Final - Mgab01

UTSC
MGAB01H3
Final EXAM
STUDY GUIDE
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University of Toronto (UTSC)
MGAB01H3
Introductory Financial Accounting I
Fall 2017
Term Test 1
Prof: Lisa Harvey
Exam Guide

Financial Statements and Business Decision
Top 3 things in this chapter:
1. Identify the different users + info needs

2. Describe the info conveyed to different decision makers in each of 4 financial statement.
• Financial Position
• Comprehensive Income
Quantitative aspects
• Changes in Equity
• Cash Flow
3. Define GAAP – IFRS or ASPE
International Financial Reporting Standard (Canadian, IFRS)
Accounting Standard for Private Enterises
User Perspective: Objectives of financial accounting
1. Identities + records the economic events of an organization

2. Describe info conveyed to different decision makers in each of the financial statements
Dividends → distribution of earnings to investors
Business Owners/Investors/Shareholders Creditors

• Look for 2 things: • Lend to a company for a specific length
1. Increase value of organization - for of time:
future sale - long term goals 1. Earn interest
2. Converting Earnings to dividends – 2. Received debt payment
Short term goals. e.g. TD Bank, RBC, Scotiabank… etc.

Employees
• Earning income, stability, pensions

• Promoted (ability to pay me well)
Responsibilities for Accounting Financial Statements & Types:
THE 4 BASIC FINANCIAL STATEMENTS:
1. Financial Position: concise pic of financial position of the company at a point in time
Quantitative
2. Comprehensive Statement: concise pic of profitability (income/1055) for a period of

time.
3. Changes in Equity:
4. Statement of Cash Flow: What happened to cash
*
5. QUALITATIVE – Financial statement
Notes
* most companies prepare F/S monthly, quarterly, annually *
IFRS → I te atio al Fi a ial Repo ti g Sta da ds Wo ld-wide used)
ASPT → A ou ti g Sta da ds fo P i ate E te p ises
1. F/P → Body of Statement <Balance Sheet>:

A. Assets
o Thing owned + controlled by the business
B. Liabilities
o Debts/obligations that resulted from PAST transactions.
o Benefits received – will useup future resources later
e.g. cash, Mortgage, Suppliers… etc.
C. Shareholders’ Equity

o Amount financed by owners of the corporation (Share Capital) and

accumulated earnings retained in the business (Retained Earnings)
o Whatever is left from dividends (R.E.)
o How much company earns (Capital)
A/C Receivable → ONLY CUSTOMERS ot Mo s
Supplies → Consumable goods
Equipment → Resou es Co pa owns that generates income
A/C Payable → Ve do s, Supplie s, Supplie s pa i da s… et .
Notes payable → Ag ee e t et ee a k a d the o pa ith te s
- An obligation to pay governed by the note and bank. E.e. Mortgage Payable, Bank
Loan Payable
- Generates interest. (friendly Institutions)
Ordinary Shares → Sha es that the o pa has pu hased.
Retained Earnings → Mo e ade that is ’t gi e out as di ide ds to g o usi ess.
→ Re e ue less e pe ses + et i o e, less di ide ds
* BALANCE SHEET * Assets = Liabilities + Shareholders’ Equity
�
� = � + �� < �
2. Comprehensive Income
A. Revenues
o Sale of goods & services provided to customers as part of the major
operations of the business.
B. E pe ses
o Dollar amount of goods + services used up by the entity to earn revenue
during a period.

 Cost of goods sold

Selling, general + administrative
I te est e pe se
Total e pe ses
 I o e efo e i o e ta es
C. Net Income
o Revenue – E pe ses = Net I o e
3. Changes in Equity (IFRS)

A. 1st Colu → A ou t of Sha ed Capital
B. 2nd Colu → Retai ed Earnings
o Amount since the start of this company
o Only required for ASPE
C. 3rd Colu → Othe
→ Do ’t Wo
Relationships Among Statements (3 of them)
1. Profit from Income Statement results in an increase in ending retained earnings

2. Feeds into Balance Sheet → Fi a ial Positio
(Profit or Loss) * HAS TO BALANCE TO A=L+SE
3. Don’t worry but then * Cash Flow *

Notes to the Financial Statements
→ P o ides supple e tal i fo a out fi a ial o ditio of a o pa .
Three Types:
1. Describe accounting rules applied

2. Present additional detail about an item on the financial statements
3. Provide additional info about an item NOT on the financial statements. (Contracts
on future pla s: e.g. Ja ues e t ea
e.g. Notes pa a le → due o pa ti ula date, interest, cubinance + security
→ E a ple of (2)
BASIS OF REPORTING
CASH BASIS ACTUAL BASIS

• When we pay (on hand) • Record when it occurs in the right
• Not a TRUE depiction period
• Only illustration. <simple> • ONLY ethod allo ed i IFRS.
(method of choice)
GAAP → Ge e all A epted A ou ti g P i iples GAAP
→ IFRS o ASPE
→ B oad alues i a ou ti g p ofessio

Investing and Financing Decisions and the Statement of Financial

Position [ SFP ]
Understanding the Business

Overview
A company’s financial performance, as reported through its audited financial statements
helps users - oth i te al a d e te al de isio ake s - review how well the business
has implemented strategies in order to improve future growth potential. Financial
Statements are intended to communicate economic facts, and this can be achieved when
companies begin to ask themselves certain questions...
● What type of business activities cause changes in the amounts reported on the SFP?
● How do these activities affect these amounts?
● How do companies keep track of such amounts?
The Conceptual Framework
• O je ti e of E te al Fi a ial Repo ti g
o To provide relevant financial information to potential investors, lenders and
creditors to help with the decision-making process regarding the provision of
resources to the business.
• Qualitative Characteristics of Accounting Information
o Fundamental Characteristics
 Relevance - Is the information relevant to decision-makers?
o Enhancing Characteristics
 Faithful Representation - Are the financial statements accurate? Free from bias?
 Comparability - Can the info be compared to that of other businesses?
 Verifiability - If reproduced, will the information stay the same?
 Timeliness - Is information provided fast enough to make relevant decisions?
 Understandability - Is the content understandable to those who analyze it?

