Kế toán, kiểm toán - Chapter 4: The mechanics of financial accounting

2Chapter 4The Mechanics of Financial AccountingLearning Objective 1List and explain the two criteria necessary for economic events to be directly recorded on the financial statements.3Economic Events Must Be:Relevant: Have economic significance including anything that affects its financial condition.Objectively Measurable: Recorded in dollars as determined by parties with differing incentives. If events are both Relevant and Objectively Measurable then the economic events are reflected in the financial statements of the entity.45Concept Practice 1 Learning Objective 2Describe the accounting equation and how it relates to each of the four financial statements. 6The Mechanics of Financial AccountingThe first step in the accounting process is transaction analysis. This process examines relevant, objectively measurable economic events through their effect on the accounting equation: Assets = Liabilities + Shareholders’ Equity7An event for which the appropriate monetary measure can be derived is considered to bea. objectively measuredb. economically viablec. relevantd. capitalized8 Exercise 4-2Using a tabular analysis approach, analyze the transactions. (Tabular analysis is on the next slide).Note that effects may be on both sides of the equation, in the same direction, or effects may be on one side of the equation with offsetting directions.910Exercise 4-2 Cash + A/R + Land = N/P + CC + RE1. =2. =3. =4. =5. =6. _____ _____ _____ = _____ _____ _____30,00030,000(20,000)20,0009,0009,000 8,0008,000 Rev.(5,500)(5,500) Exp.(500)(500) Div.Tot. 13,000 + 8,000 + 20,000 = 9,000 + 30,000 + 2,00011Exercise 4-3 Financial Statements Income Statement Revenues $8,000 Expenses 5,500 Net Income $2,500Statement of Retained Earnings RE (beginning) $ 0 Add: Net Income 2,500 Less: Dividends (500) RE (ending) $2,00012Exercise 4-3 Financial Statements Balance SheetAssets Cash $13,000 A/R 8,000 Land 20,000 Total $41,000Liabilities and S.E. N/P $ 9,000 CS 30,000 RE (ending) 2,000 Total $41,000Learning Objective 3Explain the nature of journal entries (and T-accounts) and how they relate to the accounting equation and the financial statements.13 Now Look Back at E4-2Note that the transaction analysis was relatively simple with a few transactions and a few accounts. However, with thousands of transactions and hundreds of accounts, the table used in E4-2 would be inefficient.Therefore accountants use a “double entry” system based on debits and credits.14Double Entry SystemThe journal entry is an efficient representation of economic events and how they affect the accounting equation. Debit (dr) - means an entry to the left hand side of an account.Credit (cr) - means an entry to the right hand side of an account.Note that a debit or credit does not indicate an increase or decrease.To decide the effect of a debit or credit, the type of account must be considered.1516Effect of Debits and CreditsBased on the accounting equation, we can increase or decrease various accounts depending on their classification: Note that we use debits and credits instead of pluses and minuses.17Figure 4-718The following rules can be derived from the basic formula and Figure 4-7 (previous slide):Assets have normal debit balances and are increased with a debit.Liabilities and equities have normal credit balances and are increased with a credit.Revenues (a part of equity) have normal credit balances and are increased with a credit.Expenses (which decrease equity) have normal debit balances and are increased with a debit. Dividends (which decrease equity) have a normal debit balance and are increased with a debit. 19The Format of a Journal EntryTo initially record transactions, we use a journal entry to represent the debits and credits. For example, in E4-2, Item 1: Debit Credit Cash 30,000 Common Stock 30,000Note that the debit is to the left and the credit is to the right. First we list the account (left hand entry on top), then the amount. Back to E4-2, and prepare the other journal entries:2: Purchased land for $20,000 cash. Land 20,000 Cash 20,000 3: Borrowed $9,000 cash from bank. Cash 9,000 Notes Payable 9,00020Back to E4-2, and prepare the other journal entries:4: Provided services (on account) $8,000. Accts. Receivable 8,000 Service Revenue 8,0005: Paid $5,500 cash for expenses. Expenses 5,500 Cash 5,500 21Now back to E4-2, and prepare the other journal entries:6: Paid $500 cash dividend