Introduction to Financial and Managerial Accountin Final Exam Review

Financial Accounting Overview Financial Accounting = translates events into financial statements Events Rules & Management choice Financial Statements Generally Accepted Accounting Principals (GAAP) Management selects from alternative rules and from allowable estimates under GAAP Approach in Financial Accounting z First, we identified the key Balance Sheet Equation z Next, we understood the accrual process to determine income on Income Statement. z Subsequently, we spent time understanding key accounts that appear under different Balance Sheet headers and how they interact with the Income Statement. z We also examined the Cash Flow Statement – the information it contains and how it relates to the Income Statement and Balance Sheet items Approach in Financial Accounting z First, we identified the key Balance Sheet Equation z Next, we understood the accrual process. z Subsequently, we spent time understanding key accounts that appear under different Balance Sheet headers and how they interact with the Income Statement. z We also examined the Cash Flow Statement – the information it contains and how it relates to the Income Statement and Balance Sheet items Balance Sheet Equation z Assets = Liabilities + Owners equity z Assets =probable future economic benefits owned by the firm z Liabilities = probable future economic sacrifices z Owners’ Equity = Assets – Liabilities owners’ claim = “own” – “owe” z (Owners’ Equity is sometimes also called shareholders’ equity, net book value, or the “residual claim”) Changes in Shareholders’ Equity Beginning of year: S. E. Beginning Paid in Capital + new paid in capital Ending Paid in Capital End of year: Beginning Retained Earnings + Net Income - Dividends Ending Retained Earnings S. E. Approach in Financial Accounting z First, we identified the key Balance Sheet Equation z Next, we understood the accrual process. z Subsequently, we spent time understanding key accounts that appear under different Balance Sheet headers and how they interact with the Income Statement. z We also examined the Cash Flow Statement – the information it contains and how it relates to the Income Statement and Balance Sheet items Basic Principles of Accrual Accounting z Determine what net income has been earned during a period, not just what cash has been generated during the period from operations z Why? To capture the economic events that have occurred during the period z Determine revenues recognition principles applying the revenue- z Report as expenses those costs that have been or will be incurred to generate those revenues Revenue Recognition z z Revenue recognition principles: Service has been provided by the company, customer has been billed and there is reasonable certainty of cash collection Issues in revenue recognition z z z Credit sales Warranties and returns Bill & hold sales, SAB 101 Accruals and Cash flows: Four Cases 1) Cash precedes expense Pay Cash Recognize Expense (a) (b) Balance Sheet Date Examples: Rent paid in advance, Prepaid Insurance, PP&E, Inventory Associated entries: (A) Cash Prepaid Rent –$ +$ (a) (b) –$ = (SE) Ret. Earn. –$ (rent expense) Time Accruals and Cash flows: Four Cases 2) Cash follows expense Recognize Expense Pay Cash (a) (b) Time Balance Sheet Date Examples: Taxes paid after yearend, Salaries paid on the 15th of the month, bad debt expense, warranty expenses Associated entries: (A) = (L) (SE) Cash Salaries Payable* Ret. Earn. –$ (salary expense) (a) +$ –$ –$ (b) * sometimes also called “accrued salaries” Accruals and Cash flows: Four Cases 3) Cash precedes revenue Receive Cash Recognize Revenue (a) (b) Time Balance Sheet Date Examples: Airplane tickets sold in advance Newspaper subscriptions sold in advance Associated entries: (L) Cash Unearned Revenue* (a) +$ +$ (b) –$ *sometimes also called “deferred revenue” (SE) Ret. Earn. $ (revenue) Accruals and Cash flows: Four Cases 4) Cash follows revenue Recognize Revenue Receive Cash (a) (b) Balance Sheet Date Examples: Accounts Receivable Goods shipped but cash not yet received Services provided but cash not yet received Associated entries: (A) (A) Cash Accounts Receivable (a) +$ (b) $ –$ (SE) Ret. Earn. +$ (revenue) Time Approach in Financial Accounting z First, we identified the key Balance Sheet Equation z Next, we understood the accrual process. z Subsequently, we spent time understanding key accounts that appear under different Balance Sheet headers and how they interact with the Income Statement. z We also examined the Cash Flow Statement – the information it contains and how it relates to the Income Statement and Balance Sheet items Balance Sheet - Assets z Current assets z z z z z z Cash Marketable Securities Accounts Receivable, Accounts Inventories Prepaid Rent less: Allowance For Doubtful Long term assets z z z Fixed assets, less: Accumulated Depreciation Long-term Investments Goodwill Balance Sheet – Liabilities and Stockholders Equity z Current Liabilities z z z z Long term liabilities z z z Accounts Payable Salaries Payable Deferred Tax Liabilities Bonds Outstanding Lease Obligations Stockholders equity z z z Capital Stock Retained Earnings Other Equity Prior Review Slides z Please look at review slides for Midterms 1 & 2 for key issues under each major header Approach in Financial Accounting z First, we identified the key Balance Sheet Equation z Next, we understood the accrual process. z Subsequently, we spent time understanding key accounts that appear under different Balance Sheet headers and how they interact with the Income Statement. z We also examined the Cash Flow Statement – the information it contains and how it relates to the Income Statement and Balance Sheet items Cash Flow Statements z z z z Change in net cash = Operating cash flows + Investing cash flows + Financing cash flows Given two, you should be able to work out the third Two methods: Indirect and Direct For the exam: Only Indirect The Indirect Method z Operating z z z Investing z z z Start with Net Income Make adjustments to arrive at CFO (cash flow from operations or operating cash flows) Purchase of PPE and/or other long-term assets (outflows) Proceeds from sale of PPE and/or other long-term assets (inflows) Financing z z z Dividends paid (outflows) Issuance of securities (inflows) Retirement of securities (outflows) Operating Cash Flows (CFO) z z z z z Net Income includes non-cash revenues and non-cash expenses These non-cash revenues/expenses usually are captured in changes in operating current assets and operating current liabilities (recall the twosidedness of all entries) Step 1: Identify operating non-cash current assets and operating current liabilities Step 2: Identify non-cash revenues or expenses that do not affect operating current assets or operating current liabilities (example: Depreciation Expense) Step 3: z z z z z Start with net income Add /(subtract) to it any non-cash expense /(revenue) that does not affect operating current assets or operating current liabilities ** Subtract /(add) any increase /(decrease) in non-cash operating current assets Add /(subtract) any increase /(decrease) in operating current liabilities Arrive at CFO ** Sometimes transactions that have cash consequences are similarly adjusted out of the operating section because they are not considered a result of operating activities. Managerial Accounting z The focus of the Managerial Accounting Section has been on Cost Accounting for decision-making z Allocation of costs is an important factor that affects product profitability and pricing decisions z Two major allocation systems have been covered in class: Traditional Costing System and Activity-Based Costing (ABC) Systems z The major issue in traditional costing systems is their continuous evolution as business realities change. z The major issue in ABC is the identification of objective cost drivers. Pitfalls To Watch Out For In Costing Systems z With traditional costing z z Death spirals – a direct result of using an allocation system that is “incorrect” either because it is outdated or excessively simple. With ABC z z z The sensitivity of cost allocations to choice of cost drivers. The lack of acceptance by internal managers, especially if ABC shows them in a poor light The tendency to accept easier solutions than the ones demanded as a result of ABC analysis.