AFM 101 Midterm

1. AFM 101 Midterm

2. Students Offering Support: Waterloo SOS • 2nd Largest Chapter Nationally Out of 30 Chapters • Expanded in the USA – Harvard and MIT have started their very first Chapter! • Founded in 2005 by Greg Overholt(Laurier Alumni) • Since 2005, over 2,000 SOS volunteers have tutored over 25,000 students and raised more than $700,000 for various rural communities across Latin America • Founded at UW in 2008 • Tutored 8,000 students and raised $57,500 during 2010-2011 • Offering over 30 course this term, approximately 80 Exam-AID sessions!

3. Want to get involved? APPLY AT WATERLOOSOS.COM Currently Hiring Publicist/Marketing Associates Outreach Associates Expansion Associates Sponsorship Associates Coordinators Tutors Keep checking our site to learn more about how you can participate on our OUTREACH TRIPS to Latin and Central America! “Like” Us on Facebook!

4. Introduction Course Coordinators Jenifer Lee:j388lee@uwaterloo.ca

5. Outline • Chapter 1: Financial Statements • Chapter 2: The Balance Sheet • Chapter 3: The Income Statement • Chapter 4: Adjustments • Chapter 5: Statement of Cash Flows • Chapter 6: Interpreting and Communicating Accounting Information

6. Chapter 1 4 Major Financial Statements: • Balance Sheet • Income Statement • Statement of Retained Earnings • Statement of Cash Flows

7. Chapter 1 Balance Sheet • The company’s financial position at a point in time ABC Co. Balance Sheet December 31, 2009 Assets (list all assets) $XX Total Assets XX Liabilities (list all liabilities) $XX Owner’s Equity/Shareholder’s Equity (list owner’s equity components) XX Total Liabilities and Owner’s Equity XX

8. Chapter 1 Income Statement • Measures the performance or operations of a company over a period of time ABC Co. Income Statement For the Year Ended December 31, 2009 Revenue (list all sources of revenue) $XX Total Revenue XX Expenses (list all Expenses) $XX Total Expenses XX Net Income XX

9. Chapter 1 Statement of Retained Earnings • Retained Earnings is an account on the Balance Sheet • It represents the accumulation of income from Year 1 of the business ABC Co. Statement of Retained Earnings For the Period Ended December 31, 2009 Beginning Retained Earnings $XX Add Net Income for period XX Subtract Dividends paid to shareholders XX Ending Retained Earnings XX

10. Chapter 1 Statement of Cash Flow • Used to show the activity of cash by the company during the year • Used to calculate the cash balance on the balance sheet ABC Co. Statement of Cash Flow For the Period Ended December 31, 2009 Cash flows from Operating Activities (list details) $XX Cash flows from Investing Activities (list details) $XX Cash flows from Financing Activities (list details) $XX Net Increase/Decrease in Cash XX Cash balance (Jan 1, 2009) XX Cash Balance (Dec 31, 2009) XX

11. Chapter 1

12. Chapter 1 Generally Accepted Accounting Principles (GAAP) • Principles and guidelines used by management to account and record their company’s operations • Auditor’s job is to see if financial statements are created in accordance to GAAP • Now, Canada is moving towards a transition to IFRS • IFRS will be an international set of standards that will allow greater comparability and consistency for companies across many different countries

13. Chapter 2 The Balance Sheet

14. Chapter 2 Remember the fundamental accounting equation A = L + SE

15. Chapter 2 Assets • Current Assets • Cash • Short Term Investments • Accounts Receivable • Inventory • Prepaid Expenses • Non Current Assets • Long term investments • Capital Assets /PPE (property, plant, equipment) • Intangible assets (patents, trademarks, licenses, etc.)

16. Chapter 2 Liabilities • Current Liabilities • Accounts Payable • Notes Payable • Accrued Liabilities (Income Tax, Salaries, Interest, etc.) • Current Portion of Long Term Debt • Long Term Liabilities • Long term debt • Mortgage Payable • Bond Payable

17. Chapter 2 Shareholder’s Equity • Share Capital / Common Shares • Proceeds received when shareholders purchased their shares • Retained Earnings • The accumulation of net income from year 1 • The balance comes from the statement of retained earnings • If dividends are paid to shareholders, it comes out of retained earnings

18. Chapter 2

19. Chapter 2 Business Transactions • How do we know ending balances on the B/S? • Business transactions that occurred during the year must be recorded in the general journal • Each journal entry gets posted to the specific accounts involved (General Ledger or T-account) • Sum up the amounts in each T-account to determine the amount to report on the B/S at the end of the year

20. Chapter 2 Double Entry Accounting  DR = CR Debits are always on the left Credits are always on the right = + Shareholder’s Equity Debit Credit Share Capital Debit Credit Retained Earnings Debit Credit Assets Debit Credit Liabilities Debit Credit -+ -+ +- -+ -+ Dividends Net Income = Revenue - Expenses

21. Chapter 2 On Dec 31, ABC Co. purchased an equipment for $10,000. They paid $400 cash up front and the rest on account. Cash A/P Equipment

22. Chapter 2 On June 30, ABC Co. declared a $15,000 dividend to its shareholders. It was paid on Aug 1. Cash Dividends

23. Chapter 2 Assume a company's January 1, 2007, financial position was: Assets, $40,000 and Liabilities, $15,000. During January 2007, the company completed the following transactions: (a) paid the $8,000 in principle on a long term debt (b) collected accounts receivable, $4,000; (c) issued commons shares for cash, $2,000; (d) purchased a truck, paying $1,000 cash and $8,000 notes payable. The company's January 31, 2007, financial position is: Assets Liabilities Shareholder’s Equity 40,000 15,000 25,000

