Intermediate Accounting I

Topics: Balance sheet, Income statement, Generally Accepted Accounting Principles Pages: 19 (3095 words) Published: August 29, 2013
HW 10%
MT 45%
Final 45%
HW is submitted electronically on the following Tuesday

Financial accounting:
(1) Investor—outside the company
(2) Creditor—outside the company
(3) Management—inside the company
Different points of view
(1)-–whether the investment is worthwhile
(2)—whether they can get the money back
(3)—prepare the financial statement and would not want to share every information with investors/creditors; but investors and creditors want to know the truth—accurate financial data Management hire auditors. Auditors should remain independent and work in the interest of investors and creditors (provide assurance of accuracy) Fundamental rule of accounting---accuracy

Internal auditors—make sure things work smoothly in the company. 5-year-rule—partners and clients

GAAP—rule-based-particular provision
IFRS—principle-based, here is the general outcome we expect, use your best judgment

Materiality--The materiality principle states that you are allowed to ignore an accounting standard if the net impact of doing so has such a small impact on the financial statements that a reader of the financial statements would not be misled. Historical cost--A measure of value used in accounting in which the price of an asset on the balance sheet is based on its nominal or original cost when acquired by the company. The historical-cost method is used for assets in the U.S. under generally accepted accounting principals (GAAP).

investopedia explains 'Historical Cost'
Based on the historical-cost principle, under U.S. GAAP, most assets held on the balance sheet are to be recorded at the historical cost even if they have significantly changed in value over time. 

For example, say the main headquarters of a company, which includes the land and building, was bought for $100,000 in 1925, and its expectedmarket value today is $20 million. The asset is still recorded on the balance sheet at $100,000.  Not all assets are held at historical cost. For example, marketable securities are held at market value on the balance sheet.

Depreciation is not the decline in the value of an asset, but it is the allocation of cost of an asset over its useful life. Fair value (fair market value) is different from net book value (book value-depreciation).

Conservatism: recognize all losses and anticipate no gains
Conservatism vs. fair value accounting is gaining more importance

Regarding accounting cycle—reading chapter 3 in accounting textbook

Accounting cycle:
At the beginning of accounting cycle, income statement roll into the balance sheet. The end of year 1 is the beginning of year 2.
Retained Earning--Accumulative profits/loss that a company keeps after dividends. When you sell your company, you ask the buyer to pay the amount of the equity of your company but not asset. Because asset is burdened with liability. Net worth of a company is its equity. When you can say you are a billionaire is when your net worth is over a billion.

Before any transaction in the current year, we look out AR (to collect) and AP (to be paid)

Cash inincrease in cash
Revenue earned-not necessarily has cash come in
Expenses incurredno necessarily has cash come out

Story:
Cash 20,000
AR 4,000
PP&E 100,00
124,000
WP 5,000
NP 40,000
CS 60,000
RE 19,000
124,000
2012 events:
1) collect 4k of AR
Debit cash 4000
Credit AR 4000
2) pay 5k of WP
debit wp 5000
credit cash 5000
3) make sales=52,000
12/31/2012 AR=8,000
debit cash 44,000
debit AR 8,000
credit revenue 52,000
4) incur wages=30,000
12/31/2012 WP 7,000
Debit wage expense 30,000
Credit cash 23,000
Credit WP 7,000
5) pay bank 10,000
12/31/2012 NP=31,500
Debit NP 8,500 (plug in)
Debit interest expense 1,500
Credit cash 10,000

General ledger—a set of accounts that record the transactions, a collection of all the asset, liability, owners’ equity, revenue, and expense accounts. Subsidiary ledger
Posting—transferring the essential facts and...
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