• Measurable Elements to be Reported

o Assets, Lia ilities, Re e ues, E pe ses, Sha eholde ’s E uit , I est e ts,
Withdrawals, Dividends
o Gains, Losses and Comprehensive Income
• Concepts for Measuring and Reporting
o Principles:
 Mi ed-Attribute Measurement - Based on historical cost and fair value
 Revenue Recognition - Revenue is recognized when it is measurable
 Full Disclosure - All relevant information should be disclosed to decision-makers
o Assumptions :
 Separate Entity - Corporation owners are separate from the business itself
 Stable Monetary Unit - Transactions can be measured in terms of monetary units
 Continuity - Assu ptio that the usi ess ill e ist i defi itel goi g o e
 Periodicity - Income and cash flows will be reported periodically ( e.g. monthly )
o Constraints :
 Cost - Cash amount given up for an asset
 Prudence - Assets aren’t overstated, and liabilities aren’t understated
Overview of Accounting Concepts

Elements of the Classified Statement of Financial Position
*** Refer to Statement of Financial Position in Ch. 1
The SFP focuses on reporting the amount of assets (resources owned), liabilities (money owed)
and shareholders’ equity that a business owns at a specific point in time.

Elements of this Statement
Current Assets ( short-term ) Non-Current Assets ( long-term )

Cash Property
Short-term Investments Equipment
Accounts Receivable Financial Assets
Inventories Goodwill
Prepaid Expenses Intangible Assets
Current Liabilities ( short- Non-Current Liabilities ( long-term )

term ) Bank Loans
Accounts Payable Long-Term Debt ( over a year )
Short-term Debt Provisions
Income Taxes Payable
Accrued Liabilities
Provisions

What Types of Business Activities Cause Changes in Financial Statements Amounts
Nature of Business Transactions
• E te al E e ts -: E ha ge of assets / lia ilities et ee the usi ess a d othe parties

( e.g. Bank )
• Internal Events _: Not between parties, but has a direct effect on an entity ( e.g.
Depreciation of Assets )
Accounts
Accounts are used to organize transactions in an effort to observe the effects of these
transactions on the financial position of a business entity. The transactions themselves can be
eithe i te al o e te al.
• The Statement of Financial Position keeps track of Assets, Liabilities and Shareholder’s
Equity accounts
• The Income Statement and the Statement of Comprehensive Income focus on Revenue
a d E pe ses

Chart of Accounts
Assets Liabilities Equity Revenues Expenses
Cash Accounts Payable Contributed Capital Sales Revenue Cost of Sales

Accounts Receivable Accrued Liabilities Retained Earnings Fee Revenue Wage Expense
Notes Receivable Notes Payable Interest Revenue Rent Expense
Inventory Tax Payable Rent Revenue Interest Expense
Supplies Bonds Payable Service Revenue Advertising Expense
Prepaid Expenses Deferred Revenue Insurance Expense
Investments Repair Expense
Equipment Income Tax Expense
Buildings Depreciation
Land
Intangibles
Increase with Debit Increase with Credit Increase with Credit Increase with Credit Increase with Debit
Decrease with Credit Decrease with Debit Decrease with Debit Decrease with Debit Decrease with Credit

How do Transactions Affect Accounts

Principles of Transaction Analysis
• Recall the Fundamental Accounting Equation: Assets = Liabilities + Equity. In order
to properly document the effect of transactions on a business, every transaction
must affect at least two accounts ultimately keeping the accounting equation in
balance.
• HINT - When completing journal entries, check that Debits = Credits. If not, subtract
the smaller sum from the larger one, then divide by two to determine which
amount was wrongly entered.
• Journal Entries are firstly recorded into T-Accounts, once completed the sums from
the transactions are posted to the General Ledger, which are then used in the
creation of the Statement of Financial Position.
Exa ples of Basic Tra sactio s
Transaction Description Journal Entry

Owner issues new shares. D : Cash C : Capital
Company borrows money from bank. D : Cash C : Notes Payable
Company buys asset - half cash, half on account. D : Computer C : Cash
C : Accounts Payable
Company lends to a trade supplier. D : Notes Receivable C : Cash
Company buys a share ( long-term investment ). D : Investments C : Cash
Company declares dividends. D : Retained Earnings C : Dividends Payable

How do Companies Keep Track of Account Balances

The Accounting Cycle
At the Beginning of the Period At the End of the Period
● Analyze transactions ● Adjust e e ue a d e pe se a ou ts

● Record Journal Entries in the General Journal ● Prepare Financial Statements
● Post amounts to the General Ledger ● Close Accounts
The Direction of Transaction Effects

Transactions are used to change the balances of asset, liability, equity, revenue and
e pe se a ou ts. Refe to the De it [ ADE ] / C edit [ CLR ] Theo hi h states that
Assets, Withd a als f o E uit a d E pe se a ou ts i ease ith de its, hile Capital
in Equity, Liabilities and Revenue increase with credits.
*** Refer to the Chart of Accounts
Analytical Tools
A simple journal entry within the General Ledger would look as such...
Monday, Oct. 2nd, 2017 Dr. Property, Plant, and Equipment $100
Cr. Cash $50
Cr. Notes Payable $50
To record the purchase of equipment, half in cash, half on account.