24. Chapter 3 The Income Statement

25. Chapter 3 Remember the “other” fundamental accounting equation Revenue – Expenses = Net Income

26. Chapter 3 Results of Continuing Operations Revenue/Sales $XX Less: Cost of Goods Sold (COGS) XX Gross Profit XX Operating Expenses • Selling expenses $XX • Depreciation XX • Administrative expenses XX Total Operating Expenses XX Operating Income XX Other Revenue and Expenses XX Earnings before Income Tax XX Income Tax Expenses XX Net Income from Continuing Operations XX

27. Chapter 3 Rest of the Income Statement Net Income from Continuing Operations XX Discontinued Operations XX Income Before Extraordinary Events XX Extraordinary Events (+/-) XX Net Income XX Earnings Per Share XX

28. Chapter 3 The Accrual Basis of Accounting • Determines when we can record revenue and expenses on our books • Revenue Recognition Principle • Matching Principle

29. Chapter 3 Revenue Recognition Principle • Determines when revenue is considered earned • 3 criteria • Earnings process is complete • Exchange takes place • Collection of money is reasonably assured • When 3 criterion are met, we can recognize the revenue on the income statement

30. Chapter 3 Matching Principle • Determines when expenses are incurred • Idea is that expenses should be incurred and recorded in the same period as the revenue it helped earn

31. Chapter 3 Cash Basis of Accounting • Revenue is recognized when cash is received • Expenses are incurred when the payment is made Cash 500 Revenue 500 Expense 300 Cash 300

32. Chapter 3 On September 30th ABC Co just made a $3,000 cash payment for the next 6 months of rent Cash Basis Accrual Basis **Cash is paid before the expense is incurred

33. Chapter 3 On Nov 25th TIX Co, a ticketing service agency received $5,000 worth of payments from customers for a Broadway show later in the year Cash Basis Accrual Basis **Cash is received before the revenue is earned

34. Chapter 3 The company received a $500 hydro bill on December 31st, they didn’t make the payment until the next fiscal period Cash Basis Accrual Basis **Expense is incurred before cash is paid

35. Chapter 3 You own a lawn-mowing business and you’ve mowed $200 worth of lawns, yet your clients have promised to pay within the next week Cash Basis Accrual Basis **Revenue is earned before payment is received

36. Chapter 3 Dangers of the Cash Basis • With cash basis of accounting, we are recognizing revenue before it’s earned and expenses before they are incurred OR we’re not recording an entry to reflect the business transaction at all!

37. Chapter 4 Adjusting Entries

38. Chapter 4 During the Fiscal Period: • Record Business Transactions – occurring throughout the fiscal year • Record Adjusting Entries – recognize revenue when earned and expenses when incurred

39. Chapter 4 At the end of the fiscal period: • Prepare Trial Balance – list all the accounts with their balances • Prepare Year End Adjusting Entries – not triggered by a specific event, does not affect Cash • Prepare Closing Entries – transfers net income to retained earnings • Prepare Financial Statements

40. Chapter 4 Pre-Closing Trial Balance (before closing entries) ABC Co. Trial Balance December 31, 2009 Debit Credit Cash XX Accounts Receivable XX Inventory XX … … Accounts Payable XX Accrued Liabilities XX … … Share Capital XX Retained Earnings XX Revenue XX Other Revenue XX Salaries Expense XX Rent Expense XX …. …. Total XXXX

41. Chapter 4 Deferred Revenues (Unearned Revenue) – cash was received before revenue was earned • During the fiscal period, when cash was received • Adjustment (revenue is earned)

42. Chapter 4 On Jan 1st, ABC Co signed a contract stating they will provide 2 months of services. They received $1,200 payment up front. Jan 1st Jan 31st Feb 28th Revenue Cash Unearned Revenue

43. Chapter 4 Deferred Expense (Prepaid Expenses) – payment was made before expense was incurred • During the fiscal period, when cash was paid out: • Adjustment (when expenses are incurred): Adjust to reflect amount of expense incurred, and the asset used up:

44. Chapter 4 On Jan 1st, the Supplies account had an opening balance of $1,000. On April 30th, ABC Co purchased $500 worth of supplies. At December 31st, a count revealed only $700 worth of supplies were left April 30th December 31st Supplies $1,000 Supplies Expense

45. Chapter 4 Accrued Revenue (Receivables)– cash is received after revenue is earned • During the fiscal period, when service /good is provided (set up a receivable) • Adjustment when cash is received:

46. Chapter 4 On Mar 1st, ABC Co provided services worth $500, the customer subsequently paid on Apr 24th Mar 1st Apr 24th Service Revenue A/R

47. Chapter 4 Accrued Expense (Payable) - cash is paid out after an expense is incurred • During the fiscal period, when expense is incurred (set up a payable): • Adjustment when payment is made:

48. Chapter 4 The company pays their employees on a bi-weekly basis. Total salaries expense for each period is $20,000. The next payday is Jan 2nd. The company has a Dec 31st year end. Dec 31st Jan 2nd Salaries Expense A/P

49. Chapter 4 Amortization • Matching Principle  match expense with revenue • Capital Assets  used to generate revenue • Therefore, portions of the cost of capital assets are allocated as amortization expense each period • Cost Principle  assets are listed on the balance sheet at their historical cost (i.e. purchase price) • Amortization is accumulated in a contra-asset account  accumulated amortization

50. Chapter 4 Capital Assets are listed at their net book value on the Balance Sheet Non-Current Assets Equipment 10,000 Less: Accumulated Amortization – Equipment 2,000 8,000 Equipment Accumulated Amortization: Equipment