Key Concepts from Workbook
* Assets of an entity are thing of value that it owns
* Liabilities is what you owe
* Net assets consist of the accumulated profits and losses from the entities profitable operation.
* Assets = Liabilities + Net Assets
* The amounts of assets, liabilities and net assets as of one point in time are reported on the balance sheet.
* Assets are valuable items that are owned or controlled by the entity and that were acquired at a measurable cost. Goodwill is not an asset unless it was purchased.
* Current assets are cash and assets that are expected to be converted into cash or used up in the near future, usually within one year.
* The current ration is the ration of current assets to current liabilities.
* Marketable securities are current assets
* Investments are noncurrent assets
* A single liability may have both a current portion and a non current portion
* The increase in retained earnings resulting form profitable operations is called revenue.
* The associated decrease in Retained earnings is called an expense.
* Revenue = Income + Expenses
* Revenue - Expenses = Income
* Transactions are recorded in a journal . At least 2 entries are required for each transaction. Amounts are then posted to the accounts in a ledger
* Revenue and expense accounts are temporary accounts. At the end of each period they are closed to New Assets.
* The difference between the revenues of a period and the expense of a period give us the net income (Profit / loss). This is reported on the income statement
* Net income is the change in Net assets from operating performance during that period.
* Assets, liability, and net assets, are permanent accounts. Their balances are carried forward to the next accounting period.
*Accrual accounting measures revenues and expenses during an accounting period and the difference between them (Net Income)
* If revenue is recognized before the cash receipt, an asset, Account Receivable is debited (increased). If cash is received before revenue is recognized, a liability, Advances from Customers, is credited (increased). The liability is debited (decreased) in the period (s) in which revenue is recognized
* The equity and accounts receivable balances in a period are reduced by estimated bad debt losses. A bad debt expense account is used to record the decrease in equity. When specific bad debts are later discovered, Accounts receivable is reduced but revenue is unaffected.
* The days sale uncollected ratio is Accounts receivable / (credit sales / 365). It indicates if customer are paying their bills on time.
* Expenditures are made when goods or services are acquired. If these goods or services are used up during the current period, they are expenses of the period. If not used up, they are assets at the end of that period. These assets will become expenses in future periods as they are used up.
* Some expenditures result in liabilities that will be paid in future periods. An example is accrued salaries.
* Expenses are expired costs. Assets are unexpired costs.
* Expenses of a period are
1.) Cost of products (goods and services) that were delivered to customers
2.) Other expenditures that benefit operations of the period
3.) Losses, decreases in assets from fire, theft and increases in liabilities from events such as lawsuits
* The income statement summarizes revenues and expenses of the period. It shows the increase in net assets resulting from activities during the period.
* Percentages are calculated for various income statement items, especially gross margin and net income, taking sales revenue as 100 percent.
* The financial statements do not tell the whole story about an entity because they report
- only events that can me measured in monetary amounts
- only past events
- do not report market values
- based on judgments and estimates
* Ability to meet current obligations is called liquidity. The Current Ratio is a widely used measure of liquidity.
* Ability to meet long term obligations is called solvency. If a high proportion of permanent capital is obtained form debt rather than from net assets, this increased the danger of incolvency. The proportion of debt is indicated by the debt ratio.
Ratios
GROSS MARGIN gross margin / sales revenue
PROFIT MARGIN Net income / sales revenue
CURRENT RATIO Current assets / current liabilities
QUICK RATIO Current assets - inventory / current liabilities
DEBT RATIO non current liabilities / noncurrent liabilities + net assets
When acquired a plant asset is recorded at cost, including installiation and other costs of making the asset ready for its intended use.
* Land has an unlimited life and is rarely depreciated
* Plant assets are depreciated over their service life. Each year, a fraction of the cost is debited to Depreciation Expense and credited to Accumulated Depreciation
* Depreciation Expense is an estimate. We do not know how long the service life will be, nor the asset's residual value.
* The book value of a plant asset is the difference between its cost and its accumulated depreciation. When Book vaule reached zero or the residual value, no more depreciation expense is recorded.
* Book value does NOT report what the asset is worth
* When an asset is sold, the difference between the sale price and book value is a gain or loss, and it is so reported on the income statement.
* In financial accounting, depreciation is usually calculated either by the units of production method or by the straight line method.
* In the units of production method, the annual depreciation expense is calculated by multiplying the number of service units produced in that year by a unit cost. This unit cost is found by dividing the asset's depreciable cost by the number of service units estimated to be produced over he asset's total life.
* In the straight line method, the annual depreciation expense is calculated by multiplying the asset's depreciable cost by a constant precentage. The precentage is found by dividing 1 by the number of years in the asset's estimated service life.
* Accelerated depreciation is often used for income tax purposed because it decreased the amount of taxable income in the early years. The method used is called the Modified Accelerated Cost Recovery System (MACRS).
* Depreciation is the process of writing off wasted assets and amortization is the process of writing off intangible assets. The accounting for both processes is similar to depreciation , except that the credit is made directly to the assets account.
