This power point review is only an OVERVIEW of the MAIN concepts we learned in these chapters. This is NOT a COMPREHENSIVE review of the material for the exam.

Overall Course Theme… What is financial reporting’s role in today’s American society? Milestones for corporations in America:  Limited liability Began in the US in New York in 1811  Securities and Exchange Act of 1934 SEC – regulated securities exchanges and financial reporting

Class Objectives An understanding of the process of documenting business transactions that allows for aggregation of information to prepare financial reports. An appreciation for how accounting principles and different accounting treatments guide the recording of transactions to ultimately provide consistency and ‘allowed’ differences in the financial reporting. The ability to complete the accounting cycle through the recording of individual transactions that are subsequently aggregated and constructed into financial statements. Analyze how transactions common to large corporations impact each of the financial statements, with specific emphasis on the income statement. Identify common fraud found in financial reporting, and internal controls that can reduce the likelihood of fraud. Develop an understanding of how interrelationships and interrelationships of the financial statements.

Chapter 11

Chapter 8

Short-term Notes Payable – 12/1/15 - ABC Company borrows $30,000 to purchase equipment. Note matures in 3 months and carries an annual interest rate of 9%. Interest and principal paid at maturity. Interest = Face value x Annual interest rate x Fraction of the Yea r Formula to calculate Interest Expense Complete Journal Entries for the initial transaction, year-end, and maturity.

Short-Term Notes Payable 9 JOURNAL DateAccounts and explanationDebitCredit Dec 1 Equipment30,000 Note payable, short-term30,000 Purchase of Equip. using a 3-month note 9% Dec 31 Interest expense225 Interest payable225 Accrued interest on note payable (30,000 x 9% x 1/12)

Unearned Revenues Business receives cash before services or products are provided to customers, therefore, company cannot recognize any revenue when cash is received. Results in a liability (repay if don’t deliver) Steps: 1. Record cash receipt and set up unearned revenue account (liability) 2. As services or products are provided and revenue is earned, an adjusting journal entry is completed to recognize revenue earned. 1. Debit unearned revenue and credit revenue account. Complete Journal Entries: 2/1 – “I am the Best DJ, Inc.” receives $300 deposit in advance for DJ for a Fraternity Party. 2/28 – Performs the best DJ services 10

Current Portion of Long-Term Debt (CPLTD) Example below – $10,000 auto loan payable over 5 years principal due in equal installments each year CPLTD Definition - Amount of principal payable within one year (12 months) When an organization takes out a long-term loan, the debt is typically paid back over multiple years – hence the name “Long-term”. We also need to recognize the portion of long-term debt that will be repaid over the next 12 months and classify it as “Current Portion LTD”. This provides a better mechanism to show decision-makers what will have to paid in the coming year.  Steps for recognizing CPLTD: Initial Transaction  Record (debit) for what is received in the long-term loan – i.e. cash, equipment, auto  Amount of principal due in the next 12 months is recorded into the CPLTD account (Credit).  Amount of principal due after the next 12 months is recorded into the LTD account (Credit). 11

Current Portion of Long-Term Debt (CPLTD) Example below – $10,000 auto loan payable over 5 years principal due in equal installments each year  Steps for recognizing CPLTD: Second Year and later:  Step 1: When the principal balance is paid over the next 12 months, the CPLTD account is decreased (debited) and cash is credited. Step 2 – reset balance in CPLTD account.  Credit amount of principal due in the next 12 months  Debit LTD to reduce balance in this account. 12

Sales Taxes Payable Suppose you buy lunch in the airport for $15 plus 9% sales tax. The airport restaurant records the transaction this way: Florida Sales Tax Form DR

Accounting Treatment of Contingent Liabilities – 2 of 2 charts CircumstanceAction Req.  Payment is probable and Can be reasonably estimated Record Cannot be reasonably estimated Report  Payment is reasonably possible Report  Payment is remote No Action

Warranties oBased on the matching principle, the company needs to record warranty expense in the same accounting period as the sale. oA warranty represents an expense and a liability at the time of the sale, because it meets the criteria for recording a contingent liability. oStep 1 – likelihood: probable, step 2 – payment: amount can be estimated. oWhen recording warranty expense and warranty payable, the amount is usually estimated as a % of sales. oSteps oAt the time of sale oCalculate warranty estimate oDebit warranty expense and credit warranty payable (creates a type of fund to be used later to actually pay for the warranty work when it occurs months or years later). oWhen warranty work is completed oDebit warranty payable and typically credit cash or inventory. 8-15