How is the Statement of Financial Position Prepared and Analyzed
Classified Statement of Financial Position
The Statement of Financial Position can be created at any point in time based on the current
account balances. In a Classified Statement of Financial Position, current and non-current assets
and liabilities are separated to create a further understanding of the business’ financial
position.
• Current: Short-te assets that e pi e o a e used up ithi a ea e.g. Supplies , a d

short-term liabilities that must be paid back within the time frame of a year or less. ( e.g.
Notes Payable )
• Non-Current Assets : Long-term assets that can last over the course of a couple years (
e.g. Equipment ) or long-term liabilities that take longer than a year to repay. ( e.g. Bank
Loan )
Some Misconceptions
Bookkeeping vs. Accounting
• Bookkeeping is the routine of keeping track of a business's records, and requires

minimal knowledge of the field of accounting.
• Accounting requires the skills and abilities to create information systems, analyze
o ple t a sa tio s, a d i te p et fi a ial data accurately.
Additionally, it’s important to recall that most accounting transactions are influenced by
esti ates, a e a ple ould e dep e iatio . The e’s o a of k o i g fo su e ho lo g a
asset may last, all we know is that over time, its usefulness deteriorates.
Lastly, financial statements simply report on an entity’s financial position and the amount it has
in assets, liabilities and equity. They do not report the company’s market value.

Operating Decisions and the Income Statement
The Operating Cycle
• The long-term objective of any business is to earn a profit by generating more cash
th ough al ead e isti g ash. This e ash ust e ge e ated th ough ope ati g
activities - not borrowing money, or selling assets, and can be achieved over time if
companies set goals, plans, strategies and measurable indicators for themselves. Recall
from chapter one, that operating activities are the day to day occupations that
businesses go through, including buying and selling products, paying suppliers and
collecting cash.
• The operating (cash to cash ) cycle begins with the purchase and receival of raw
materials, or finished goods for the sake of sale or resale. Revenue gathered is
reinvested into the production of goods.
• Products are purchased or manufactured on credit
• Suppliers are paid back in cash
• Product is delivered, or service is provided
• Cash is received

Operating Cycle: Underlying Accounting Assumptions
• Time Period : The long life of the company can be reported at smaller intervals (
periodicity )
• Recognition Issues: When should the effects of the operating activities be recognized?
• Measurement Issues: What amounts should be recognized?
Classified Statement of Earnings
The State e t of Ea i gs helps i te al a d e te al de isio makers in identifying the

business’ earnings from operating activities throughout the accounting period. This statement
includes three areas…
• The sum of the amounts of the two first areas results in an amount for Net Earnings.
o The results of continuing ope atio s [ P ofit = Re e ues - E pe ses + Gai s - Losses ]
 Continuing operations are the daily business activities that a company
completes. Such tasks have been previously discussed in the operating cycle.
o The results of discontinued operations
 Discontinued operations are major segments that a business disposed of. These
transactions are reported separately, and serve no purpose in determining the
future of a business.
o Earnings per share
Elements of a Statement of Earnings
• Gains: The increase in owner’s equity as a result of something other than operating
activities.
• Losses: The decrease in net income as a consequence of non-operating activities.
• Revenues: The amount of money a company receives from business activities.

• E pe se: The money spent, or the cost incurred in an effort to generate revenue.
o E.g. Re t, I su a e, Repai s, Utilities, Ad e tisi g e pe ses.
How are Operating Activities recognized and Measured?
Cash Basis Accounting
• This method of accounting recognizes revenue only when cash is re ei ed, a d e pe ses
when cash is paid. However, this method is not allowed under the GAAP (Generally
Accepted Accounting Principles) rules and would only be generally accepted for
usi esses that do ’t eed to epo t to e te al use s.
Accrual Basis Accounting
• U de this ethod of a ou ti g, assets, lia ilities, e e ues a d e pe ses a e e pe ted

to be recognized when the transaction that causes them occurs - cash doesn’t
necessarily need to be involved. Net Income is calculated as such: Revenues (when
earned) - e pe ses he i u ed = A ual Basis Net I o e.
I te atio al Fi a ial Repo ti g Sta da ds [ IFRS ]
This accrual basis accounting method is required by both GAAP and IFRS since it abides by the
rules and guidelines it sets forth to ensure proper and efficient accounting. Those are listed
below...
• Revenue Recognition: Revenue should be recognized when it is earned, as opposed to

when cash is received.
• Business Entity Concept: Accounting for a business should be kept separate from
personal affairs and other businesses.
• Cost Principle: States that accounting for a business’ purchases must be recorded at
their cost price.
• Time Period Concept: Accounting process takes place over fiscal periods; the period of
time reflected in financial statements, typically a calendar year or a quarter.

• Conservatism: Be cautious to ensure that neither assets are overstated nor liabilities are
understated.
• Consistency Principle: Must use the same accounting policies, if changed, modifications
must be disclosed to show impact.
• Materiality: Information is material if it would impact the decisions of those who read
the financial statements of the business.
• Going Concern: Assumption that a business will continue to operate and that hardships
such as bankruptcy do not occur.
• Objectivity: The financial statements of any business or organization must be free from
biases.
Revenue Recognition Principle
This Principle abides by the Accrual Basis Accounting and states that revenue must be
recognized when…
• The company has transferred the goods over to the buyer.