to owners. Dividends 500 Cash 500Note that dividends is a contra equity account and ultimately reduces retained earnings.22Arcadia Company provided landscaping services and received $3,000 from customers immediately. Which of the following occurred?a. assets and shareholders’ equity increase by $3,000b. assets and shareholders’ equity decrease by $3,000c. assets and liabilities increase by $3,000d. assets and liabilities increase by $3,00023T-AccountsRunning tally of the affect of transactions on an account in the General Ledger. We call this process ‘posting’ to the GL. The running tally makes it possible to complete trial balances and financial statements.24Back to E4-2: Posting to G/LNow post transactions (for cash) to “T” account:25 Cash(1) 30,000(2) 20,000(3) 9,000(4) 5,500(5) 500Bal. 13,00026Concept Practice 3 Learning Objective 4Describe how gains and losses are recognized on the financial statements. 2728Recognizing Gains and LossesOften, investments and noncurrent assets are sold for more or less than the amounts at which they are carried on the balance sheet. In such cases a gain (if a credit) or loss (if a debit) must be recognized.Ex: Land that cost $10,000 is sold for $11,000 cash. Prepare the General Journal Entry: Cash 11,000 Land 10,000 Gain on Sale of Land 1,000 Note: gains are a form of revenues and losses are a form of expenses on the income statement.Learning Objective 5Define accruals and explain how the affect the financial statements. 29Periodic AdjustmentsPrepared at the end of the accounting period to align revenues and expenses (matching).Usually NO document flow to trigger recording.Based on the accrual system of accounting which records revenues as earned and expenses as incurred (rather than based on cash flows).30Types of Periodic AdjustmentsAccruals (expenses and revenues)Deferrals (expenses and revenues)Revaluation adjustments31Example - Accrual of ExpensesProbably the most common type of AJE.Ex: accrue wages at the end of the period: Wages Expense xx Wages Payable xxNote: this is a “skeletal” journal entry, where the “xx” simply indicate values to be calculated later. The focus is on the account and direction.Other examples of expense/payable include interest, rent, taxes.32Example - Accrual of RevenuesFor revenues that have not yet been recorded at the end of the period.Ex: accrue interest revenue: Interest Receivable xx Interest Revenue xxAnother example of receivable/revenue accruals relates to rent revenue, where the rental payment has not yet been received. 33Employees were paid $10,000 on June 9, 2017 for five days work through Friday, June 3. What adjusting entry was necessary at the company’s year-end, Tuesday, May 31, 2017, as a result of this?a. Debit Wages Expense and credit Cash for $10,000. b. Debit Wages Expense and credit Shareholders’ equity for $6,000.c. Debit Wages Payable and credit Wages Expense for $6,000.d. Debit Wages Expense and credit Wages Payable for $4,000.34When an adjusting entry that recognizes accrued interest revenue is recorded,a. assets increase and liabilities increase.b. shareholders’ equity increases and liabilities decrease.c. assets decrease and liabilities decrease.d. shareholders’ equity and assets increase.35Learning Objective 6Distinguish the effects on the financial statements of expensing a cost vs. capitalizing it. 3637Deferral of Expenses This category of AJE relates to the concept of asset capitalization and the matching principle.Asset capitalization occurs when a cost (with future economic benefit) is incurred. An asset is recognized at that time.As the asset contributes to the generation of revenue (revenue recognition), the related cost is recognized as an expense (matching).Some expenses are deferred for a short period of time (Supplies Expense), and some expenses are deferred for many years (Depreciation Expense).38Continued on the next slide39Continued from previous slide40Deferral of Expenses Example: Purchase 1 year insurance policy. Journal Entry at time of purchase: Prepaid Insurance xx Cash xx Adjustment at the end of the period (for the portion that has been used): Insurance Expense xx Prepaid Insurance xx 41Deferral of Expenses (continued) Example: purchase of equipment. Journal Entry at time of purchase: Equipment xx Cash xx Adjustment at end of the period (for the portion that has been used): Depreciation Expense xx Accumulated Depr. xx42Deferral of Expenses (cont’d) Intangible Assets are often capitalized