Chapter 2 – Constructing FS Solvency Ratios • Accrued expense (occurred payable) - expense

FSET Template Times interest earned (TIE) = EBIT/Interest Expenses incurred but not yet paid or recorded
BS: Cash assets + non-cash assets – Contra assets = Debt-to-equity (D/E) = Total liabilities/Total stockholders’
Liabilities + Contributed Capital + Earned Capital –Contra- equity
Equity * Assets = Liabilities + Common Stock + (Beg RE + Net Income – Dividends) * Chapter 3 – Adjusting Accounts for FS
IS: Revenue – Expenses = Net Income Unadjusted Trial Balance & Adjusted Balance Close process: closes out the books for the period.
Assets= Liabilities + Equity Account Debit Credit Unadjust Adjust. Adjust Adjusted Trial Balance used to make the following:
Cash AP (suppliers) Contribute Cap Balance ed B. (c) (d) ed B. Step 1: Income Statement
Cash xxx Given FSET c + d Step 2: Statement of Equity
ST-securities Bonds payable Common Stock Step 3: Balance Sheet
Account xxx Given FSET c+d
AR (on account) Notes payable Additional paid- Step 4: Statement of Cashflows
Receivables
(bank notes) in capital Closing Temporary Accounts
Inventory xxx Given FSET c+d
Inventory ST-borrowings Treasury Stock •
Permanent Accounts: Assets, Liabilities, Equity,
Prepaid xxx Given FSET c+d Contributed, Capital, Retained Earnings
Prepaid Accrued payable
+ Insurance • Temporary Accounts: Revenues & Expenses
Expenses (warranties)
Security xxx Given FSET c + d Accounting Cycle: Analyze → Record → Adjust → Report → Close
LT-investments Unearned Revenue Earned Capital Chapter 6 – Revenue & AR
Deposit
PP&E LT-debt RE (Retain Earn) Fixtures xxx Given FSET c+d • Revenues (Top of IS)
o Recurring Items
Intangibles LT-Liabilities Acc. &Equipment o Non-recurring items
(prepayments) Comprehensive Accounts xxx Given FSET c+d • Common non-recurring items
Income/Loss payables o Restructuring charges (large expense in current period)
Chapter 5 – Analyzing & Interpret FS Unearned xxx Given FSET c+d o Discontinued Operations (sell of a segment of its business)
Vertical Analysis: Common Size FS revenue Revenue Recognition Standard (4 & 5 recognize revenue)
• IS items as % of net sales LT- Notes xxx Given FSET c+d 1. Identify contract with customer
2. Identify performance obligations in contract
• BS items as % of net sales payable
3. Determine transaction price
Horizontal Analysis: Year-to-Year analysis CS xxx Given FSET c+d
• % Change = [Second year amount – Base year amount]/Base year 4. Allocate transaction price to performance obligations
RE xxx Given FSET c+d 5. Recognize revenue when entity satisfies perf. Obl.
Return Measures
Return on equity = Net Income/Avg. Stockholders’ equity Sales Rev. xxx Given FSET c+d Sales of Rights of Returns (30-days of return): Revenue Recognition + Estimate Loss
Indicator of Revenue Recognition issue = Optimistic estimates in accrual acct
Earnings without interest expenses = NI + I x (1- Tax) COGS xxx Given FSET c+d Earnings Management purposefully manipulate their financial statements to
Return on assets = EWI/Average total assets Expenses xxx Given FSET c+d achieve desired results both pressured from internal and external sources.
Return on financial leverage = ROE – ROA Long Term Contracts where Contract Amount (ca): given
Total sum sum Given FSET c+d • Percentage of Completion Method
Profitability Ratios
Profit margin (PM) = EWI/Sales revenue Types of Adjustments (Required by GAAP) Cost % of Revenue Expenses Profit
incurred completion (a) (b)
Gross profit margin (GPM) = (Sales Rev. – COGS)/Sales Rev. Deferrals - (Not previously recorded in BS, ↑IS & ↑BS)
• Deferred Revenue (unearned revenue) - receive Year 1 xxx xxx/sum % x ca xxx a-b
Expense-to-sales (ETS) = Individual expense items/Sales Rev.