• The business no longer has ownership of the goods sold to the buyer.
• The amount of revenue received from the sale can be measured reliably.
• It is probable that the entity will reap the benefits of the transaction.
• The costs incurred, or to be incurred can be measured reliably.
The Expanded Transaction Analysis Model
Transaction Analysis Rules
Re all the De it [ADE] / C edit [CLR] Theo .
• Assets: Debits Increase, Credits Decrease

• Liabilities: Debits Decrease, Credits Increase
• Capital: Debits Decrease, Credits Increase
• Drawings: Debits Increase, Credits Decrease

• Revenue: Debits Decrease, Credits Increase

• E pe ses: Debits Increase , Credits Decrease
Below are listed a couple of rules accounting abides by…
• All a ou ts a i ease a d de ease, although e e ues a d e pe ses te d to

increase.
• Debits are on the left of the T-Accounts, while credits are always on the right.
• Every transaction affects at least two accounts.
• Revenues increase with credits since they affect Net Earnings, Retained earnings and
Equity.
• E pe ses i ease ith de its si e the de ease Net Ea i gs, Retai ed ea i gs a d
Equity.
How is the Statement of Earnings Prepared and Measured?
How Financial Statements Prepared and Analyzed
Statement of...
• Earnings: Revenues - E pe ses = Net Ea i gs
• Changes in Equity: Beginning Equity + Net Earnings - Dividends Declared + Other =
Ending Equity
• Financial Position: Asset = Liabilities + Shareholder’s Equity
• Cash Flows: Cash from Operating + Investing + Financing Activities = Change in Cash
NOTE: Statements must be created in this order, because sums found in the previous
do u e t, help i the eatio of the e t.
Total Asset Turnover
• The asset turnover ratio is calculated by dividing Sales Revenue by Average Total
Assets*. The ratio measures the sales generated per dollar of assets and helps decision-

makers in determining how efficiently a business is using their current and non-current
assets in the generation of revenue.
Return On Assets
• Retu o Assets is fou d di idi g Net Ea i gs + I te est E pe se A e age Total

Assets*. This ratio determines how much the company earned for each dollar that was
invested into it, and helps debtholders and shareholders observe how well the firm is
employing their investments.
* Average Total Assets = (Beginning Total Assets + Ending Total Assets ) / 2
Income from Continuing Operations
(a) Multiple Step

• Operating + Non-Operating activities are separated
• E pe ses a e lassified fu tio
(E.g. Selli g + Ad i ist ati e E pe se, Cost of Goods Sold
• Advantages:
o Highlight req + irreq activities allows for greater prediction value
(assess future earnings) and feedback value (assess past earnings)
o Provides better detail to Compare Companies
o Allows for ratio analysis used to assess performance.
(b) Single-Step
• 2 Broad Classifications:
o All revenues + gains are listed first
o All e pe ses + losses a e listed e t + su t a ted f o total e e ue
to compute net income
o Income from continuing operations is computed in one step, without
intermediate subtotal.

Tutorial #1
Statement of Earnings
Nuclear Company
Summary of Income Statement
For the year ended Dec. 31, 2014
Total Sales Revenue 140 000

Total E pe ses e ludi g I o e Ta 99 100
Ea i gs efo e I o e Ta 50 900
I o e Ta E pe se 15 270
Net Earnings 35 630
Statement of Financial Position

Nuclear Company
Summary of Income Statement
For the year ended Dec. 31, 2014
Assets Liabilities & Shareholders’ Equities
Cash Accounts Payable
Accounts Receivable Salaries Payable
Inventory Total liabilities 49 370
Equipment Shareholder’s Equity
Total Assets 172 000 Contributed Capital 87 000
Retained Earnings 35 630
Total + SE 172 000
* MIDTERM: A/R might sep. trans actions – sub up *
P2-5 Assume that the following transactions occurred in the last quarter of 2012.
a) Dr Cash €60
Cr Contributed Capital €60
b) Dr Cash €615
Cr Financial Liabilities €615
c) Dr Retained Earnings €1160
Cr Cash/Dividend Payable €1160
d) Dr Intangibles €64
Cr Cash €64
e) Dr pp & E €6924
Cr Cash €1514

Cr Long-Term bank loan €5410

f) Dr Investments €623
Cr Cash €623
g) Dr A/R €125
Cr Cash €125
h) Dr Cash €461
Cash Investments €461
ICQ 4 P 3-2 (Recording normal entries)
May 1 Dr Cash (+A) 40 000

Cr Share Capital (+SE) 40 000
May 1 Dr Cash 60 000

Cr Longterm Bank Loan 60 000
May 1 D Re t E pe se -SE) 1500
Dr Prepaid Rent (+A) 1500
Cr Cash (-A) 3000
May 1 Dr Prepaid Insurance 2400
Cr Cash 2400
May 3 D Fu itu e/Fi tu es +A 15 000

Cr Accounts Pauable 15 000
May 4 Dr Inventory (+A) 2800
Cr Cash 2800
May 5 Dr Ad e tise e t E pe se TE-SE) 3000

Cr Cash (-A) 3000
May 9 Dr Accounts Receivable (+A) 850
Dr Cash (+A) 850
Cr Revenue (+SE) 1700
D Cost of Goods sold TE→-SE) 900
Cr Inventory (-A) 900
May 10 Dr Accounts Payable 15 000
Cr Cash 15 000
May 14 Dr Cash 210

Cr Accounts Receivable 210

Adjustments, Financial Statements, & Quality of Earnings
The Accounting Cycle
CHART OF ACCOUNTS
Phase 2: End of the Acc period Opening Balance Phase 1: During Acc Period
Closing Entries Transactions / Events
Prep. of Financial Statements Transaction Analysis
Adjusted Trial Balance Journal Entries
Adjusted Entries POSTING
Unadjusted Trial Balance
Review: * required by GAAP
1. Cash Basis: Re + E p are recorded when $$ is received
2. Accrual Basis: - A, L, Re , E e e og ized he t a sa tio that causes them occurs, not

when cash is paid/received
Adjusted Entries
Accruals
A ual E pe se → D E pe se
C A ual E p
E o o i E ha ges Dec 31 Cash E ha ges

A ual Re e ue → D A/ Re e ue
Cr Revenue

I o e ta
Deferrals
e.g. Depreciation
Defe ed E pe se:
Option A, Option B
Cash E ha ges TE Economic Event Deferred Revenue:

Option A, Option B
> E a ples of All Adjusti g E a ples
1. A ual E pe se: Sa ple Co pa has e plo ees, ea h $ / eek, paid e e

F ida ut the ea e d YE is De , o a Wed esda .
(1) (2) (3)

M T W T F →Pa Da
Dec 31
3
100 × $1000 × �� = $60 000
5
Journal Entry:
• Dec 31, 2015 D Wages E pe se 60 000
End of
Period
Cr Wages Payable 60 000
Ne t Yea • Jan 2, 2016 D Wages E pe se 40 000

Dr Wages Payable 60 000
Cr Cash 100 000
→ Assu e that Sample Co. did not record Adjusting Entry @Dec 31, 2015 and on Jan 2, 2016
D Wages E pe se 100 000

Cr Cash 100 000

A L SE Revenue E pe se Profit
2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
NE NE NE US NE OS NE NE OS US US OS
60000 60000 60000 60000 60000 60000
* error would correct itself at the END of the 2nd year. *
(Accrued) A = L + SE
+T T+ T+
Accrual Revenue:
Sample sold $5000 goods cost $3000 on Dec 31, 2015 and transactions were recorded on Jan 4,
2016/ Assume that YE is De , .
→Jou al E t
• Dec 31, 2015 Dr Accrued Revenue 5000

Cr Revenue 5000
Dr Cost of goods sold 3000
Cr Inventory 3000
→ Assu e that the jou al a o e as e o ded o Jan 4, 2016
2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
NE US NE NE NE US OS US OS US OS US
2000 2000 5000 5000 3000 3000 2000 2000
No effect

Depreciation:
Co. purchased $10,000 equipment on Mar 1st (useful for 4 years + $2000 residual value).
Sample’s year end is May 31st.
Dep. E pe ses = Cost – Residual Value
10 000 – 2000 = / ea s = 500
4 years
→ Jou al E t :
• May 31, 2015 D Dep e iatio E pe se 500
Cr Accumulated Dep Equip 500
→ Assu e that Sa ple Co. sta ted e o di g the dep e iatio i .
2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
OS OS NE NE OS OS NE Ne NE US NE OS
500 500 500 500 500 500
Deferred Revenue:
Sa ple Co. e ei ed $ , ash f o a te a t. Who sig ed a ea lea e o Aug , . YE

is May 31st.
A. Sample recorded the transaction to B. Sample recorded the transaction as

Deferred Revenue Revenue
8/1/16 Dr Cash 36000 8/1/16 Dr Cash 36000
Cr Deferred Rev 36000 Cr Revenue 36000

D/R Rev D/R Rev

10000 Ø (beg 10000 Ø (beg 26 36
balance) (AP) balance) (8/1)
36 26
(8/1) 26000 10000
26000 10000
Dr D/R 10000 Dr Revenue 26000

Cr Revenue 10000 Cr D/R 26000
36000 1000
= �� ℎ
36 × 10
= 10000
Defe ed E pe se: → P epaid E pe se
Sample Co paid 2 year Insurance Premium for $29000 on Feb 1, 2015 was recorded as
1. Prepaid Insurance
2. I su a e E pe se Yea E d is Ma st

(A) Prepaid Insurance (B) I su a e E pe se
Prepaid E pe se Prepaid E pe se
Ø 4000 4000 Ø
24 20000 24000 20000
20 4000 20000 4000
Dr I su a e E pe se 4000 Dr Prepaid Ins. 20000

Cr Prepaid Ins. 4000 Cr I s. E pe se 20000
> If the beginning balance was $6,000
(A) (B)
Prepaid E pe se Prepaid E pe se
6000 10000 6000
24000 10000 14000 24000 14000
20000 10000 20000 4000
D I su a e E pe se 10000 Dr Prepaid Ins. 140000

Cr Prepaid Ins. 10000 Cr I su a e E p 140000

Supplies Inventor →Prepaid E pense
Sample has $10000 supplies inventory at the beginning of the year. The Co. purchased $50000
supplies and recorded as
1. Supplies e pe se 2. Supplies Inventory
(A) (B)
Inv. E pe se Inv. E pe se
10000 50000 10000 57000 57000
7000 7000 50000
3000 57000 3000 57000
Dr Supplies E pe se 7000 Dr E pe se 140000

Cr Inventory 3000 Cr Inventory 140000
* Memorize the 3 different statements *
ICQ #1 - E4-7
1. Dec 31, 2014 D Wages E pe se 2700
Cr Wages Payable 2700
2.
OS Inv O/S E p
450
500 675 675
275 675
D O/S E pe se 675
Cr O/S Inventory 675

3. Accrued Revenue
Dr Accrued Receivable 1120
=
Cr Rent Revenue 1120
��− ��

4. �� = = ��
��
D Dep E pe se 12100
Cr Accumulated Dep 12100
5. 2 year Insurance
Prep Ins. (A) I sE p

Ø Dr I s E pe se 600
7/1/14 2400 600 Cr Prep Ins 600
1800 600
= × 6 = 600
��ℎ
1800 → P epaid
6.
D/R Revenue 96
= 1600 × 2 = 3200
6
Ø = 3200 Rev
3200 9600 (11/1) 3 3200 6400 O/R
6400 3200
Dr D/R 3200
Cr Revenue 320

(B)
D/R Revenue Dr Revenue 6400

6400 6400 9600 Cr D/R 6400
6400 3200
7. Dr Accrued Receivable 800

Cr Repairs Revenue 800
May 1 Dr Cash (+A) 40 000

Cr Share Capital (+SE) 40 000
May 1 Dr Cash 60 000

Cr Long-term Bank Loan 60 000
May 1 D Re t E pe se -SE) 1500

Dr Prepaid Rent (+A) 1500
Cr Cash (-A) 3000
May 1 Dr Prepaid Insurance 2400

Cr Cash 2400
May 3 D Fu itu e/Fi tu es +A 15 000

Cr Accounts Payable 15 000
May 4 Dr Inventory (+A) 2800

Cr Cash 2800
May 5 D Ad e tise e t E pe ses TE-SE) 3000

Cr Cash (-A) 3000
May 9 Dr Accounts Receivable (+A) 850

Dr Cash (+A) 850
Cr Revenue (+SE) 1700

Dr Cost of goods Sold TE→ -SE) 900

Cr Inventory (-A) 900
May 10 Dr Accounts Payable 15 000

Cr Cash 15 000
GOOD LUCK!

