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ACC1701X Cheat Sheet
Accounting for Decision Makers (National University of Singapore)
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Chapter 8: Inventory and the Cost of Sales
3 Types of inventories: Raw materials, Work in process, Finished goods
COGS: All costs involved in buying the inventory and preparing it for
sale. COGAS (Cost of goods available for sale): total cost of inventory
avail for sale.
Who owns the inventory?:
Goods that are being shipped have 2 kinds:
1. Free-on-board (FOB) Destination
Only when it reaches the buyer it belongs to them
2. Free-on-board (FOB) Shipping point
Once shipped it belongs to buyer already
Goods on consignment:
Goods owned not physically with owners but with a retailer.
Accounting for Inventory Purchases and Sales:
Perpetual system:
Continually update as and when goods are sold, for items that are of high
value or have large costs if stocks run out or overstocked.
All journal entries would affect inventory account directly.
Purchase of inventory:
Inventory
Accounts payable
Transport cost:
Inventory
Cash
Purchase Discounts:
Accounts payable
Inventory
Cash
Sales:
Accounts Receivable
Sales Revenue
Cost of goods sold (Expense)
Inventory
If goods are missing, do double entry to adjust:
COGS
Inventory
Adjustment for inventory shrinkage
Periodic system:
Updated periodically, for biz that have a lot of sale.
Purchase of inventory:
Purchases
Accounts payable
Transport Cost:
Freight in
Cash
Purchase discounts:
Accounts Payable
Purchase Discounts
Cash
Chapter 7: Receivables
Chapter 10: PPE and intangible assets
Types of Receivables:
1. Account receivables (current assets)
Money due for services performed or merchandise sold on credit
2. Note receivable (current assets if due in one year if not noncurrent)
Legal claim, stronger than accounts receivable, has interest involved.
Calculating and recording Depreciation expense:
Undepreciated cost is called carrying amount or book value.
Valuing and reporting receivables:
Some companies do not pay for items purchased AKA bad debts.
Direct write-off method is delete the entire receivable but not the way to
go.
Allowance method:
Create a contra asset account called: ‘Allowance for Expected Credit
Loss’ or ‘Loss allowance’
Expected impaired amount is an expense (Expected credit loss).
Contra asset (- Dr, + Cr)
Sales Revenue
At end of period, transfer everything to inventory:
Inventory (Net purchases, calculated from balancing this)
Purchase Returns
Purchase Discounts
Freight in
Purchases
If goods missing, wouldn’t know, all of it would be absorbed into COGS
If ending inventory overstate (understate), COGS is understated
(overstate), net income is overstated (understated). For next year,
beginning inventory is overstated (understated), COGS is overstated
(understated). Net income understated (overstated). RE first year is
overstated (understated) but by second year it is balanced out.
Cost Formula for Inventory:
FIFO, LIFO, Weighted average, and specific identification cost formula.
LIFO not allowed by IFRS.
Inventory should be reported the lower of cost or net realisable value:
whichever is smaller of the value.
Net realisable value: Cost of inventory can be sold minus any selling
cost.
To write down to net realisable value:
COGS
Allowance for inventory write-down (contra-inventory
account)
Units-of-production method of depreciation:
Cost - Salvage value/ total estimated life in miles, hours or units =
depreciation per unit, mile, hours used
For natural resources its called depletion instead of depreciation.
Accelerated Depreciation: Declining-balance method
Double-declining-balance depreciation method:
1/Estimated life (years) x 2 = DDB rate
Depreciation for the year using DDB = Carrying amount x DDB rate
Changes in Depreciation estimates and methods:
If change, stop all calculation and use remaining amount as new ‘cost’.
When impairment is recognised:
Expected Credit Loss (Expense)
Loss Allowance
Repairing and improving PPE:
Two type of expenditures on PPE:
1. Revenue Expenditures
2. Expenses of the current period, maintenance and repairs
When have to write-off:
Loss Allowance
A/C receivable
When incurred:
Repairs and Maintenance
Cash
When have to reinstate (cause can collect):
A/C Receivable
Loss Allowance
Then,
Cash
A/C Receivable
Capital Expenditures:
Lengthens an assets useful life, increases capacity or changes its use.
3 criterias: Significant amount, should benefit more than one period,
increase productive life or capacity of the asset.
Net realisable value of A/C receivable is the actual amount the company
expects to collect.
