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MGMT 1101/COMM 1101- Full Review, Study notes of Accounting

Dalhousie University Accounting

This review contains information from everything you learn during the semester. There are tables and images and graphs and lots of explanations. Using this to study for the Final Exam will guarantee a great grade!

Typology: Study notes

2021/2022

Available from 05/12/2023

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Financial Accounting Exam Review

Chapter 1: The Purpose and Use of Financial Statements

What is Accounting?

1. Accounting is the language of business. It is the information system organizations use to measure

business activities.

2. Accounting helps process data into results and communicates those results to key decision-

makers.

3. Accounting identifies and records the economic events (financial transactions) within an

organization. Organizations then create financial statements using the financial transactions they

collected and recorded to communicate the results to interested users.

4. Accounting can be used for both companies and individuals – companies want to see how they

are performing in any given year, but you can also apply it to your life to track your earnings and

expenses.

What are Financial Statements?

1. The financial statements aim to provide a picture of the financial position and performance of a

business.

2. Financial accounting focuses on preparing financial statements for external users to help them

make decisions. External users are not involved in the day-to-day business.

3. Internal users are the ones who prepare those financial statements. Internal users must act

ethically for the financial statements to have value to the external users.

Internal Users:

- Finance/Accounting Dept. – The ones making financial statements! Marketing & HR Department

External Users:

- Investors: They decide on investing or buying/selling shares of a company

- Lenders: They want to know if they will be repaid

- Governments: They want to know if they are paying taxes appropriately, or using loans correctly

- Customers, employees, labour unions

What are GAAP (Generally Accepted Accounting Principles)?

- The basis on which general-purpose financial statements are created, and a broad set of

principles.

- International Financial Reporting Framework (IFRS) versus Account Standards for Private

Enterprises (ASPE)

- Used to make the financial statements comparable!

- Makes sure internal users are acting ethically!

- Helps external users have the ability to understand how the company is doing compared to others

in the industry & allows them to feel “good” about making decisions based on the financial

statements

Partial preview of the text

Download MGMT 1101/COMM 1101- Full Review and more Study notes Accounting in PDF only on Docsity!

Financial Accounting Exam Review

Chapter 1: The Purpose and Use of Financial Statements

What is Accounting?

1. Accounting is the language of business. It is the information system organizations use to measure

business activities.

2. Accounting helps process data into results and communicates those results to key decision-

makers.

3. Accounting identifies and records the economic events (financial transactions) within an

organization. Organizations then create financial statements using the financial transactions they

collected and recorded to communicate the results to interested users.

4. Accounting can be used for both companies and individuals – companies want to see how they

are performing in any given year, but you can also apply it to your life to track your earnings and

expenses.

What are Financial Statements?

1. The financial statements aim to provide a picture of the financial position and performance of a

business.

2. Financial accounting focuses on preparing financial statements for external users to help them

make decisions. External users are not involved in the day-to-day business.

3. Internal users are the ones who prepare those financial statements. Internal users must act

ethically for the financial statements to have value to the external users.

Internal Users:

- Finance/Accounting Dept. – The ones making financial statements! Marketing & HR Department

External Users:

- Investors: They decide on investing or buying/selling shares of a company

- Lenders: They want to know if they will be repaid

- Governments: They want to know if they are paying taxes appropriately, or using loans correctly

- Customers, employees, labour unions

What are GAAP (Generally Accepted Accounting Principles)?

- The basis on which general-purpose financial statements are created, and a broad set of

principles.

- International Financial Reporting Framework (IFRS) versus Account Standards for Private

Enterprises (ASPE)

- Used to make the financial statements comparable!

- Makes sure internal users are acting ethically!

- Helps external users have the ability to understand how the company is doing compared to others

in the industry & allows them to feel “good” about making decisions based on the financial

statements

What is the Income Statement (Statement of Income)?

- The statement of income reports the success or failure of the company’s operations for a

period/fiscal year (usually a year)  Jan 1 to Dec 31 OR Nov 1 to Oct 31 (any 12 months)

1. Revenue is the income earned from the sale of goods or services (sales, service revenue, interest

revenue, rental revenue)

2. Expenses are the cost incurred to be able to run your business and earn revenue (COGS, rent

expense, income tax expense)

3. Net Income is calculated: Revenues – Expenses

- Investors are interested in a company’s past income because these numbers provide information

that may help predict future income.

- Income is required to generate cash to fund growth, repay debt, and pay dividends so this

statement shows how profitable the company was in the last fiscal year.

- Creditors want to be repaid in the future  they typically don’t lend to companies who are not

making income!