University of Toronto
Scarborough
MGAB01H3
Introductory Financial Accounting I
Fall 2017
Final Exam
Prof: Lisa Harvey
Exam Guide
Table of Contents:
Reporting and Interpreting Sales, Revenue, Receivables, and Cash Parts I - IV
Reporting and Interpreting Cost of Sales and Inventory

Reporting and Interpreting Sales, Revenue, Re eiva les, and Cash Part I
(1) Revenue → Rev. recognition - impact of credit sales, sales discounts
Rev. principle -return ton amounts as net sales.
(2) A/Receivables → Estimate, report & evaluate the effects of uncollectible accounts
receivable (bad debts) on the financial statements.
The Rev. Recognition Principle
Recongnizes revenues when the earnings process = complete/substantially

complete. (RPMC)
● Risks + rewards have been transferred.

● Performance – complete
● Transaction/consideration can be MEASURED
● Collection is reasonably assure.
eg. Artist paints a portrait. Buyer paid but if hasn’t been delivered yet until 2017.
∴ C ✓ BUT Risks + Rewards ≠ transferred.
p ✓
M ✓ ∴ Should be recorded as revenue next year.
Reporting Net Sales
Sales Revenues
Less : Credit card discounts Companies record these contra-acc.
Sales discounts Sep. to allow mgmt monitor these
Sales returns & allowances transactions.
Net Sales.
redit Card Discount → Increases Sales, avoid providing credit directly to customers.
(1) C
*must pay credit card → Avoid losses due to bad cheques
Company a fee for → Receive payment quicker
The service it provides* (Credit Card Discounts reported as a contra-revenue acc.)
(2) Sales Discount 2 / 10 , n / 30

(3) S ales Returned and Allowances → Debited & or damaged/returned mevds.
Significant $ in retail + book publishing
ontra Rev acc. (extent of customer dissatisfaction)

→ C
→ I f returns = material + inestimable – sales rev can’t
be recorded until after uncertainty – resolved.
6 entries that are important :
➢ Sample co. started the year w/$30000 A/R Balance and $6000 Allowance for
Doubtful Account (AFDA)
(i) Total Sales for the year amounted to $100,000 of which $20, 000 was cash sales,
$00000 was credit sales & the remainder on account with 2/10, n/30. Credit Card
Co. charges 4% on credit sales. Gross Profit is 40%.
● DR Credit Card discount (40000 x 4%) 1,600
Cash Sales (20000 + 40000 – 1.6) 58,400
A/R 40,000
CR Revenue 100000
● DR Cost of goods sold (100000 x 60%) 60000
CR Inventory 60000
Cost of goods 60%
1,000 of goods were returned to inventory

(3) $
● DR Sales return & allowance 1,000
CR Accounts receivable 1,000
● DR Inventory (1000 x 60%) 600
CR Cost of goods sold 600
What if the inventory retuned from customers is damaged.
● DR loss due to damaged goods 600

CR Cost of goods sold 600
*(NO EFFECT ON INCOME)*

(4) T otal bad debt was calculated (calculation TBD) to be 4,000
● DR bad debt expense 4,000

CR AFDA 4,000
*Bad debt = an estimate NOT ACTUAL, recorded once a year*
uring the year, the company wrote off $2,000 of A/R that were deemed uncollectible.
(5) D
*ACTUAL A/R GONE BAD*
● DR AFDA 2,000

CR A/R 2,000
*(NO EFFECT ON INCOME)*
2,500 of previously written off account were collected during the year.
(6) $
● DR A/R 2,500

CR AFDA 2,500
● DR cash 2,500
CR A/R 2,500
Calculating Bad Debt : <BASED ON (6) entries before>
llowance method →
(A) A
↪ Credit Sales Method ad debt % is based on actual uncollectible accounts from
- b
prior years’ (historical rates) credit sales.
ad debt expense on income statement.

- B
et Credit Sales

- N
x % Estimated uncollectible
Amount of Journal Entry
eg. Credit Sales 40, 000
Less DR Bad debt exp 1945
Sales Discount (90) CR AFDA

1945
Sales R & A (1,000)
Net Credit Sales 38,910 5% = 1945
GIVEN

B/Sheet
↪ Aging Method - bad

debt exp DR 1300
A/R AFDA
Beg. 30000 15000 (2) 6000 Beg.
k(1) 40000 1000 (3) 000
(5) 2 2500 (6)
500
(6) 2 2000 (5) 6500
2500 (6) 1300
EB 52000 7800
GIVEN 15% = 7800


