MGT201 FINAL REVIEW

A business structure where a single individual owns and operates the business. They have complete control and are personally liable for all debts and obligations.

→ HAS TAX ADVANTAGES

a legal entity formed by individuals or shareholders to conduct business activities. It has its own rights, liabilities, and obligations separate from its owners. It provides limited liability protection to its shareholders, meaning their personal assets are generally not at risk.

When Revenue > Expenses

When Expenses > Revenue

1. Balance sheet / statement of financial position

2. Income statement

3. Statement of changes in Equity

4. Cash Flow statement

Statement of Financial Position

→ reports ASSETS/ LIABILITIES/ EQUITY owned by a company

Reports performance wellbeing of a company

→ Report its REVENUE/ EXPENSES/ INCOME

Provides investors with information about the company’s ABILITY to earn future income

Reports HOW much of the company’s earnings are retained to the business

→ after dividends are distributer

→ after how much shares are issued/ repurchased

→… after other changes in equity overtime

Reports what companies used their cash ON

Assets = Liabilities + ShareHolder’s Equity

A collection of all individual financial statements accounts that a company uses

POSTING is the process of transferring information from the journalised transaction to the general ledger

LAND DOES NOT DEPRECIATE

Current Assets consists of cash + other assets that will be converted into cash.

1. ANALYZE transactions

2. JOURNAL transactions

3. post to ledger

4. prepare a TRIAL BALANCE

5. *make necessary adjustments to trial balance

6. prepare financial statements

7. prepare closing entries+ post closing trial balance

1. Accounting equation: Assets = Liabilities+ SE. EQUITY

2. Identify what factors in the balance sheet are affected

3. Determine whether the factors affected increased/ decreased, comparison to previous financial statements

DEBIT INCREASE

→ credit decrease

debit decrease

→ CREDIT INCREASE

CREDIT INCREASE

,

debit decrease

Trial balance only proves the equality between debit & credit.

where debit=credit.

→ Trial Balance will NOT detect any errors of analysis

1. Assets

2. Liabilities

3. Shareholder’s Equity

4. Revenue

5. Expense

Liabilities increase

On the journal entries, it requires 2 separate entries.

1. Declaring it, CREDIT dividends payable

2. Actually paying it , DEBIT dividends paid

1. Cash Basis Accounting

OR

2. Accrual Basis Accounting

When Cash is RECEIVED

→ regardless if revenue is earned

Transactions are recorded when revenue is EARNED

→ unrelated to when cash is received or not

1. Significant risks+ rewards of ownership must have been transferred FROM seller to purchaser

2. Amount of revenue+cost MUST be RELIABLY measured

3. Managerial involvement should NOT be retained by the seller; seller should NO LONGER have any effective controls over goods sold

4. Economic benefits must be made possible to be flowed to the seller

→ process of reviewing the accuracy of the financial statement

*each company must have INTERNAL control over financial reporting

Internal auditing is performed from an internal department or sector of a company, they perform checkups before sending financial statements to external auditing.

→ Where as external auditing has no affliction with the company itself

Stock price will be affected due to any errors detected in the auditing process; depends how big of an error it is

Process of tracking potential & actual problems in the internal control system

• understanding the business’s CONTROL ENVIRONMENT

  → RISK ASSESSMENT

  →in order to design CONTROL activities to eliminate risks regarding company’s assets

  → Monitoring activities

External decision makers - government/ banks/ investors/ suppliers

Internal decision makers - board of director/ CFO/CEO

= Internal + External Audits

Control Environment

1. authorization of transactions

2. documentation adequacy

3. segregation of duties

4. physical controls

5. independent checks on performance

6. human resource controls

Refunding is an example of authorisation of transactions: requires authorization to the quality of the item to be resold

• To increase likelihood of errors being detected

• to eliminate risk of major theft

• increase efficiency

Physical Controls

• Physical protection for its assets

→safeguarding requires physical protection of the asset

• Number of records

• Number of Inventory

1. short term liquidity ratio

2. debt management ratio

3. asset efficiency ratio

4. profitability ratios

SHORT TERM LIQUIDITY RATIO

Current ratio is often measured within a yearm whereas quick ratio is measured less than a year

DEBT MANAGEMENT RATIOS

No higher debts does NOT mean the company is going under, it can sometimes mean new investment is taking place hence the current liabilities being higher in comparison

‘Times interest earned‘ ratio measures the firm’s ability to repay its debts from recurring expenses

Turnovers: average length of time required for an asset to be consumed/replace.

• The more occurrence of turnovers=the higher the efficiency

• Measure of efficiency, efficiency of how a company utilises its assets

Ending # + Beginning of year #

/2

• since they are the same number

• (2x)/2

• ans/2

Measures the company’s effectiveness at managing amounts owing to trade creditors.

USING FREE MONEY

• when a company is paying fast, they might be using all the $ they have to pay back, in which they could have delayed a bit where they have more money in their bank to grow their business. Don’t need to rush when you don’t need to.