Turnover ratios Liquidity Ratios payment first but have not done any service Year 2 xxx xxx/sum % x ca xxx a-b
Asset turnover (AT) = Sales Rev./Avg total assets • Deferred Expense (prepaid expense) - made payment Total sum 100% sum sum sum
Accounts receivable turnover (ART) = Sales Rev./Avg AR first but not yet receive any service or product Cost
Day Sales Outstanding (DSO) = 365/ AR turnover • Completed Contract Method
Inventory turnover (INVT) = COGS/Avg Inventory Cost Revenue (a) Expenses Profit
(receive AR in days/ replenish inventory in days) incurred (b)
PP&E turnover (PPET) = Sales Rev./Avg PP&E Accruals - (Not previously recorded in BS, ↑IS & ↑BS)
Year 1 xxx
Liquidity Ratios • Accrued Revenue (earned revenue) - revenue earned
but not yet received cash or recorded Year 2 xxx ca sum (xxx) a-b
Current ratios (CR) = Current assets/Current liabilities
Quick ratio (QR) = (Cash+ securities+ AR)/Current liabilities
 Total sum sum sum sum Products Cost (Direct association): BS, Sold to IS; accumulated inventory Negative - Adj. because FIFO COGS < LIFO COGS
Cost value → no associated expense recorded till product sold
NE + change in LIFO reserve = FIFO Net Income
Period Cost (Immediate recognition): IS, not on BS; when expenses incurred
AR and allowance for uncollectible receivables immediately Plus adj. because FIFO COGS < LIFO COGS; therefore, FIFO
AR – AFDA = NRV Associated Financial Statement Impacts Profit > LIFO Profit
• AFDA/D = Allowance for Doubtful Account/Debt • Inventory (B/S): Raw Materials, Work in Process, Finished Goods Inventory is reported on the balance sheet at Lower of Cost or
• NRV = Net Realizable Value • Cost of Goods Sold (COGS) (I/S) Net Realizable Value (LCNRV)
Age of AR Receivab Estimated % Estimated • Gross Profit (I/S) = Sales Revenue – COGS Net Realizable Value = Selling Price – Cost to complete, sell
• LIFO (Reserve) Allowance – Footnotes
le Bal. uncollectible uncollectible and dispose = Quantity * Unit Cost/Unit NRV (lower value)
Cost of Goods Sold Computation
Current xxx % (a) X (b) • FIFO
Beginning inventory value (prior period ending B/S) FIFO Trans. Units CPU Total Remark
0-60 days xxx % (a) X (b) + Cost of inventory purchases and/or production
(a) (b) Cost
61-180 days xxx % (a) X (b) Cost of goods available for sale
- Ending inventory value (current period B/S) Opening xxx $ (a) x (b) 0
Over 180 xxx % (a) X (b) Cost of goods sold (current income statement) Purchase xxx $ (a) x (b) closing
Total AR sum sum Inventory Costing Methods (Inventory valuation) Sold (xxx) $ Remark (Sold x
Write-off = you remove the UNCOLLECTIBLE AR from your accounts • First-in, First-out (FIFO) CPU)
AR AFDA NRV o Early purchases come out of inventory first Closing sum sum
Beg Bal Acc. Rec. (XXXXXXX) XXXXXX • Last-in, First-out (LIFO) • LIFO
Sale credit XXXXXX XXXXXX o Early purchases tend to stay in inventory LIFO Trans. Units CPU Total Remark
• Average Cost (a) (b) Cost
Write Off (XXXXXXX) (XXXXXXX)
o Total cost / Quantity = Cost per unit Opening xxx $ (a) x (b) closing
End Bal Sum Sum Sum o WA Unit Cost = Cost of goods available for Purchase xxx $ (a) x (b) 0
Opening Allowance xxx sale/units available for sales
Sold (xxx) $ Remark (Sold x
Write-off (xxx) – affects only BS not IS • Specific Identification: 100% accurate
Bad Debts Expense xxx – affect both BS & IS CPU)
Net Income Comparison
Closing sum sum
Ending Allowance xxx Price FIFO LIFO Average
Balance Sheet (excerpt) *Current Assets • AVERAGE
Rising Higher Lower Middle Average Trans. Units CPU Total Remark
Ending Gross Accounts Receivable
Falling Lower Higher Middle (a) (b) Cost
Write-off
Cost of Goods Sold Comparison Opening xxx $ (a) x (b) 0
Remaining Gross AR
- Ending Allowance for Uncollectible accounts Price FIFO LIFO Average Purchase xxx $ (a) x (b) 0
Net Accounts Receivable Rising Lower Higher Middle Sold (xxx) $ (a) x (b) (Sold x
WA cost)
Falling Higher Lower Middle
Recording Estimated Bad Debt Expense Closing sum sum
Inventory Management (MOVEMENT)
• BS: - Contra-asset: - Allowance for uncollectible accounts Sales Revenue (sales) – COGS (total cost) = Gross Profit
Opening Balance xxx © Days of Supplies under LIFO
= Earned Capital: -RE
(Not Purchase xxx DAYS OF SUPPLIES = INVENTORY TURNOVER DAYS
• IS: - Bad Debt Expense = -NI → -RE
fixed) INVENTORY TURNOVER = COGS/AVERAGE INVENTORY
Recording Write-Offs of Uncollectible Accounts
IS COGS (xxx) • INVNEOTRY TURNOVER DAYS = 365/INVNEOTRY
• BS: Non-cash Asset: - Accounts Receivable – Contra-
BS Closing Balance xxx TURNOVER (annual)
asset: -Allowance for uncollectible accounts
• INVNEOTRY TURNOVER DAYS = 30/INVENTORY
Chapter 7 – Expense Recognition LIFO Reserve = FIFO Ending inventory Cost - LIFO Ending
TURNOVER (monthly)
Three approaches: inventory cost (Adjust from LIFO to FIFO on BS) Average Balance = (Opening Balance + Closing Balance)/2
• Immediate recognition: recognize as expense incurred (SG&A cost) FIFO ending inventory = LIFO Reserve + LIFO Ending Inventory
• Systematic allocation: span more than one period (Depreciation)
cost (Adjust from LIFO to FIFO on IS)
• Direct association: cost directly related to revenue (COGS)
LIFO COGS - change in LIFO reserve = FIFO COGS