What is the Statement of Financial Position (Balance Sheet)?

- The balance sheet reports assets and claims to those assets at a specific point in time (the end of

the fiscal period).

- It provides a “snapshot photo” of a moment in time. It will show the balances ($$) of each account

– Assets, liabilities and Shareholders’ Equity for a specific date.

- The accounting equation states that the assets must be equal to the liabilities and SE – Everything

must always balance – hence the name! ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY

1. Assets – What you Own: Resources a company owns or controls that will provide future benefit

the s to the company

2. Liabilities – What we Owe to someone else: Claims of lenders – Obligations that are a result of a

past transaction

3. Shareholders’ Equity – What the company is worth: Claims of shareholders – Comes from the

statement of changes in equity – it is the ending balances in the retained earnings and common

shares

- Lenders and other creditors could look at the company and analyze if they will be repaid (and how

many liabilities the company already has)

- Investor interest in looking at the number of assets compared to liabilities

The accounting equation ALWAYS balances no matter what. Let’s look at some examples:

- Shareholder’s invested $500 into the company

- + Cash (Asset) & + C/S (SE)

- The Company used $200 of the cash to purchase

equipment

– Cash (Asset) & + Equipment (Asset)

- The Company purchased a building by taking out a

mortgage

+ Buildings (Asset) & + Mortgage Payable (Liability)

What is the Statement of Cash Flows (Cash Flow Statement)?

- The cash flow statement shows the cash inflows and outflows of a company during a period of

time (usually the year). We will dive deeper into cash flow at the end of the semester.

1. Operating – Cash ins and outs from the company’s any’s daily activities (revenues and expenses)

2. Investing – Cash ins and outs from buying or selling long-term assets (equipment)

3. Financing – Cash ins and outs from borrowing or repaying long-term debt or equity (shares and

dividends)

- The statement of cash flows provides answers to these simple but important questions:

1. Where did cash come from during the period?

2. How was cash used during the period?

3. How much cash was generated or lost during the period?

What is the relationship between the Financial Statements?

- The statement of income, statement of changes in equity, and cash flow statement shows the

results over a period of time: usually a year. E.g. Nov 1, 2020 – Oct 31, 2021.

- The balance sheet shows the assets, liabilities, and shareholder’s equity at a point in time (i.e. on

October 31, 2021).

Types and Forms of Businesses-

1. Service Companies provide a service rather than a product (Hairdresser, accountant, lawyer, real

estate agent

2. Merchandising Companies sell products purchased from other businesses to customers

(Shoppers, grocery stores, clothing stores)

3. Manufacturing Companies use raw materials to make a product. They usually sell to

merchandising companies (Food companies, paper companies, furniture companies)

1. Corporation – Apple, Netflix, Microsoft, Irving

- A separate legal entity that is owed by shareholders

- Indefinite life & easy to transfer ownership

- Limited liability

 More expensive to set up

2. Proprietorship – Small businesses

- Single owner

- Simple to set up

 The owner bears unlimited liability

 Limited life

Chapter 2: A Further Look at Financial Statements

What is a Classified Balance Sheet?

- To improve users understanding of a company’s financial position, companies group together

similar assets and liabilities.

- Because there are so many types of assets/liabilities it is easier for companies to break down the

balance sheet into current/non-current assets and liabilities.

- Assets and Liabilities will be separated on the Balance Sheet based on whether they are Current

or Non-Current assets/liabilities.

What are Assets?

- A resource that a company owns or controls that provide probable future economic benefits to

the company.

What are Current Assets?

- Short-term assets that can be converted into cash, sold, or used up within one year.

- The order of this section is based on liquidity or how fast you can convert that asset into actual

cash.

Cash – This is the amount of money a company has on hand and in its bank account
Accounts receivable – are amounts owed to a company by its customers who purchased products or services on credit (on account). Customers are usually given an invoice with a time frame specifying when they need to pay the company back.
Inventory – Consists of goods held for sale to customers. Merchandising companies sell inventory directly to customers.

Example – H&M sells clothing/shoes/jewelry to customers for sales

Supplies – Supplies include consumable items like office supplies (paper, ink, pens, cleaning).
Prepaid Expenses – This represents the cost of an expense like rent or insurance that is paid in advance of it being “consumed” or “used”. They are current assets because they reflect unused benefits such as office space and insurance coverage.

Example – The Company pays $12,000 ($1,000 per month) upfront for rent for 12 months. This is a current asset because it reflects unused benefits such as office space for a year.