When incurred:
PPE
Cash
2 methods of estimating:
1. % of total receivables
Calculate by taking X% from outstanding A/C receivables
Recording Impairments of asset value:
If there is an impairment:
2. Aging A/C receivables
% differs based on how old debts have been. % usually provided.
Impairment Loss (Expense)
Accumulated Impairment losses, XXX
How ECL and Loss allowance is presented on income statement and
balance sheet respectively
Notes Receivables:
A written promise that includes interest.
Recoverable amount is either net fair value or value in use, whichever is
higher.
Impairment loss = Carrying amount - recoverable amount.
Represented similar to Accumulated depreciation on sheet
When A/C receivable convert into Note receivable:
A/C receivable
Note receivable
Disposal of PPE:
If after complete use:
Accumulated Depreciation
PPE
When collecting:
Cash
If there is a loss:
Accumulated Depreciation
Loss on disposal of PPE
Cash
PPE
Note receivable
Interest revenue (must add this portion)
Chapter 9: Completing the Operating Cycle (LO3 and LO4)
Provisions and Liabilities:
Sales:
A/C Receivables
Straight line depreciation method:
Cost - Salvage value/ Estimated useful life = annual depreciation expense
Selling PPE:
If sold for a gain:
Accumulated Depreciation
Cash
PPE
Gain on sale of PPE
Provision should be recognised when:
1. A present obligation as a result of past event
2. It is probable
3. Reliable estimate
Recognise the provision (warranty):
Product warranty expense
Product warranty provision
If sold for a loss:
Accumulated Depreciation
Cash
Loss on sale of PPE
PPE
If provide the warranty:
Product warranty provision
Supplies
Contingent Liabilities:
Same like provision just that it is either not probable that it will go
through or that the amount needed to be paid cannot be measured properly
Capitalise versus expense:
R&D - Always to be expensed less if technological feasibility has been
established then can be capitalised (IASB)
Advertising - Always expensed unless results from it are probable (eg.
Targeting loyal customers)
Intangible assets:
Only goodwill obtained through acquisition is recorded.
Amortisation is same, basically depreciation of intangible assets
Intangibles must be regularly checked for impairment
Chapter 12: Financing: Equity
Common stock AKA ordinary share/share capital.
right to vote in corporate matters
Preemptive right to purchase shares if more shares are issued by
company
Rights to receive cash dividends if they are paid but not before
preferred stocks
Right to ownership to all corporate assets once obligations to everyone
else has been satisfied
Chapter 14: Statement of Cash Flows
Preferred Stock AKA preferred share/preference share.
no voting rights, Mainly only fixed cash dividends
Have priority in being paid cash dividends if any before common
stock holders
Some convertible preferred stock that can be converted to common
stock at special conversation rate
Current-dividend preference, basically gets cash payout first
Cumulative-dividend preference, every year will have. If last year not
paid yet will cumulate
CA increase means minus
CA decrease means add
CL decrease means minus
CL increase means add
Accounting for Stock:
Issuance of stock:
Stocks have a par value. When sold above par value it is being sold at
a premium
Issuing Par-value common stock at a premium:
Cash (XXX shares X $a)
Common Stock (XXX shares X $par-value)
Paid-in capital in excess of par, common stock
(XXX shares x $excess)
Paid-in capital in excess of par AKA Common Stock premium
Issuing No par-value shares:
Cash
Common Stock
Issuing par-value preferred stock at a premium:
Cash (XXX shares X $a)
Preferred Stock (XXX shares X $parvalue)
Paid-in capital in excess of par, preferred stock
(XXX shares X $excess)
Issuing shares for non cash assets:
Land
Common stock
Paid-in capital in excess of par, common stock
Accounting for stock repurchases:
Buying back stocks from holders means shares become treasury
shares.
Treasury stock is accounted for on a cost basis (how much it was
bought for).
Treasury shares are minus off at the end of equity.
Purchasing treasury stock:
Treasury stock, common
Cash
Reissuing treasury stock above cost:
Cash
Treasury stock, common
Paid-in capital, treasury share
Reissuing treasury stock below cost:
Cash
Paid-in capital, treasury stock
Treasury stock, common
If below cost, paid-in capital, treasury stock account would be debited.
If value is 0 or not enough, retained earnings would be deducted.
Format on balance sheet
Retained earnings:
Cash dividends.