Warranty Example  Warranties are estimated at 1% of Sales =January Sales = $10,000,000.  Warranty claims can be handled in a number of ways, here are two common methods: Issuing new product (inventory) Repair old product through certified repair centers (cash paid to repair center) Exercise: 1. Calculate Warranty Estimate and record expense 2. Calculate actual warranty work throughout the year based on the following percentages 25% are new product issued (inventory) 75% are repairs paid to certified repair centers (Cash)

Chapter 9 LTD

LO1 Explain financing alternatives oFinancing Options oDebt Financing - borrowing money (liabilities) oBonds – most common form of Lg. Company debt oNotes Payable oLeases oEquity Financing - obtaining additional investment from stockholders (stockholders’ equity) oCapital Structure - is the mixture of liabilities and stockholders’ equity used by a business 9-18

Summary of Bond Characteristics 9-19

Bonds Values at Issuance Bond value at issuance is always based on market rate (Present Value). Based on the comparison of stated rate and market rate, the following three terms describe the issuance: 1. Par - stated interest rate equals the market interest rate. The bond is issued for face value of bonds. 2. Premium – stated interest rate exceeds the market interest rate. The bond is issued for more than the face value of bonds. 3. Discount – stated interest rate is below the market interest rate. The bond is issued for less than the face value of bonds.

Bonds issued at Par Par - stated interest rate equals the market interest rate. The bond is issued for face value of bonds. Therefore, the amount of cash the organization receives from lenders (investors) will equal the face value of the bonds. Steps for original issuance: 1. Debit Cash for amount received 2. Credit Bonds Payable for amount of cash received. Steps for semi-annual interest payments: 1. Calculate ‘cash’ interest payments using stated rate and our typical formula. 2. Debit Interest Expense 3. Credit Cash Steps for final repayment of bond at maturity to lenders (investors): 1. Debit Bonds Payable for face value of bond 2. Credit cash for amount of repayment.

Bond issued at Par - Example 10 year $100,000 term bonds with stated rate of interest of 7% issued at par on 1/1/12. Interest is payable semi- annually. Original transaction, 1st interest payment, and maturity of bond in 10 years.

Issuance of a bond at a Discount/Premium Discount – stated interest rate is below the market interest rate. The bond is issued for less than the face value of bonds. Therefore, the amount of cash the organization receives from lenders (investors) will be less than the face value of the bonds. Steps for original issuance: 1. Debit Cash for amount received 2. Credit Bonds Payable for amount of cash received. Steps for semi-annual interest payments: 1. Use the ‘Effective Interest Rate Method” Steps for final repayment of bond at maturity to lenders (investors): 1. Debit Bonds Payable for face value of bond 2. Credit cash for amount of repayment.

Effective Interest Method The effective interest method for bonds provides an ‘amortization’ of the discount (or premium) over the term of the bond so that the bond payable account equals face value at maturity. Very important – ‘CASH’ interest payments to investors are in differing amounts than the ‘INTEREST EXPENSE’ we record semi-annually. Steps: 1. Calculate ‘Cash Interest Payment’ (Credit to Cash account) Formula - Face Value * Stated Interest * Time Period 2. Calculate amount recorded as ‘Interest Expense’ (Debit the expense account) Formula - Carrying Value * Market Interest * Time Period 3. Difference between Interest Payment and Interest Expense is either Credited (discount) or Debited (premium) to Bonds Payable. 4. Calculate new carrying value after discount or premium is amortized. 25

Issuance - Recording Bonds Issued at a Discount oIn the preceding example we assumed the stated interest rate (7%) and the market interest rate (7%) were the same. oIf the market interest rate is 8%, the bonds will issue at only $93,205. oThis is less than $100,000. The bonds are paying only 7%, while investors can purchase bonds of similar risk paying 8%. oThe entry RC Enterprises makes to record the bond issue at a discount is: 9-26

