ACCOUNTING)EQUATIONS Balance)Sheet)Equations Shareholder’s)Equity:"Stockholders’"Equity"="Paid7in"Capital"+"Revenues"–"Expenses"–"Dividends"–"Treasury"Stock Expanded)Accounting)Equation:"Assets"="Liabilities"+"Paid7in"Capital"+"Revenues"–"Expenses"–"Dividends"–"Treasury"Stock Income)Statement)Equations Net"Book)Value)of)Asset:"Book"Value"="Asset"Acquisition"Cost"7"Acc'd"Depreciation Retained)Earnings:"REEND"="REBEG"+"Net"Income"7"Dividends Inventory)Equations LIFO)Reserve:"LR"="InventoryFIFO"7"InventoryLIFO"(Adjustment"to"LIFO) Change)in)LIFO)Reserve:"COGSLIFO"7"COGSFIFO"="∆LR FIFO/LIFO)Net)Income:"NIFIFO"–"NILIFO"="∆LR"*"(17"tax"rate) FIFO/LIFO)Annual)Tax)Expense:"TaxExpenseFIFO"–"TaxExpenseLIFO"="∆LR"*"(tax"rate) FIFO/LIFO"Cumulative"Tax"Expense:"TaxExpenseFIFO"7"TaxExpenseLIFO"="Adjustment"to"LIFO"(LR)"*"tax"rate Finished)Goods:"FinishedGoodsEND"="FinishedGoodsBEG"+"cost"of"units"completed"–"COGS Raw)materials:"RMEND"="RMBEG"+"RMPURCHASES"–"Shift"to"WIP Work)In)Process:"WIPEND"="WIPBEG"+"Shifted"RM"+"Direct"Labor"+"Overhead"–"Shift"to"FinishedGoods Finished)Goods:"FGEND"="FGBEG"+"Goods"Shifted"from"WIP"–"COGS Cost)of)Goods)Sold)(General)Inventory):"INVEND"="INVBEG"+"Purchases"7"COGS Accounts)Receivable Allowance)for)Bad)Debt:"BadDebtAllowanceEND"="BDABEG"+"Bad"Debt"Expense"–"Writeoffs Gross)Accounts)Receivable:"GrossAREND"="NetAR"+"Allowance"for"Doubtful"Accounts Gross)Accounts)Receivable:"GrossAREND"="GrossARBEG"+"sales"–"writeoffs"–"cash"collections Net)Accounts)Receivable:"NetAREND"="NetARBEG"+"Sales"–"Bad"Debt"Expense"–"Cash"Collections Cash)Flow:) Change)in)Cash:"Change"in"Cash"="Change"in"Liabilities"+"Change"in"S/E"–"Change"in"Non7Cash"Assets Buildings:"BuildingsEnd"="Buildings"BEG"+"Purchases"7"BookValue"of"Buildings"Sold"(COST)"–"assumes"cash"used"to"purchase."" Accumulated)Depreciation:"AccDepEND"="AccDepBEG"+"Depreciation"Expense"–"AccDep"on"Things"Sold""""(everything"positive) LongRLived)Assets PPEFinal"="PPEBeg"+"Additions"7"Original"Cost"of"Disposed"Assets Net"Income"before"provision"for"income"taxes"="net"income"before"provision"as"reported"+"amortization"expense"+"writeoffs"7"capitalized"costs AccDepFinal"="AccDepBeg"+"Depreciation"Expenes"(SCF)"7"AccDep"of"Assets"Disposed"(Plug) Capitalization:"costs"incurred"(dr."asset,"cr."Cash)"Future"Entries"(Dr."Expense,"Cr."Asset) Expensing:"costs"incurred"(Dr."Expense,"Cr."Cash);"Future"Entries"(none) Depreciation Depreciation)Journal)Entry:"(Dr."Depreciation"or"Amortization"Expense,"Cr."Accumulated"Depreciation"or"Amortization) Change)in)Useful)Life)or)Salvage)Value:"use"book"value"at"date"of"new"information"to"calculate"ongoing"expense"(no"retroactive"restatement) Repairs)vs.)Improvements:"Repairs"(routine"costs)"expense"immediately,"Capital"improvements"(extend"useful"life)"are"capitalized"and"deprec Asset)Impairment:"if"book"value"(cost7acc."dep)">"undiscounted"future"cash"flows,"write"down"asset"to"market"value Asset)Impairment)Journal)Entry:"Dr."PP&E"(market"value),"Cr."PPE"(historical"cost),"Dr."Acc."Dep,"Dr."Impairment"Loss Types)of)Depreciation Straight)Line:"Basis"(cost7salvage"value);"Rate"(1/useful"life) Declining)Balance:"Basis"(Book"Value"="Cost"7"Accumulated"Depreciation);"Rate"(1*declining"multiple/useful"life) Sum)of)Years)Digits:"Basis"(Cost"7"Salvage"Value);"Rate"(Years"remaining"at"Beg."Of"Year"(n(n+1)/2) Usage:"Basis"(Cost"7"Salvage"Value);"Rate"(1*year's"production/estimated"total"production) LongRterm)Liabilities Contingent)Liabilities:)GAAP"requires"recognition"if"it"is"probable"the"asset"has"been"impaired"or"liability"incurred Value:"present"value"of"future"cash"payments Balance)Sheet:)at"issuance"(PV"based"on"effective"interest"rate);"at"later"time"(PV"of"remaining"cash"payments"using"historical"interest"rate