as well and amortized over their useful life: Patent xx Cash xx Adjustment at end of the period (for the portion that has been used): Amortization Expense xx Accumulated Amort. xx43Deferral of Revenues Cash is received from customer before goods/services are delivered (before revenue can be recognized). Ex: Received cash for an airline ticket for a flight to take place at a future date. Journal Entry at time cash received: Cash xx Unearned Revenues xx Adjustment at end of the period (for portion completed): Unearned Revenues xx Ticket Revenues xx44Revaluation AdjustmentsThese are adjustments that do not fall into the categories of accruals or deferrals.They serve to restate certain accounts to keep their reported values in line with existing facts.Examples include the revaluation of:Short-term investmentsAccounts receivableInventories45Preparing Adjusting Journal Entries - P4-8a. AJE at 12/31 for supplies used: ($85,000 - $30,000 unused = $55,000 used) Supplies Expense 55,000 Supplies 55,000b. AJE at 12/31 for rent owed: Rent Expense 2,400 Rent Payable 2,400 46 Preparing Adjusting Journal Entries - P4-8c. AJE at 12/31 for services performed: ($18,000 x 2/3 = $12,000 earned by 12/31) Unearned Revenue 12,000 Service Revenue 12,000d. AJE at 12/31 for depreciation: ($500,000/10 = $50,000 per year) Depreciation Expense 50,000 Accumulated Depr. 50,00047 Preparing Adjusting Journal Entries - P4-8e. AJE at 12/31 for interest owed to the bank on the notes payable. Use Principal x Rate x Time to calculate the interest owed from July 1 to Dec. 31 (6 months): P x R x T 10,000 x .12 per year x 6/12 of a year Interest Expense 600 Interest Payable 60048 Preparing Adjusting Journal Entries - P4-8f. AJE at 12/31 for amount owed for advertising: Advertising Expense 28,000 Advertising Payable 28,000g. AJE at 12/31 for insurance used from 7/1 to 12/31: ($350 x 1/2 year) Insurance Expense 175 Prepaid Insurance 175 49Reporting Difficulties Faced by Multinational CompaniesMultinationals have a home in one country but operate, own subsidiaries, or raise capital in others.Financials must be consolidated – data is in differentLanguagesCurrenciesUsing different accounting standardsConversion and consolidation CostlyTime consumingAdjusted Trial BalanceThe Adjusted Trial Balance reflects totals after the AJEs are posted to the general ledger. The balance sheet accounts reflect the end-of-year balances, and the income statement accounts reflect the proper revenues and expense to be recognized for the year.This list of accounts and amounts is used to prepare the balance sheet and income statement.5051Financial StatementsThe financial statements for Kelly Supply (upcoming slides), and other examples in text, can be used as guidelines to prepare financial statements.The financials should be prepared in the following order:Income Statement (I/S)Statement of Stockholders’ Equity (SSE)Balance Sheet (B/S)Note that the statement of cash flow (SCF) is not prepared from the adjusted trial balance, but from a detailed analysis of the cash flow activities of the company (see appendix). 52Financial StatementsComments on the preparation of financial statements from adjusted trial balance (ATB):Revenue and expense balances from the ATB are carried to the income statement.Net income is carried to the retained earnings column in the SSE.Other activity, like dividends and issue of stock, are reflected in the SSE.Ending balances in the SSE are carried to the stockholders’ equity section of the balance sheet.Asset and liability balances from the ATB are carried to the balance sheet.53Financial Statement Examples - Kelly SupplyFigure 4-23 Financial Statements for Kelly Supply54Figure 4-23 Financial Statements for Kelly Supply55Figure 4-23 Financial Statements for Kelly Supply56Concept Practice 6 Continued on next slide57Concept Practice 6 - ContinuedLearning Objective 7 (Appendix 4A)Describe T-accounts.5859T-Account Analysis and the statement of Cash Flows *Appendix 4ATwo methods are used to present the statement of cash flows—the direct method and the far more common indirect method. The statement of cash flows can be prepared from two comparative year over year balance sheets, an income statement, and some additional information. The approach involves T-account analysis.60Figure 4A-4 Statement of cash flows – direct method of presentationFigure 4A-5 Operating Section of the statement of cash flows – indirect method of presentation61Wiley © 2017