When declared:
Cash dividends, common stock
Cash dividends, preferred stock
Cash dividends payable, common stock
Cash dividends payable, preferred stock
Continued from Chapter 12:
When distributed:
Stock dividends distributable
Common Stock
When paid:
Cash dividends payable, common stock
Cash dividends payable, preferred stock
Cash
Stock dividends account will close to retained earnings:
Retained earnings
Stock dividends
At end of year, cash dividends is closed into RE:
Retained Earnings
Cash dividends, common stock
Cash dividends, preferred stock
Large stock dividends:
Stock dividends
Stock dividends distributable
Small Stock dividend:
When declared:
Stock dividends
Stock dividends distributable
Paid-in capital in excess of par
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Indirect method for operating activities:
- Start with net income before tax
- Remove depreciation and gains and loss of disposals
- Adjust according to increase or decrease in current assets and current liabilities
- Remove interest expense and revenue
- Find how much actually collected and paid for interest
- Find out how much paid for income tax
Cash flow from financing and investing activities:
Investing is just from PPE sale and purchase
Financing is loans
Chapter 15: Analysing Financial Statements
Vertical analysis AKA common-size financial statements.
Provides a view on how a company has allocated its economic resources across
periods
Balance Sheet is % of Total assets.
Income statement is % of Net sales.
Horizontal Analysis
Use earlier year as base amount.
Percentage of change = Current period amount - Base period amount/ Base period
amount X 100%
Trend percent = Current period amount/Base period amount X 100%
Reflect amount change, % change and trend percent.
Financial Ratios:
Liquidity - Current ratio and Acid-test (quick ratio)
Efficiency - A/C TO and average collection period, Inventory TO and number of
days’ sales in inventory, fixed asset TO
Solvency (ability to pay debts when its due) - Debt ratio (how much of assets is
from borrowed money), Debt-to-equity ratio (reflects mix of sources of financing for
a company), Times interest earned ratio (income that is available for interest payments
to annual interest expense)
Profitability - Profit margin (Return on sales), Return on assets, Asset TO, Return on
equity for common shares, Earnings per share, Price-earnings ratio
Cash Flow - Cash flow-to-net income ratio, Cash flow adequacy
DuPont Framework:
Return on equity = Net income - preference dividends/Average total equity
DuPont: ROE = profitability X Efficiency X Leverage
Profitability = Return on sales (profit margin)
Efficiency = Asset TO
Leverage = Assets-to-equity ratio
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Accounting Equation: Assets = Liabilities + Equity
3. Statement of Changes in Equity (SOCE)
4 Types of Financial Statements:
1. Statement of Financial Position (Balance
Sheet)
2. Statement of (Comprehensive) Income
3. Statement of Changes in Equity (SOCE)
4. Statement of Cash Flows (SOCF)
Chapter 4: Completing the Accounting Cycle
Chapter 5: Internal Controls: Ensuring the integrity of Financial Information
Accrual Accounting: recording expenses and revenues when
incurred and recognised instead of when cash is received
Types of problems that occur:
1. Errors - Genuine entry errors
2. Disagreements - Judgements made of certain decisions when preparing financial statements
3. Frauds - Deliberate falsifying of data
Cash-Basis Accounting: Recording expenses and revenue
when cash is received or paid. Not accepted
Internal control structure aims to safeguard and ensure financial reports are accurate.
Periodic Reporting: Fiscal year (1 year but starting month
depends on individual biz, usually Jan)
Adjusting entries:
a. Unrecorded Receivables (Accrued Revenue)
Work/Criteria met but yet to receive cash
When incurred:
A/C Receivable
1. Statement of Financial Position (Balance Sheet)
Assets (Current and Non-Current)
Liabilities (Current and Non-Current)
Equity
XX Revenue
When collected:
Cash
2. Risk assessment
3. Control activities (Procedures)
a. Segregation of duties
No one desperate not or individual should be responsible for handling all or conflicting phases of a transaction.
b. Authorisation of transactions (Proper procedures for authorisation)
A/C Receivable
4. Statement of Cash Flows (SOCF)
Operating: From operations (normal biz of company)
Investing: PPE (purchase and sale)
Financing: Long term loans (payment and taking up of loans) and also dividends distributed
Split into 5 basic categories:
1. The control environment
Consists of actions, policies and procedures that reflect the overall attitude of top management about control and its
importance to the company. Clear organisational structure. Subset of directors form an audit committee.
c. Record keeping of transactions (Adequate documents and records. Easily interpreted and understood. Pre-numbered for
easy ID and tracking. Formatted for easy access.)
b. Unrecorded Liabilities (Accrued Liabilities)
Expenses already incurred but have yet to pay
d. Custody of assets, physical possession of assets (Physical safeguards to protect resources).