• higher interest expense overtime

• poor relationship

Shows the relationship of profits in total investment & investment by shareholders

Because it shows the profit in total investment as well as investment by shareholders. We hops the #s stays consistent, if not better.

Earnings per share

1. EPS cannot be compared externally since every company have a different # of shareholders

2. Can only be compared INTERNALLY

To have the ability to produce future FRESH cash flows

Cash FLOWS from OPERATING ACTIVITIES

• Cash inflow > cash outflow = positive cash flow (ideal)

*However, a negative cash flow overall does NOT mean business is going under, it means its not sustainable in the LONG RUN atm.

! NEGATIVE cash flow is considered GOOD

• since it means company is acquiring/ disposing OPERATING assets & investments in other companies (lending $ etc.)

  → signifies the company is doing good

• Obtaining resources from creditors + owners 

• NEGATIVE CASH FLOW DOES NOT MEAN BAD 

Eg. not paying dividends BUT paying off debts & repurchasing company’s shares 

-> small companies differs as new start ups might have a positive cash flow

1. Cash flows from OPERATING ACTIVITIES

• Cash inflow 

• Cash out

• Net cash provided (used by operating activities )

2. Cash flow from INVESTING ACTIVITIES 

• Cash inflow , cash outflow, $ (used for investing activities)

3. … from FINANCING ACTIVITIES

   • Debit expense 

   • Credit appreciation  

Indirect method starts off with NET-INCOME

Focus on the difference between Net Income

& Operating cash flow

The indirect method does not report individual cash inflows

NO.

(-)

• Non Cash REVENUES 

• Accounting GAINS 

• Increased # in current assets 

• Decreased # in current liabilities

1. Significant risks and rewards of ownership has been transferred to purchaser from seller 

2. Seller has not retained continuing managerial involvement / effective control over the goods sold 

3. Probable that the economic benefits associated with the transaction will flow to the s;;er 

4. Cost incurred to the transaction can be reliably measured 

5. #$ revenue can be readily measured

1. Sales discounts 

2. Credit card discounts

3. Sales returns 

4. Sales allowance 

   • Sales discounts- standard notation to state discount+credit terms 

   • -> : 2/10 , n/30

• 2/10=pay within 10 days, 2% discount 

• n/30=pay within 30 days, 0 discounts

1. Direct write off method 

2. Allowance method

Waits until an account is determined to be uncollectible, before a drop in account receivable & receive bad- debt expense.

• (inconsistent w/ concept so we focus more upon Allowance method)

: bad debt expense is recorded in the period of sales 

  -> allows it to be properly match with revenues

-> recognized before the actual default

An account to store potentially uncollectible accounts

1. % of credit sales method 

2. Aging method

Notes payable requires an formal contract + longer period of due date + accumulated interest expense

DEBIT bad dept expense

CREDIT allowance for doubtful accounts

DEBIT allowance for doubtful accounts

CREDIT account receivables

Straight line method multiplies a depreciation rate by the depreciable cost of asset

(yes but remember you have to deduct any residual or salvage value and you pro-rate if it is not a full year). 

• Meaning it records an equal amount # of depreciation expense evenly throughout the period of Asset's life. 

Whereas under declining balance method, we do not depreciate below the residual value!!!

• because we are calculating the deprecation value with the assumption that the asset loses its value faster in earlier years, and that the value of depreciation will be smaller overtime/ over the years.

It follows the concept that if the asset is used more often; the value of depreciation expense will be bigger.

Common shares

Represents the shareholders/owner's residual claims of asset, after all liabilities has been deducted.

Where you put money into the business and the company gives you 1 share. This is where you record it.

→ That is about it for this course.

The money the company made that was kept in the business meaning no dividends but kept in the business to help the business grow. 

Using past experience, the company estimates the % of current credit sales that will eventually uncollectable.

( total credit sales ) x ( % credit sales estimated )

= estimated bad debt expense

NO. It is a long term asset.

• Once a company sell its inventory, the cost of inventory turns into the cost of goods sold

• Gross profit is a key performance measure

• = Revenue - cost of goods sold

1. Raw materials inventory eg.wood/lumber

2. 2.Work in process inventory eg.labor eg.cut/furnish wood in process

3. Finished good inventory eg.wood dining table

Beginning inventory 

+purchases 

= 

Cost of goods available for sale 

-Ending inventory 

= 

Cost of goods sold

• Perpetual

• Periodic

…recorded with each sale

… recorded only at the end of a period (periodically)

Cost of inventory will include the purchase price + other incidental costs

• incidental cost such as the delivery cost/ transportation cost of delivering the merchandise to warehouse

= Transportation cost

: expense of moving inventory from one place to another

Free On Board

Ownership of inventory passed from seller to buyer

Buyers pay transportation cost at FOB shipping point.

Sellers pay transportation cost at shipping point.

Determines how costs are allocated to cost of goods sold & ending inventory