Recording Bonds Issued at a Discount Step 2: We calculate interest expense as the carrying value (the amount actually owed during that period) times the market rate. Step 1: Cash paid for interest is equal to the face amount times the stated rate (3.5% semi-annually or 7% annually, in our example). Step 3: On June 30, 2012, RC Enterprises the interest payment and expense. Interest expense= Carrying value of bondX Market interest rate per period $3,728=$93,205 8% x ½ Cash paid for Interest= Face amount of bondX Stated interest rate per period $3,500=$100,000 7% x ½ June 30, 2012DebitCredit Interest Expense ($93,205 x 8% x ½) 3,728 Bonds Payable (difference) 228 Cash ($100,000 x 7% x ½) 3,500 (Record semiannual interest payment) 9-27

Amortization Schedule for Bonds Issued at a Discount oAn amortization schedule provides a nice summary of the cash interest payments, interest expense, and changes in carrying value for each semi-annual interest period. oThe amounts for the June 30, 2012 and the December 31, 2012 semi-annual interest payment entries can be taken directly from the amortization schedule. (1) Date (2) Cash Paid for interest (3) Interest Expense (4) Increase in Carrying Value (5) Carrying Value Face Amount x Stated Rate Carrying Value x Market Rate (3) – (2)Prior Carrying Value + (4) 1/1/2012 $93,205 6/30/2012$3,500$3,728$22893,433 12/31/20123,5003, ,670 * * * * * * * * * 99,057 6/30/20213,5003, ,519 12/31/20213,5003,981481$100,

Leases o A lease is a contractual agreement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specific period of time. o For accounting purposes, we have two basic types of leases: o Operating Leases: This type of a lease is similar to a rental. Example: Car rentals and short-term apartment leases. o Payments are expenses on income statement. Is not recorded on the balance sheet. o Capital Leases: Occurs when a lessee buys an asset and borrows the money through a lease to pay for the asset. Example: A borrower signs a four-year lease for a car that automatically transfers ownership at the end of the lease term. o Recorded on the balance sheet. 9-29

Chapter 10

Stockholders’ Equity Paid-in capital Earned Capital - Retained Earnings Treasury Stock – Contra Equity TOTAL amount stockholders have invested in the corporation Amount of earnings the corporation has retained Corporation’s stock that is reacquired Common Stock Preferred Stock

Classes of Stock COMMONPREFERRED  Basic form of stock  Has four basic rights  Shareholders benefit most if corporation succeeds Take more risk  Has four basic rights  Has advantages over common Receive dividends first Receive assets first in liquidation  Shareholders earn a fixed dividend  Very few corporations issue 32 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.

Stock Type of Stock Definition Authorized Shares available to sell (issued and unissued) Issued Shares actually sold (includes treasury stock) Outstanding Shares held by investors (excludes treasury stock) Authorized – Unissued = Issued Issued – Treasury Stock = Outstanding 10-33

Steps for recording Common Stock issues No Par Value Stock  Calculate cash received from sale of stock Formula = number of shares sold * sales price per share 1. Cash – debit for amount of cash received 2. Common Stock – credit for amount of cash received Par Value Stock  Calculate cash received from sale of stock Formula = number of shares sold * sales price per share  Calculate par value of stock issuance Formula = shares issued * par value 1. Cash – debit for amount of cash received 2. Common Stock – credit for amount of the par value calculated above 3. Additional Paid-in-Capital - credit based on the difference between cash received and par value of issuance

Accounting for Common Stock Issues – Par Value The entry changes slightly if the corporation issues par value stock rather than no-par value stock. In that case, we credit common stock and additional paid-in capital. Cash (1,000 shares x $30)30,000 Common Stock (1,000 shares x $0.01)10 Additional Paid-in Capital (difference)29,990 (Issue common stock above par) 10-35

LO4 Treasury Stock (Cont.) Par value of stock is not considered in treasury stock transaction. 1.Steps for initial stock repurchase (Par is not considered for treasury stock transactions) Calculate cost of repurchase Number of shares repurchased * purchase price of stock Debit treasury stock Credit Cash 2.Steps for re-issuing treasury stock Calculate proceeds from reissue Number of shares reissued * sales price of stock Debit Cash Credit treasury stock account based on the original cost for the share of treasury stock. Difference between the debit to cash and credit to treasury stock record in additional paid- in-capital (either as a debit or credit).