Notes receivable – These are amounts owed to a company from a customer. It is different than accounts receivable as it is a written promise to pay the company back & it usually bears interest. Terms of agreements may be for a few months or it could be a long-term asset if it is over a year.

What are Non-Current Assets?

- Long-term assets that are used in operations to generate profit and are expected to be held onto

for a long-term period of time (more than one year)

Long-term investments – these can be notes, bonds, or shares of other companies that management plans to hold onto for many years to earn interest or investment income.
Property, plant, and equipment (PPE) – Tangible assets (physical assets that you own) with long useful lives. These are things such as land, buildings, equipment, vehicles, and furniture.

What are Liabilities?

- Liabilities are obligations arising from a past transactions that will result in an outflow of resources

What are Current Liabilities?

- Liabilities are present obligations that result from a past transaction. Current liabilities are

obligations that a company must settled/pay within one year.

Bank Indebtedness – Short term lines of credit (or loans) that companies take out when they are short on cash
Account Payable – Represent amounts owed by the company to suppliers for purchases made on credit/account. Usually have an invoice.
Accrued Liabilities – These are similar to accounts payable except they do not have an invoice. They are other short term payables that arise from amounts owed by the company for salaries, interest, sale tax, rent, income tax, etc.
Deferred Revenue – Represents cash received from a customer before performing a service or providing a good. Example – Airplanes take your money upfront for flights that are book, they will need to record deferred revenue because they have an obligation to provide you that flight at a future period.
Note Payable – This is a written promise to pay a specific amount owed, often to a bank. Notes payable are usually interest bearing, whereas accounts payable are not. Notes and loans can be used interchangeably. Notes/Loans can be current or non-current – it depends on the terms.
Current portion of long-term debt – If the company has a long-term (non-current) loan/note, if this is some portion due within the year, that portion must show under the current liabilities.

What are Non-Current Liabilities?

- These are obligations that are expected to

be paid or settled after one year

Mortgages – these are long-term loans that are taken out for buildings. They typically have collateral attached to them.
Bond Payable – These are typically issued by large corporations or government. They have interest and principal payments typically over a long period of time.

Lease Liabilities – These are amounts that a company will pay in the future on a long-term rental contracts (for buildings, equipment, etc.). What is Shareholders Equity?

Shareholders’ Equity is the residual amount (what is left over) and is the difference between a company’s asset and liabilities. ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY | SHAREHOLDERS’ EQUITY = ASSETS – LIABILITIES

Share Capital: When an individual purchase shares in a company by investing (cash) they receive the share certificate in exchange and a piece of the ownership of the company.
Retained Earnings: This represents the accumulation of net income that a company has retained since the inception of the company.

Beginning Retained Earnings + Net Income – Dividends = Retained Earnings What is Depreciation and Accumulated Depreciation?
PPE purchases such as buildings, cars, and equipment, are recorded as an asset because the company owns them and they will provide the company benefits for more than one year.
The period in which the PPE item will provide “benefits” is referred to as the items “useful life”. This is the number of years the item is expected to help generate benefits for the company. For a building it might be 50 years, for a computer it might be 2 years.
A company needs to determine the useful life for each PPE item at the time they record the asset.
Companies record or capitalize their PPE items at COST – this is the amount you paid for them.
From an accounting standpoint the cost of the asset must be allocated over the assets “useful life” – How do we do this? Through deprecation!

E2.4 : These items are taken from the financial statements of Summit Ltd. at December 31, 2021: Accounts payable Liability Balance Sheet $21, Accounts receivable Asset Balance Sheet 20, Accumulated depreciation—buildings Contra Asset Balance Sheet 50, Accumulated depreciation—equipment Contra Asset Balance Sheet 21, Buildings Non Current Asset Balance Sheet 133, Cash Asset Balance Sheet 24, Common shares Shareholders Equity Balance Sheet Stmt of Changes in Equity

Equipment Non Current Asset Balance Sheet 66, Income tax expense Expense Income Statement

Interest expense Expense Income Statement

Interest payable Liability Balance Sheet 2, Land Non Current Asset Balance Sheet 194, Long-term investments Non Current Asset Balance Sheet 28, Mortgage payable Non Current Liability Balance Sheet 104, Operating expenses Expense Income Statement

Prepaid insurance Asset Balance Sheet 1, Retained earnings, January 1 Shareholders Equity Balance Sheet Stmt of Changes in Equity

Service revenue Revenue Income Statement

Supplies Asset Balance Sheet 1,

Calculate net income and the ending balance of retained earnings at December 31, 2021. It is not necessary to prepare a formal statement of income or a statement of changes in equity.