Interpreting and Reporting Sales Revenue, Re eiva les and Cash Part II
Bad debt expense
✓ n
ot actual
✓ e stimate
✓ r ecord if once a year / period.
➢ Allowance Method
↪ “CR” AFDA – policy choice
(1) Balance sheet (2) I ncome
statement approach
(2) (% of A/R, the aging (% of sales approach)
method)
2T – accounts : ✓ n

eed net credit sales
A/R Allowance for doubtful acc - (A/R) Credit Sales XXX

Beg bid XXX XXX beg balance - less : Sales Discount (XXX)
(a) Cvs sales XXX XXX cash collection XXX bad debt - less : Sales returns & Allowance (XXX)
(6) expense (c) (only from credit sales
A/R prev. writes XXX uncollectible & Uncollectible / XXX A/R prev Net Credit Sales XXX
off non written off (d) written off XXX writes off non
collectible collectible
(e) XXX XXX A/R collected (e) Bad debt % XX%
Allowance XXX XXX End balance Bad debt expense XXX
X % gives you desired AFDA
It the overall end balance of AFDA
Is > than desired AFDA, credit
(NEGATIVE EXPENSE)
Can be a credit!!
➢ Write-off method
Direct w/o approach ✡ No GAAP (usually small/private businesses)
(1) No AFDA account
(2) Bad debt expense is Actual not an estimate

DR Bad debt expense XXX

CR A/R XXX
Looking at the example (comparing AFDA)
Entry (A) Same
(B) S ame
o entry
(C) N
ot the same

(D) N
redit bad debt

(E) C

Interpreting and Reporting Sales Revenue, Re eiva les and Cash Part III
Looking at the example (comparing AFDA)
Entry (A) Same.
(B) Same
(c) No entry
Br bad dept expense
(D) N
ot the same CR A/C
(E) c reditbaddebt.
Example : Frasier ltd. 4% of A/R bad debt.
Q 1. A/R AFBA

Beg balance 1,250,000 50,000 Beg. Bal.
(3) 42,000
(1) 12,800,000 10,000,000 (2)
42,000 (3)
End b. 4,008,000 160,320. EB
x 4% desired = 160320
end AFBA
(800000 + 200000 − 66000)

DR cash 3934000
(1) Cash soles 800000 DR cr. Card descant 66000
CR card sales 2200000 ×3% = 66000 DR A/R 12800000
A/R 12800000 credit card discount. CR Sales 15800000
Total sales 15,800,000
(2) A/R collected. 10000000
70% 30% = 30000
Cash 7000000 ∴ net cash 2970000

DR cash 9970000
DR sales disc. 30000
CR A/C 10000000
(3) DR AFBA 42000

CR A/R 4200
(4) DR bad debt expense 152320
CR AFDA 152320
(C) DR bad debt expense 42000
CR A/R 42000
* when written off *
Fraser hues % of sales to record bad debt and assume
As # of sales approach
5% of sales use collectables. ∴ net sales !! 1/s.
Prepare the formal entry to record bad debt
DR credit sales (A/R) 12800000
Less sales discount (30000)
12770000
× 5%
638, 500
DR bad debt expense 638500
CR AFDA 638500

Interpreting and Reporting Sales Revenue, Re eiva les and Cash Part IV
Q 1 A/R AFDA
1250000 42000 50000
(1) 12800000 10000000 (2)
42000 (3)
14050000 10042000 8000
4008000 152320 BDE
160320
Journal entries
(1) Credit card discount 66000

Cash sale (800000 + 2200000 − 66000) 2934000
C/R 12800000
Revenue 15800000
[1] sales discount (10, 000, 000×0.3×0.01) 30000
Cash (10, 000, 000 − 30000) 9970000
A/R 10000000
[3] AFDA 42000
A/R 42000
(A) Bad debt expense 152320
(B) Bad Debt Expense 638500
AFDA 638500
Credit sales → 12800000 − 30000 = 12770000
× 5%
638500
Internal Control and Cash Leaving O je tives
Top 3 things you need to know from this chapter.
(1) Under stand importance of safe guarding cash by using deft. Internal centrals.
(2) Preparation of a bank reconciliation.
(3) Explain.
Internal control → organization plan all related measures adopted by an entity to ensure
orderly + efficient conduct of business.
e.g . Tags on clothes (metal defector).
. Security cameras
. scanning → receipt (invoice).
Purpose of internal control :
- Discharge statutory responsibilities, maintain all. To owners + adherence to managerial
policies.
- Profitability + minimization of cost – Evalue to e. performance.
Good 1( systems have S prim components : Limitation of 1(c
(1) Control envt. - Reasonable assurance
(2) Risk assess mint - Cost 1/ benefit
(3) Control activities - Human element
↪ authorization of + variation - Collusion
Segregation of butler - Size of business.
Document a tide / physical canted end .

checks
(4) Information &communication
(5) Monitoring
Bank reconciliation
(1) Landscape approach/Format
Balance per bank Balance per bank
+ be posits in transit + deposits by bank (credit memes )

- Outstand l.g changes - Service charge
- NSF changes
± Bank errors
± Book errors
= Adjusted balance = Adjusted Balance
(2) framework / Chart
* Fallowing equations
Next page is chart
Rimm. Company
Bank reconciliation
As at Dec. 31, XXXX
Book Bank
Not equal unadjusted balance XXX Unadjusted balance XXX
Add Add
Notes collection XXX o/s Deposit + XXX
Interest Revenue XXX
Deduct Deduct
Bank changes (XXX) o/s chegues (XXX)
NSF cheese (XXX)
NSF-Bank changes (XXX)
Equal adjusted balance XXX Adjusted Balance XXX
(3) Errors (A) who made the error

(B) d etermine the correcting entry will dictate whether it’s an “add” or “deduct”
(4) Journal entry (A) Part of adjusting entry
(B) only adjustment on the “Book” side.

