ACCT_232 Financial_Statements_Module_Notes.docx.pdf

Financial Statements Module Notes

Cash Flow Statements is cash collected from customers/consumers

Cash flow statements report cash flows from operating, investing, and capital activities

Income Statement is prepared first because other financial statements require it

Statement of Retained Earnings is prepared second

Current Assets are Cash, Accounts receivable, and Supplies

Total Assets are long term like buildings and land

Entity Assumption: Can’t put personal assets on the business books

Equity represents the “insider claims”

Financial accounting provides information for decision makers (investors) outside the entity

Investments increase equity in a Business

GAAP are the professional standards for accounting in the United States

Equations:

oBeginning Retained Earnings + Net Income – Dividends = Ending retained earnings

oNet Income = Ending Balance – Beginning Balance – Stock Issued + Dividends

oNet Income = Revenue – Expenses

oAssets = Liabilities + Stockholder’s Equity

Entity Assumption: separate owners from the business which is the entity

The continuity Assumption (Going-Concern): a business will theoretically operate indefinitely

oQuitting Concern: going out of business assumption

Historical Cost Principle: assets should be recorded at actual cost measured on date of purchase

Stable Monetary Unit Assumption: dollar purchasing power is stable over time; ignore inflation

The chart of accounts is a record of all the accounts of a business

The ledger houses the t-accounts where the changes in accounts are recorded

The journal is a chronological record of the transactions of the business

A trial balance is a list of all the accounts with their balances

The first step in recording a transaction is to journalize the transaction in the journal (i.e.,

double-entry accounting – at least one debit and one credit; at least two accounts are affected).

Step two is to post the transactions from the journal to the ledger (i.e., t-accounts). Thirdly, you

compute the balances in the t-accounts and ensure that all debit balances equal credit balances

by preparing a trial balance.

The rules of debits and credits state that equity increases with a credit. Therefore, any account

under equity that increases equity, increases with a credit. Retained earnings is an equity

account that increases stockholders' equity, therefore it also increases with a credit. Cash is an

asset and all assets increase with a debit. Rent expense and dividends are equity accounts,

however they decrease equity, so they also increase with a debit.

Posting

oE. Copying data from the journal to the ledger

Expense

oA. The cost of operating a business; a decrease in stockholders' equity

Debit

oK. Left side of an account

Trial balance

oH. Lists all accounts with their balances

Equity

oF. Assets - Liabilities

Net income

oG. Revenues - Expenses

Receivable

oB. Always an asset

Chart of accounts

oD. Lists a company's accounts and account numbers (no account balances in this

item)

Payable

oI. Always a liability

Journal

oJ. Record of transactions

Normal balance

oC. Side of an account where increases are recorded

Ledger

oL. The book of accounts and their balance

Accrual basis revenue is good for accurately tracking profit margins

Accrual account records noncash transactions

oSales on account; Accounts Receivable

Revenue is recorded in the month that it is earned

Under cash basis, when cash is received then revenue is recorded

Accumulated depreciation is a contra-asset account, which is permanent

Prepaid expenses is an asset account, which is permanent

Unearned service revenue is a liability account, which is permanent.

Misappropriation of assets

oCommitted by employees

Theft of money or inventory

Birbery and kickback schemes

Overstate expense reimbursement

Fraudulent financial reporting

oCommitted by managers

False and misleading journal entries

Deceive investors and creditor

Fraud Triangle

oOpportunity

Easiest for companies to decrease chance of fraud

oMotive

oRationalization

Ex. It doesn’t matter because they are a big company and I deserve the money

Internal Controls

oPrimary way to prevent, detect, and correct fraud

oPlan of organization and procedures implemented

• Safeguard assets

• Encourage employees to follow company policy

• Promote operational efficiency

• Ensure accurate, reliable accounting records

• Comply with legal requirements

oFive components

Control Environment

Risk assessment

Information systems

Control procedures

Smart hiring practices

oBackground checks

oTraining and supervision

oCompetitive salaries

oClear employee responsibility

Separation of duties

oAsset handling

oRecord keeping

oTransaction approval

oNeed to have multiple people with separate roles

Comparison and compliance monitoring

oOperating and cash budgets

oException reporting

oAudit

Adequate records

oDetails of business transactions

oHard copy documents or electronic

oPrenumbered documents

Limited access

oLimit access employees have to assets based on job

responsibilities

oLock and key

oPhysical access controls

oPassword and encryption

Proper approvals

oManagements general or specific approval

Management may delegate approval to specific

department

oPurchasing department

Only buy from approved vendors

Based on competitive bids

Information technology

oAccounting system continue to rely less on manual procedures

and more IT

oElectronic sensors

oBarcodes

Safeguard controls

oImportant documents on fireproof vaults

oBurglar alarms and security cameras

oLoss prevention specialists

oFidelity bonds on cashiers

oMandatory vacations and job rotations

Internal controls for ecommerce

oStolen credit card numbers

oViruses, Phishing

oEncryption and firewalls are security measures

Monitoring of controls

Payment Packet

oPurchase order

oInvoice

oReceiving Report

Petty cash

oUsed to pay for minor expenses

oEx. Company orders pizza and receptionist uses cash from petty cash box to pay

oAccounts will take receipts from box and replace them with cash

Don’t spend more money on internal controls than you are protecting; Cost Benefit

Bank reconciliation

oExplanation for the differences between the booka and company’s cash records and

bank balance

oBank side

ADD Deposit in transit

SUBTRACT Outstanding checks

ADD or SUBTRACT Bank errors

oBook side

ADD Bank collections

SUBTRACT EFTs payments

ADD EFT receipts

SUBTRACT Service charge

ADD interest revenue

SUBRATCT NSF checks

SUBTRACT Cost of printed checks

ADD or SUBTRACT Book errors

oMust journalize all items on book side of reconciliation

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