Accounting for Treasury Stock Treasury Stock (100 shares x $30) 3,000 Cash3,000 (Repurchase treasury stock) Cash (100 shares x $35)3,500 Treasury Stock (100 shares x $30)3,000 Additional Paid-in Capital (difference)500 (Reissue treasury stock above cost) Cost Reissue price oTreasury stock is reported as a contra-equity (negative equity account). oWhen a corporation repurchases its own stock, it increases, or debits treasury stock and vice versa when it sells

Steps in Distributing Cash Dividends 1. Declaration Date - Board of Directors declares the distribution of a dividend and the type of dividend. 1. Important - Dividends are only paid on shares outstanding 1. Dividend – debit 2. Dividend Payable - credited 2. Date of Record – all stockholders as of a certain date (date of record) will receive dividend. No journal entry required. 3. Payment Date – the date the dividend is actually distributed, either in cash, stock, or other asset. 1. Dividends Payable – debit 2. Cash – credit 38

Dividends Lets consider the following dividend example A corporation declares a $0.25 per share dividend on its 2,000 outstanding shares March 15 (declaration date) Dividends (2,000 shares x $0.25)500 Dividends Payable500 (Declaration of cash dividends) April 15 (payment date) Dividends Payable (2,000 shares x $0.25)500 Cash500 (Payment of cash dividends) March 31 (No entry for Record date) 10-39

Final Exam – Topics and Sample Questions Overall Study Tips  New accounts introduced – know definitions, financial statement, main category, and normal balance as well as how transactions are recorded into the account. For example, sale tax payable is an accrual for sales tax collected from customers and subsequently remitting to government agencies; balance sheet, current liability, and normal balance of credit. a. How do these new accounts impact the accounting equation?  Cash Flow - understand how the cash flow statement is constructed, what information is required for each section, and how and increase or decrease in certain balance sheet accounts affects cash.  Connect – Do not use as the initial study resource. Use Connect to verify that you understand only after you have been studying and are comfortable with the materials. a. Learn Smart b. Exam Practice Questions  Complete Self-study questions at the end of each chapter related to the topics listed below.

Chapter 8  Current Liabilities ◦ Accounts - know definitions, financial statement, main category, and normal balance as well as how transactions are recorded into the account.  Accounts Payable  Short-term Notes Payable & Interest calculation  Sales tax payable  Unearned revenue  Current portion long-term debt  Warranty expense and warranty payable  Contingent liability

Chapter 9  Bonds ◦ Definitions for bond itself  Principal amount or face value  Interest rate (stated or coupon)  Market interest rate ◦ Interpreting Bond Price quotes (not calculating a bond price) ◦ Record new bond issuance at par, premium, or discount. ◦ Interest payments for bonds issued at par. ◦ Effective Interest Rate Method for interest expense and interest payments (steps and formulas)  Bonds issued at a premium or discount - effective interest rate calculation using actual cash interest payments and the market rate of interest to amortize the premium or discount.  Impact of interest amortization on bond carrying value over time. ◦ What is the carrying value for bonds and how does is change over time? ◦ Bond retirement  Notes Payable – recording original transaction and accruing interest at year-end.  Operating and capital leases – just the basic understanding of what they are and which financial statement they primarily impact

Chapter 10 (Exclude – ratio analysis) ◦ Two sources of Stockholders equity  Paid in capital  Common Stock  Preferred Stock  Additional Paid in capital  Earned Capital - Retained earnings ◦ Shareholder rights  Common Stock – 4 rights  Preferred Stock – 2 additional rights ◦ Shares authorized, issued, outstanding - definition and formulas ◦ Par value of stock – definition and how it is used to record stock issuance ◦ Classes of stock  Common  Preferred  Features of preferred stock ◦ Issuing common stock and preferred (par & no par) ◦ Treasury stock – repurchase and reissuing ◦ Cash Dividends (only) – steps in issuing dividends

Chapter 11 (Exclude – direct method of cash flow preparation and ratio analysis)  Format for cash flow statements – Three sections and cash balance reconciliation at the end.  Be able to follow the steps to construct a cash flow statement for each of the three sections (you will not have to construct a statement, but you do need to understand the steps).  Source of information (which financial statement and area of financial statement) for each section in the cash flow – i.e. investing is based on long-term assets on balance sheet  Most important section of cash flow?

 Answers:  D  C  B  C  D  B