Example : Rimm company Bank reconciliation
As at Dec. 31, XXXX
Book Bank
Unadjusted Balance 9275 Unadjusted balance 8757
Add Not collection interest revenue error # Add o/s deposit # 2487
227(550−580) 270
Deduct Bank charges (28) Deduct o/s chegnes.
NSF Changes (1250) #221 2990
NSF Bank Changes (15)
Adjusted balance (8252) Adjusted balance (8252)
2) journal entries.
DR Cash 270 DR Bank charges 28
CR Computer supplies Expulse 270 DR A/R 1265
CR Cash 1293
* Entries are only on the book side *

Chpater 8: Reporting and Interpreting Cost of Sales and Inventory
Importance of Inventories
Inventory: largest current asset and total assets of many facturing and retail firms:
- Considered “high” risk assets – los of internal control issues
COGS: the largest single expense category on the I/S
Key areas:
1. items and costs to include in inventory
2. cost flow assumptions
3. lower of cost/ market – valuation
Periodic Inventory System

Beg. Inventory Goods Available for Sale Ending Inventory (B/S)
COG Purchased for the period COGS (I/S)
Purchases: Purchase Returns + Allowances – Purchase Discounts = Net Purchases + freight (FOB
shipping point) = Cost of Goods Purchased
Bank Reconciliation
Custom Harvest
As of July 31, 2015
Book Bank
U. Balance 26, 686.95 Unadjusted Balance 28945.27
(Add) Interest Revenue 80 (Add) Deposit in Transit 4000
(Deduct) NSG Cheque 180 (Deduct) O/S Cheque #811 861.12
Service Charge 7.65 #812 640.80
#813 301.05
Total: 31142.30 31142.30

Journal Entries (Book Side)

Cash 80
Interest Revenue 80
Cash 4545
Notes Receivables 4545
Cash 18
Office 18
(853.02-835.02 = 18 understated)
Service Charge Expense 7.65
Cash 7.65
A/R Custom Harvest 180
Cash 180
On the B/sheet at July 31, 2015 – the amount of cash would be: 31,142.30
Mini Mart Corporation

Bank Reconciliation
As of June 30
Book Bank
Unadjusted 499 Unadjusted 1330
(Add) Notes Receivable 800 (Add) O/S Deposit 160
(Deduct) Service Charge 9 (Deduct) O/S Cheques 240
Adjusted 1250 1250
Journal Entries
Cash 840
A/R 800
Int. Revenue 40
Bank Service Expense 9
Cash 9
A/R [NSF Cheque] 80
Cash 80
Inventory Turnover Ration and Average days to sell inventory

Inventory turnover = Cost of Sales/Average = 4831/(710 +707/2) = 6.81
Average days to sell = 365/6.81 = 54 days
Inventory turnover: average inventory was produced and sold over the year (how many times)

Average number of days: average time it takes the company to produce and deliver inventory
1. WAC – Periodic
GAS = GOAGS/ number of units available for sale = 49200/1500 = $32.80
End inventory = end inventory units * WAC/unit
= 700 * 32.8 = $22,960
COGS = units sold * WAC/unit
= 800 *32.80= #26, 240
FIFO
Specific Identification
4/1 700 units COGS 700 (Number) $21,840
2/5 (700) * 30 = 8400 COGS 100 $6300
3/5 (700) * 32 = 13440
8/1 100*36 = 3600
COGS  21,840 + 3600 = $25,440
End. Inv.  700 units (49200 – 25440) = $23, 760
GAS  1500 $49200
Good Luck!! find more resources at oneclass.com

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UTSC

University of Toronto (UTSC)

Prof: Lisa Harvey

find more resources at oneclass.com

Financial Statements and Business Decision

Top 3 things in this chapter:

1. Identify the different users + info needs

User Perspective: Objectives of financial accounting

1. Identities + records the economic events of an organization

Dividends → distribution of earnings to investors

Business Owners/Investors/Shareholders Creditors

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• Earning income, stability, pensions

Responsibilities for Accounting Financial Statements & Types:

THE 4 BASIC FINANCIAL STATEMENTS:

2. Comprehensive Statement: concise pic of profitability (income/1055) for a period of

5. QUALITATIVE – Financial statement

* most companies prepare F/S monthly, quarterly, annually *

IFRS → I te atio al Fi a ial Repo ti g Sta da ds Wo ld-wide used)

ASPT → A ou ti g Sta da ds fo P i ate E te p ises

1. F/P → Body of Statement <Balance Sheet>:

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o Amount financed by owners of the corporation (Share Capital) and

A/C Receivable → ONLY CUSTOMERS ot Mo s

Supplies → Consumable goods

Equipment → Resou es Co pa owns that generates income

A/C Payable → Ve do s, Supplie s, Supplie s pa i da s… et .

Notes payable → Ag ee e t et ee a k a d the o pa ith te s

Ordinary Shares → Sha es that the o pa has pu hased.

Retained Earnings → Mo e ade that is ’t gi e out as di ide ds to g o usi ess.

→ Re e ue less e pe ses + et i o e, less di ide ds

* BALANCE SHEET * Assets = Liabilities + Shareholders’ Equity

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 Cost of goods sold

3. Changes in Equity (IFRS)

Relationships Among Statements (3 of them)

1. Profit from Income Statement results in an increase in ending retained earnings

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Notes to the Financial Statements

→ P o ides supple e tal i fo a out fi a ial o ditio of a o pa .

1. Describe accounting rules applied

e.g. Notes pa a le → due o pa ti ula date, interest, cubinance + security

CASH BASIS ACTUAL BASIS

GAAP → Ge e all A epted A ou ti g P i iples GAAP

→ B oad alues i a ou ti g p ofessio

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Investing and Financing Decisions and the Statement of Financial

Understanding the Business

The Conceptual Framework

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• Measurable Elements to be Reported

Overview of Accounting Concepts

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Elements of this Statement

Current Assets ( short-term ) Non-Current Assets ( long-term )

Current Liabilities ( short- Non-Current Liabilities ( long-term )

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What Types of Business Activities Cause Changes in Financial Statements Amounts

Nature of Business Transactions