook recognize the revenue from online games. They show high cash inflows and there are no real rules on how they should recognize revenues. So they try and follow the revenue principle. It discusses how they should recognize it. They use Ernst & Young and some believe they are not critical enough. Wrote book on ways for them to recognize and leaves a lot of the timing up to management discussion. -game-based- recognize slowly over life of game - user-based- recognize over time typical user is interested - item-based- on virtual goods. (but can change based on item type) item used right away then recog if not then spread out. Revenues are greatly affected by the lifetime or user interest chosen. It changes profit greatly. From a loss. Boeing Hits a Milestone- Boeing make plane 787 Dreamliner cost 14 billion. Plan to make profit in future so far been capitalizing cost. When produce them in large quantity they will spread out the cost. Right now its an asset and will be spread out over planes they make. Currently costs more to produce than sell, but over time becomes easier to produce and the cost decreases. Right now add losses and cots to asset developing cost. Use the odd capitalization technique to treat production costs. Gap Gets Squeezed by Spiral of Costs- Manufacture lot of own clothes. Not efficient with manufacture and distribution. Cost of production is increasing. Poor management of inventory have too much and discount to sell. Profit decrease b/c of inventory holding costs and discount to sell. Share price dropped. Bad gross margin poor inventory management and increasing costs. Real Estate Worries Some GE Analysts- GE benefit gvt. Assistance. Profit halved in a year. Real estate losses in capital and some feel should save up cash to account for them. Pension Packages Are Getting Fresh Attention- review them and who bears the risks. b/c of economy plans not really growing. Ppl living longer so need pay pension longer created big liability for company. Leases Suffer Identity Crisis- 6 years try and rewrite standards make on BS so represented. Asset are leased and now pay depreciation. Many ppl complain b/c so many affected. Fewer Stock Splits, Record Share Prices- Last 4 years less stock splits b/c of crisis. Companies less willing to split b/c of fear of market. Not want get low. Apple and Google ignore the theory. Brokers believe it makes a difference SEC, FINRA, Call for Probe of Facebook IPO- Facebook IPO was a failure. Thought to sell for $38 and last week was $20. Ppl are losing money b/c was overpriced. The company benefited problem is unhappy ppl. Bad for rep. underwriter and

stock exchange. Have difficulty issuing in future. Fiasco b/c told corporate clients that was going to decrease. Groupons Accounting Lingo Gets Scrutiny- IPO coming up and terms confusing, no one else uses them are trying to distract consumers. Look at profit b4 expense. Why You Shouldnt Buy Those Earning Surprises- Point out companies that did better than expected. The surprises are becoming common. Predetermined by companies and analysts. Analysts incentive to revise predictions. Lowballing is now guidance.

Ratios Gross Profit Percentage- Gross Profit (Net Sales-COGS)/Net Sales How much profit get from a $ of sales higher is better. Usually means higher profit but need to watch operating expenses too. Receivables Turnover Ratio- Net Sales/Average Net Trade Receivables How effective at collecting and times TR collected and recorded in period. Higher is better so can invest cash. If low can mean too generous ineffective. Decline mean lagging sales, record sales that will be returned. Compare same company or similar industry Average Collection Period- Average Net Trade Recievables/Net Sales Per day 365 days/ Recievables Turnover Ratio average time it takes a customer to pay Compare same company or similar industry Inventory Turnover Ratio- Cost of Sales/ Average Inventory How quick buy and sell inventory. Efficiently they manage inventory. Need benchmark to compare like past and same industry. Fixed Asset Turnover Ratio- Net Sales/ Average Net Fixed Assets Sales generated from fixed assets. Low may mean buying capital to expand. High is usually good and mean efficient, but may mean cutting back b/c downturn. Current Ratio- CA/CL Size not matter, want greater than 1. Prob some assets slow to convert like collection of recievables Quick Ratio- Cash+Short term investments + net trade recievables/ CL Less than .40 then bad Cash Ratio- Cash + Cash Equivalents / CL Trade Payables Turnover Ratio- Cost of Sales / Average Trade Payables How frequently buy and use and pay liabilities. Higher mean pay back quick Compare to benchmark of industry. Low if cant pay or are being aggressive and choosing to make suppliers wait. Average Age of Payable- Average Trade Payables/ Average Cost of Sales per Day Financial Leverage Ratio- Average Ttl Assets/ Average SE No borrow then 1. More borrow higher it gets. Higher more debt and risk Time Interest Earned- Profit b4 Int and Tax/ Int Exp Measure ability to pay interst and how secure to pay. IF 1 then can barely cover it. Dividend Yield Ratio- Dividends per Share/ Market Price per Share % return relative to current price depend on type of investment ROE- Profit/ Avg. SE Cash Coverage Ratio- Cash from Operate Act + Int and Tax/ Int paid

Statement of Cash Flows Operating- include Depreciation Loss/gain Trade P and R Inventory Payables Investing- Sale Financing- Repay Notes, Shares, Dividends Notes Non-cash TR balance add back allowances