Accounting Formulas Notes

Accounting Cheat Sheet DIAGRAM OF T-ACCOUNTS METHODS & ORGS Accrual basis Follows the matching principle and recognizes transactions as they occur (GAAP Method) Balance Sheet as of 12/31/2100 = Liabilities = + Equity Cash basis Recognizes transactions when cash or equivalents have been exchanged (Not GAAP) + Income Statement, year ended 12/31/2100 T-Account Debit Revenue - Expense - Credit Profit or loss recorded to Retained Earnings Assets US-GAAP Generally Accepted Accounting Principles system established by FASB that governs financial reporting IFRS International Financial Reporting Standards Financial reporting standard adopted widely outside of US (No LIFO permitted, different FMV valuation permitted) = Net income increases RE ACCOUNTING EQUATION Equation Assets = Liabilities + Equity Equity = Assets - Liabilities Cost of Goods Sold (COGS) Beginning inventory + Purchases Ending inventory Cost of Goods Sold (COGS) INVENTORY Journal Entry debit credit Cash 100 Common stock 100 Receive cash for common stock Gross Profit Revenue - COGS Gross Profit Revenue x (1 - Gross profit rate) COGS Valuation at lower of cost or market Higher ending inventory = Lower Cost of Goods Sold Lower Cost of Goods Sold = Higher Net Income FIFO First In First Out Early purchases come out of inventory first LIFO Last In First Out Early purchases tend to stay in inventory Average cost Total cost / Quantity = Cost per unit DEBITS & CREDITS Increases & Decreases Bolded: Natural balance Increase Decrease Perpetual inventory tracked in real time Periodic inventory tracked by counting at end of period Balance Sheet Asset Contra asset Contra assets: Accumulated depreciation, Allowance for doubtful accounts debit credit credit debit Liability credit debit Equity Contra equity credit debit debit credit Net Income Comparison Price Rising Falling Expense Most transactions: Typically debits LIFO Lower Higher Average Middle Middle Rule: In a period of increasing inventory costs, FIFO method results in higher net income compared to LIFO Cost of Goods Sold Comparison Contra equity: Treasury stock Income Statement Revenue Most transactions: Typically credits FIFO Higher Lower credit debit debit credit Price Rising Falling FIFO Lower Higher LIFO Higher Lower Average Middle Middle Accounting Cheat Sheet PRINCIPLES, GUIDELINES, ASSUMPTIONS Comparability Conservatism Financial statements must be comparable period to period Considers all risks | strict rules Consistency Constraints Same accounting methods year to year Information has a cost/benefit and is material Cost principle Economic entity Keep costs at purchase price or lower (lower of cost or market) Maintain separate records for each entity Full disclosure Provides detailed information in addition to financial statements Going concern Matching Assume business is going to and has capability to continue Recognize cost the same time as benefit Materiality Monetary unit Significance to the overall financial picture Currency is used to record transactions and is assumed to be constant Relevance Reliability Financial reporting has predictive, feedback, and timeliness value Financial reporting is neutral, valid, and verifiable Revenue recognition Time period Conditions of how an organization records revenue Report financial activity in specific time periods TEST VOCABULARY Cost basis Disposition Original cost of investment minus prior accumulated depreciation Sale, scrapping, or removal of an item, typically an asset Gross | Net Gross = total number | Net = gross number minus expenses Goodwill Purchase price less tangible value of physical assets purchased Net asset value NSF Cost basis minus accumulated depreciation (prior total depreciation) Non-sufficient funds, typically a returned check Principal Unrealized gain | loss The amount, typically of a loan Investment that has increased | decreased in value, but not yet sold Unrealized calculation Basis minus fair market value (FMV) BUSINESS TYPES INTEREST FORMULAS Monthly interest Compound interest P X (r / 12) A = P(1 + (r/n))^nt A = Amount, P = Principal, r = Rate n = compoundings per period, t = number of periods BANK RECONCILIATION Balance per bank + Deposits in transit Outstanding checks +/- Errors, fees, returned items Balance per books Sole Proprietorship One owner, no liability protection Partnership Two or more owners, no liability protection Limited Partnership Two or more owners, liability