Net Income = Revenue – Expenses = 183,040 – 158,680 – 4,550 – 5,200 = 14610 Retained Earnings = Beginning RE + Net Income – Dividends = 116,520 + 14,610 = 131,

Prepare a statement of financial position. Assume that the company will pay $30,500 of the mortgage payable in 2022

Chapter 3- The Accounting Information System

The system a company uses to collect and process a company’s transactions into financial statements is called an accounting information system.
All accounting systems – small or large – rely on the accounting cycle, which is a series of steps that are used to account for and report transactions.

Analyze Transactions
Journalize
Post to General Ledger
Trial Balance
Adjusting Entries
Adjusted Trial Balance
Financial Statements

Step 1: Analyzing Transactions
The first step in the accounting cycle is analyzing transactions to determine the effect on the accounting equation.
An accounting transaction happens when an economic event results in the company’s financial position (the assets, liabilities, and shareholder’s equity) changing in a measureable way.

Debits and credits are words that are used to reflect the double-sided nature of all financial transactions. At least 2 accounts have to be impacted to keep the accounting equation balanced!! What are the Normal Balances of Debits and Credits?
The first step in understanding debits and credits is to understand how “normal balances” work. All accounts have a “normal balance” depending on if they are assets, liabilities, or shareholder’s equity accounts.
An accounts normal balance is always the side that is used to increase the account
An economic event by definition has two sides  there is a source and a destination
All destination accounts normal balance is a DEBIT, Assets, Expenses, Dividends
All source accounts normal balance is a CREDIT, Liabilities, Common Shares, Revenue

Assets: Normal Balance is the left side or “debit”. So when an asset account goes up – example we receive cash – it will be a debit. If we spend cash – the account goes down and it will be a credit.
Liabilities: Normal Balance is the right side or “credit”. So when a liability increases – we purchase supplies on account – it will be a credit – when we pay off that liability it will be a debit.
Shareholder’s Equity: Shareholder’s equity has more than one component and they do not all move in the same direction. We have Common Shares and Retained Earnings (RE). And we know RE can be sub divided into Revenue – Expenses (Net Income) and dividends. These components are added to (revenues) or deducted from (expenses and dividends) in the calculation of retained earnings.

Common shares, retained earnings, and revenues normal balance is the right side or “credit”. They all increase the shareholder’s equity balance.
Expenses and dividends declared normal balance is the left side or “debit”. These two decrease the retained earnings balance so therefore decreases shareholder’s equity.

We need to analyze each transaction to determine the following:

Does it change the financial position of the company (assets, liabilities, and shareholders’ equity)?
Which accounts does it impact & the dollar value?
Does that account need to be debited or credited?
- Once we answer those questions we can record the account transactions, we use Journal Entries which are recorded into the general journal. The general journal is a central warehouse for all accounting data/transactions.
- Transactions are recorded in order of date and each journal entry provides all of the accounting transaction information in one place – the date, the accounts affected, the debit/credits on those affected accounts, and an explanation Step 3: Post to the General Ledger
- The procedure of transferring journal entries from the general journal to the general ledger is called posting. The general ledger contains all assets, liabilities, shareholders equity, dividends, revenues, and expense accounts. The general ledger is arranged in order of how they appear on the financial statements.
- This is where all the journal entries get recorded to their specific accounts and how companies are able to see their ending balances within accounts. In

Chapter 4: Accrual Accounting and the Adjustment Process

Step 5: Adjusting Entries

Events that are being recorded in a company’s financial statements can be recorded two ways

1. Cash Basis- Events are recorded when the flow of cash happens. I.E - A company reports revenues

when cash comes in and expenses when cash goes out

2. Accrual Basis- Events are recorded in the period in which the events take place rather than when

the company receives/pays the cash. I.E - When revenue is earned or expenses incurred

What does Earned & Incurred Mean?

- Revenues are recorded when they have been provided to customer (not when they pay)

- Expenses are recorded in the accounting period (or fiscal year) they were of benefit to the

company, rather than when they were paid. Salaries expense incurred when employees worked,

rather than when pay day was.

- Accrual accounting recognizes transactions in the period they occurred rather than when cash was

received/paid.

Accrual method  required by ASPE & IFRS

Benefits:

1. More accurate for users – shows what has actually taken place during the year

2. Cash method is misleading and shows an inaccurate picture of the company’s efforts during the

year.

