1. How to measure assets? How to present assets?
*Assets are economic resources owned or controlled by the company and can be measured by dollars. *Measure assets by the Principle of Historical Cost.
*The cost of asset includes all expenditures that make that asset in place and ready for use. * Present assets in the Balance Sheet by the rank of liquidity.
2. How to measure profits? How to present profits?
* Operating Profit = Revenue - Expenses
* Revenue Recognition principle and Expense Matching Principle help us determine the (operating) profit (or, be more specific, the operating profit of each reporting period). * Profits are reported in the Income Statement, structured as a multi-layered cake. * There are at least three different kinds of profits: (core) operating profit; gains/losses; and extraordinary items.
3. The accounting assumptions involved in asset measuring and profit recognition. (1) Separate Entity; (2) Monetary-unit; (3) Time-period; (4) Going concern
4. Who determines the accounting principles? Who has the final say on them? * The Financial Accounting Standards Board (FASB) determines the accounting principles. * The Securities and Exchange Commission (SEC) has the final authority over these principles.
5. What are accruals? What are deferrals?
* Accruals: transactions in which action occurs before the cash movement (Payables, Receivables) * Deferrals: : transactions in which cash movement occurs before the action ( Prepaid items; Unearned Revenue)
6. When should some expenditure be capitalized, expensed? * An expenditure will be capitalized (being treated as an asset) if it can benefit the business for multiple periods. * A capitalized expenditure will be amortized into future expenses.
Exercise 1: Analyzing Transactions and Preparing Financial Statements
Transaction Description of Tom’s Wear in 2008 January:
T1: On Jan.1, Tom’s Wear purchased Computer for $5000 with $2000 down and 2-year, 12% note for $3000. The computer is expected to last for 3 years and have a residual value of $800. T2: Tom’s Wear bought advertising for $250, paying $100 in cash and the remainder on account. The ad runs immediately for this month operation. T3: Tom’s Wear collected accounts receivable of $350 from the sales made in last December. T4: Tom’s Wear bought insurance for $ 300 for the first quarter of this year, all paid in cash. T5: On Jan. 3rd, Tom’s Wear Purchased 200 shirts @$5 each with cash, $1000. T6: Tom’s Wear sold 150 shirts for $10each, all on account, for total sales of $1500. T7: On Jan 23, Tom’s Wear spent $500 to register its trademark “T-T” with the U.S. Patent and Trademark Office. AT1: Using straight line method to calculate the monthly depreciation expense of the computer; AT2: Recognize the insurance expense for the month;
AT3: Recognize the monthly interest expense on the note payable Other information:
(1) No dividends are paid. (2)Assume there is no corporate income tax. 1. Please analyze each transaction of Tom’s Wear in the following table.
| Assets| | | | =| Liabilities| +| Shareholders’ Equity| | | | | | | | | Capital| Retained Earnings|
| Cash| Accounts Receivable| Inventory| Pre-paidInsurance| Equip.| Acc.Deprect.| Intangible assets| Accounts Payable| Otherpayable| Interest Payable| Notes Payable| | Common Stock| Revenues -Expenses| Div| Beg| 6000| 500| 0| 125| 0| 0| | 800| 0| 0| 0| | 5825| | | 1| (2000)| | | | 5000| | | | | | 3000| | | | | 2| (100)| | | | | | | | 150| | | | | Advertising Expense (250)| | 3| 350| (350)| | | | | | | | | | | | | |
4| (300)| | | 300| | | | | | | | | | | |
5| (1000)| | 1000| | | | | | | | | | | | |
6| | 1500| (750)| | | | | | | | | | | Revenue...