When incurred:
XX Expense
e. Independent Checks.
Internal and external checks.
XX Payable
4.Information and communication
5. Monitoring
When paid:
XX Payable
Cash
c. Prepaid Expenses
An asset. Pay early for expenses
When paid:
Prepaid Expense
Cash
When expense is incurred:
XX Expense
Prepaid Expense
Supplies is same as prepaid expense:
Supplies
Reasons for Earnings Management:
1. Meet internal targets
Manipulate earnings to hit targets
2. Meet external expectations
Manipulate earnings to hit investors’ expectations
3. Income Smoothing
Making income graph smooth instead of erratic, helps with investors’ confidence.
4. Window dressing for IPO (initial public offering)
Making company look more attractive leading up to IPO.
Bank Reconciliation:
Chapter 6: Cash
3 Types of cash flow:
Operating activities
Investing activities
Financing activities
Cash
Supplies Expense
Supplies
d. Unearned Revenue
A liability (obligation). Cash is received but work has yet to
be done.
When receive cash:
Cash
Unearned Revenue
Fundamental Concepts and Assumptions:
2. Statement of (Comprehensive) Income
Revenue
Expenses
Income
a. The Separate Entity Concept
Biz entity separate from its individual owners
b. The Time-Period Assumption
Artificial time periods must be used to report results of biz entities. Eg. Fiscal year
c. The Assumption of Arm's-Length Transactions
Every transaction would be rational and unbiased, both parties trying to achieve the best
deal possible
d. The Cost Principle
Record transactions at historical cost. Assumed to represent the fair market value.
e. The Fair Value Principle
Assets and Liabilities to be recorded at fair value so relevance can be improved.
f. The Monetary Measurement Concept
Only record things that can be measured in monetary terms.
g. The Going Concern Assumption
Assumes that biz will continue in the foreseeable future.
h. The Matching Principle
All costs and expenses incurred to generate revenue must be recognised in the same
accounting period as related revenues.
When work is done:
Unearned Revenue
XX Revenue
Closing books:
Close nominal accounts, do not last more than one period
(eg. Income statement - Expenses, Revenues)
Real accounts last more than one period, are permanent (eg.
Asset, Liability and Equity).
Closing entries:
Sales revenue
Other operating income
Financial income
Expenses
Taxes
Retained Earnings (might be Dr or Cr
depending on performance of company)
*Dividends are not expense so they are deducted from RE
accounts not during closing entries.
Retained Earnings
Dividends
Summary of Accounting Cycle:
1. Analyse transactions
2. Record effects of transactions
3. Summaries effects of transactions
- Journal entries
- Trial balance
4. Prepare reports
- Adjusting entries
- Financial statements
- Closing the books (Post-closing trial balance)
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Internal Control of Cash:
1. Separating duties in handling of cash and accounting for cash
2. Cash receipts are deposited in banks
3. Except for small payments, payments are made with prenumbered
checks
4. Prepare bank reconciliation frequently
Purchase discounts:
Eg. 2/10, n/30
2% discount if customer paid within 10 days if not net amount is due in
30 days.
Purchase on credit:
Inventory
Accounts payable
Discount:
Accounts payable
Cash
Inventory
Petty Cash Funds:
Establish/increase the fund:
Petty Cash
Cash
To refill the fund:
Expense
Expense
Cash Short and Over (Dr if missing cash or Cr if got extra cash)
Cash (money to match all expense to top up back to
original amount)
Adjustments made to company bank account that
may not be in journal:
a. NSF (not sufficient funds)
Cheque cashed in bounce back cause payer’s
account not enough balance
b. ATM transactions (eg. Direct deposits)
c. Withdrawals for debit card transactions paid
directly from accounts
Owner pay through debit card, direct payment
d. MS (miscellaneous)
e. Time period difference
Bank statement may not be as updated as accounts
f. Deposits in transit
Still processing cheques
g. Outstanding checks
Cheques written but have not be cashed in by
company whom owner paid
h. Bank debits
Bank charges etc
i. Bank credits
Interest earned from bank
j. Accounting errors
Numerical errors made by either company or bank.
Must do adjusting entries to relevant accounts to
make sure cash account tallies with bank statement.
Adjusting entries taken from Book side of bank
recon.