protection LLC Limited Liability Company Liability protection, flexible Corporation Liability protection, double taxation issues Accounting Cheat Sheet TECHNICAL INVENTORY AND COSTING Buyer’s books at year end, title passes when goods delivered FOB shipping point FOB destination Seller’s books at year end, title passes when goods received Raw materials Overhead costs Direct costs of materials manufactured such as steel Costs typically thought of as expenses that are added to cost of goods Work in process (WIP) Goods in the process of being manufactured (assets) ASSET SALES Sale of inventory Debits and credits Increase AR, Increase sales, Decrease inventory, Increase cost of goods sold Debit AR, Credit sales, Credit inventory, Debit cost of goods sold Sell appreciated stock Debits and credits Increase cash, Increase realized gain, Decrease stock Debit cash, Credit realized gain, Credit stock Sell stock for a loss Increase cash, Increase realized loss, Decrease stock Debits and credits Debit cash, Debit realized loss, Credit stock Sell depreciated asset, gain Increase cash, Decrease asset, Decrease accumulated depreciation, Increase gain Debits and credits Sell depreciated asset, loss Debit cash, Credit asset, Debit accumulated depreciation, Credit gain on sale Increase cash, Decrease asset, Decrease accumulated depreciation, Increase loss Debits and credits Debit cash, Credit asset, Debit accumulated depreciation, Debit loss on sale BONDS Bonds Financial instrument (agreement) issued by a company to borrow money from investors at a specified term (time) and rate Issuer Company that is raising the money Face value Amount that is repaid at the end of term Stated coupon rate Interest that bond pays investor Effective interest Rate of interest investor receives if the bond is purchased at a discount or premium Premium Amount company is paid in excess of face value, often paid when coupon rate is greater than market rate Premium = Price paid for bond - face value Discount Amount below the face value paid for a bond often occurs when coupon rate is less than market rate Discount = Face value - price paid for bond Depreciation terms Depreciation methods Cost Price paid for asset (may include costs to install) Straight line Rate = (Cost - Salvage value / Useful life) Book value Cost - Accumulated depreciation Declining Book value x Depreciation rate Salvage value Estimated scrap value at the end of asset life (Accelerated method) Rate = Straight line rate x Applicable % Accelerated methods Methods resulting in greater depreciation during earlier years MACRS / ACRS / DDB Depreciation Accelerated depreciation methods Expense taken on a physical asset over time Amortization Expense taken on an intangible asset over time Applicable % = 150% for 150 DB and 200% for double declining Sum-of-years’-digits (Cost - Salvage value) X Applicable fraction (Accelerated method) Applicable fraction = Years of estimated life remaining / Sum of years digits Accounting Cheat Sheet FINANCIAL STATEMENTS BALANCE SHEET As of 12/31/2100 Assets Cash 1,497 Accounts receivable 400 Allowance for doubtful accounts (90) 200 Equipment Accumulated depreciation Inventory Total Assets (40) 1,967 Liabilities Accounts payable Wages payable Note payable Dividends payable Total Liabilities 300 405 705 Equity Common stock Treasury stock Retained earnings 1,010 (175) Total Equity 427 1,262 Liabilities + Equity 1,967 BALANCE SHEET FEATURES Balance sheet (statement of financial position) shows the ending balances of assets, liabilities, and equity at the end of the accounting period Mechanics Assets always equal liabilities plus equity, (which forms the accounting equation) ASSETS Current assets To be used within one year of the balance sheet date or longer, if the operating cycle is greater Current assets Cash and equivalents, accounts receivable, inventory, prepaid expenses to be used within a year Long-term assets Expected benefit greater than one year Examples: property, plant, equipment, intangible assets (copyrights, trademarks, goodwill) Accounts receivable (AR) Cash due from customers who have purchased goods or received services not yet paid for Inventory Goods for sale or manufacture, valued under GAAP at lower of cost or market Prepaid expense Expenses paid in advance, considered an asset until used (such as a two year insurance policy) Accumulated depreciation | amortization The sum of all prior depreciation | amortization (contra asset) increases with a credit and offsets the value of depreciable assets reported at cost LIABILITIES Current liabilities Obligations due in one year or less Long-term liabilities Debts owed to creditors, due in more than one year from the balance sheet date Accounts payable (AP) Money owed to creditors and vendors Notes payable Debts owed to banks or other creditors based on written agreements Accrued expenses Expenses incurred before the end of the accounting period, but not yet paid for Deferred revenue Cash received in advance, but not yet earned Long-term bonds payable Money borrowed to finance company operations, due in more than one year SHAREHOLDERS’ EQUITY Common stock Sold to investors for ownership of a corporation Preferred stock Investors receive dividends before common stockholders and usually do not have voting rights Additional paid-in capital Investment received by corporation, in excess of par value per share (APIC = Issuance price - Par value) Par (stated) value Per share amount on stock certificates, also referred to as legal capital (no relation to market value) Retained earnings Sum of all previous profit and losses, less dividends Treasury stock Stock repurchased by company Dividends Corporate profits paid to shareholders from retained earnings (not an expense) Accounting Cheat Sheet INCOME STATEMENT STATEMENT OF CASH FLOWS FEATURES Year ended 12/31/2100 Year ended 12/31/2100 Income Revenue Cost of goods sold 930 (10) Gross profit 920 Expense Cash flows from operating activities: Net income 435 Adjustments to reconcile cash used for operations Depreciation and amortization 40 Changes in operating assets and liabilities: Bad debt 90 Accounts receivable Depreciation Inventories Interest 40 5 Utilities Wages 50 300 Total Expense 485 Net Income (Profit) 435 Accounts payable Allowance for doubtful accounts Accrued expenses Total adjustments Net cash used in operating activities (400) 10 90 300 40 475 INCOME STATEMENT FEATURES Cash flows from investing activities: Income statement (profit and loss) shows the performance of a business by reporting revenue earned minus expenses incurred to equal net income or loss (profit or loss) Mechanics Reports the business activity for a specific period of time and results in net income or loss, which gets recorded to retained earnings at the end of the accounting period REVENUE AND EXPENSE Revenue recognition Recognize (book into accounting record) revenue when it is earned and realizable Expense recognition Expenses are recognized when incurred, as goods are used and services received Net income or loss Revenue minus expenses results in net income or net loss also referred to as profit or loss Net income increases retained earnings and net loss decreases retained earnings STATEMENT OF CASH FLOWS FEATURES Statement of cash flows Shows the flow of cash in and out of the business Mechanics Starts with beginning cash from the prior period and reconciles to ending cash in the current period showing the changes Usefulness Shows actual changes in cash on a cash basis, instead of the accrual basis which does not necessarily reflect the flow of cash Indirect method of preparation uses the changes in accrual basis accounts Direct method of preparation (uncommon) presents specific cash flows such as cash received from customers and paid to suppliers Purchase of property and equipment (200) Net cash used in investing activities (200) Cash flows from financing activities: Proceeds from notes payable Proceeds from issuance of common stock 500 1,000 Purchase of treasury stock Principal on loan payment (175) (95) Dividend paid (8) Net cash provided by financing activities 1,222 Net increase in cash and equivalents 1,497 Cash and cash equivalents, beginning 1,497 Cash and cash equivalents, ending Accounting Cheat Sheet STATEMENT OF OWNERS’ EQUITY FEATURES Statement of owners' equity shows sources of capital (business funding), additional paid in capital and common stock breakdown, changes in retained earnings, and treasury stock (stock repurchased) Mechanics The statement starts with beginning balances and reconciles to ending period balance STATEMENT OF OWNERS' EQUITY As of 12/31/2100 Common stock Retained earnings Treasury stock Total Balance December 31, 2099 Net income for 2100 Common stock issued 10 10 435 435 1,000 1,000 Treasury stock Dividends (175) (175) (8) (175) 1,262 (8) Balance December 31, 2100 1,010 427