Challenges:

1. Accrual accounting is more complex and requires someone who understands accounting!

Example: Assume that ABC Company had the following transactions in January:  Jan. 1: Received cash from customer, in advance of work done, $3,000. Work was not started until Feb.  Jan. 15: Provided services for another customer worth $5,000 but will be paid in Feb.  Jan. 30: Paid insurance for the next 12 months $1,200 (Feb 1 – Jan 31).  Jan. 30: Wages expense for employee were incurred for Jan but won’t be paid until Feb Cash Basis Accrual Basis Income Statement Balance Sheet Revenue- Jan 1 +3000 Revenue 0 Revenue +3000 Cash +3000 Deferred Rev

Jan 15 0 Revenue +5000 Revenue +5000 AR Expenses- Jan 30 Jan 30 -1200 Insurance (^0) -500 Wage Expense -1200 Cash +1200 Prepaid Insurance +500 Wage Payable

MGMT 1101/COMM 1101- Full Review, Study notes of Accounting

Related documents

Partial preview of the text

Download MGMT 1101/COMM 1101- Full Review and more Study notes Accounting in PDF only on Docsity!

Financial Accounting Exam Review

Chapter 1: The Purpose and Use of Financial Statements

What is Accounting?

1. Accounting is the language of business. It is the information system organizations use to measure

business activities.

2. Accounting helps process data into results and communicates those results to key decision-

makers.

3. Accounting identifies and records the economic events (financial transactions) within an

organization. Organizations then create financial statements using the financial transactions they

collected and recorded to communicate the results to interested users.

4. Accounting can be used for both companies and individuals – companies want to see how they

are performing in any given year, but you can also apply it to your life to track your earnings and

expenses.

What are Financial Statements?

1. The financial statements aim to provide a picture of the financial position and performance of a

business.

2. Financial accounting focuses on preparing financial statements for external users to help them

make decisions. External users are not involved in the day-to-day business.

3. Internal users are the ones who prepare those financial statements. Internal users must act

ethically for the financial statements to have value to the external users.

Internal Users:

- Finance/Accounting Dept. – The ones making financial statements! Marketing & HR Department

External Users:

- Investors: They decide on investing or buying/selling shares of a company

- Lenders: They want to know if they will be repaid

- Governments: They want to know if they are paying taxes appropriately, or using loans correctly

- Customers, employees, labour unions

What are GAAP (Generally Accepted Accounting Principles)?

- The basis on which general-purpose financial statements are created, and a broad set of

principles.

- International Financial Reporting Framework (IFRS) versus Account Standards for Private

Enterprises (ASPE)

- Used to make the financial statements comparable!

- Makes sure internal users are acting ethically!

- Helps external users have the ability to understand how the company is doing compared to others

in the industry & allows them to feel “good” about making decisions based on the financial

statements

What is the Income Statement (Statement of Income)?

- The statement of income reports the success or failure of the company’s operations for a

period/fiscal year (usually a year)  Jan 1 to Dec 31 OR Nov 1 to Oct 31 (any 12 months)

1. Revenue is the income earned from the sale of goods or services (sales, service revenue, interest

revenue, rental revenue)

2. Expenses are the cost incurred to be able to run your business and earn revenue (COGS, rent

expense, income tax expense)

3. Net Income is calculated: Revenues – Expenses

- Investors are interested in a company’s past income because these numbers provide information

that may help predict future income.

- Income is required to generate cash to fund growth, repay debt, and pay dividends so this

statement shows how profitable the company was in the last fiscal year.

- Creditors want to be repaid in the future  they typically don’t lend to companies who are not

making income!

What is the Statement of Financial Position (Balance Sheet)?

- The balance sheet reports assets and claims to those assets at a specific point in time (the end of

the fiscal period).

- It provides a “snapshot photo” of a moment in time. It will show the balances ($$) of each account

– Assets, liabilities and Shareholders’ Equity for a specific date.

- The accounting equation states that the assets must be equal to the liabilities and SE – Everything

must always balance – hence the name! ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY

1. Assets – What you Own: Resources a company owns or controls that will provide future benefit

the s to the company

2. Liabilities – What we Owe to someone else: Claims of lenders – Obligations that are a result of a

past transaction

3. Shareholders’ Equity – What the company is worth: Claims of shareholders – Comes from the

statement of changes in equity – it is the ending balances in the retained earnings and common

shares

- Lenders and other creditors could look at the company and analyze if they will be repaid (and how

many liabilities the company already has)

- Investor interest in looking at the number of assets compared to liabilities

The accounting equation ALWAYS balances no matter what. Let’s look at some examples:

- Shareholder’s invested $500 into the company

- + Cash (Asset) & + C/S (SE)

- The Company used $200 of the cash to purchase

equipment

– Cash (Asset) & + Equipment (Asset)

- The Company purchased a building by taking out a

mortgage