Income)Statement:"interest"expense"="historical"interest"rate"*"book"value"of"liability Future"Value"="PV"*"(1+r)^T PV"of"Annunity"="Periodic"Payment"*"Factor"(Table"4) Effective)Interest)Rate)Method Journal)Entry)for)Interest:)Dr."Interest"Expense,"Cr."Bond"Discount,"Cr."Interest"Payable"or"Cash 1 2 3 4 5 6 Pe Liability at Beg of Interest Expense (at Coupon Payment (at Difference: Decrease in Liability at End of Period rio Period 3%) = .03 * (2) 4%) = .04 * Par Book Value = (4) – (3) = (2) – (5) d 1 $49,24,603.20 $1,47,738.10 $1,60,000.00 $12,261.90 $49,12,341.30 Reacquisition)of)Bonds)Journal:"Dr."Debenture"Bonds"Payable"(current"liability),""Cr."Cash"(market"value),"Cr."Gain"(or"Dr."Loss)"on"Retiremt"of"Bonds Face"Value"="Bond"Discount"(e.g."Unamortized"Discount)"+"Net"Book"Value Journal"Entry"(Dr."Interest"Expense,"Cr."Bond"Discount,"Cr."Cash)
NBV"="PV"*"(1+r)^T Amortized"Bond"Discount"(noncash"portion"of"interest"expense)"="Total"Interest"Expense"7"Cash"Paid"(Coupon"Payment) Book"Value"(T+1)"="Book"Value"(T)"+"Amortization"of"Bond"Discount"during"the"year Unamortized)Debt)Discount:)=)Face"Value"7"Present"Value Interest"Expense"="Cash"Paid"+"Increase"in"Liability"(e.g."Decrease"in"unamortized"Discount) PV"Next"Period"="PV"Current"Period"+"Increase"in"Liability Average)Rate)of)Interest)on)LongRterm)Debt)=)Interest)Expense)in)Year)(IS)/Average)LongRterm)Debt)Outstanding Leases Off)Balance)Sheet)Financing:"Using"assets"by"a"firm"that"obligates"them"to"make"payments"in"future,"but"transaction"ont"recorded"as"liability"on"BS Goal"of"GAAP:"assess"whether"company"using"assets"(lessee)"bears"risks"of"ownership"7"if"so,"record"on"balance"sheet Why"Keep"Debt"off"Balance"sheet?"Reduce"perceived"risk"of"firm,"increase"access"to"new"debt,"maintain"slack"in"existing"debt"covenants." Capital)Lease:"lessor"transfers"substantially"all"risks"and"benefits"of"ownerhsip"to"the"lessee"(a""purchase") Operating)Lease:"lessor"transfers"property"rights"to"lessee"for"a"period"of"time"(a""rental"agreement") Criteria)for)capital)lease:"1)"lessor"transfers/ownership"to"lessee"after"lease"term,"2)"a"bargain/purchase/option"exists"for"less"than"market"value 3)"lease"term"extends"for"at"least"75%/of/asset's/life,"4)"PV/of/minimum/lease/payment"is">"90%"of"FV"of"asset"at"time"lease"is"signed Operating)Lease)Journal)Entries) LESSEE:"Inception:"none;"End)of)Each)Year:"Dr."Rent"Expense,"Cr."Cash LESSOR:"Inception:"Dr."Equipment,"Cr."Inventory,"End)of)Each)Year:"Dr."Cash,"Cr."Rent"Revenue,"Dr."Dep."Exp.,"Cr."Acc."Dep Capital)Lease)Journal)Entries) LESSEE:"Inception:"Dr."Capital"Lease"Asset,"Cr."Capital"Lease"Liab.;" End)of)Year:"Dr."Dep"Exp,"Cr."Acc."Dep,"Dr."Int."Exp.,"Dr."Capital"Lease"Liab"(Current"Portion),"Cr."Cash LESSOR:"Inception:"Dr."Lease"Receivable,"Cr."Sales"Rev.,"Dr."COGS,"Cr."Inventory,"End)of)Each)Year:"Dr."Cash,"Cr."Int."Revenue,"Cr."Lease"Recievable Lease)Amortization)Table)(Same)as)Bond)Amortization)R)Effective)Interest)Rate)Method)R)ABOVE) Capital)Lease)vs.)Operating)Lease:"total/amt"expensed"over"life"of"asset"is"identical;"amounts"expensed"(int."&"dep)"larger"earlier"in"capital"lease Lessee"generally"prefers"operating"lease"(off"balance7sheet)"and"lessor"generally"prefers"capital"lease"(up"front"revenue"from""sale") Income)Taxes Change)in)Deferred)Tax)Asset"="Current"Period"Timing"Differences"*"Current"Statutory"Rate Total)Deferred)Tax)Liability)on)Balance)Sheet"="cumulative"timing"differences"*"current"statutory"rate." DTL"Journal)Entry:""Dr."Income"Tax"Provision"(Expense),"Cr."Deferred"Taxes,"Cr."Current"Taxes"Payable DTA"Journal)Entry:""Dr."Income"Tax"Provision"(Expense),"Dr."Deferred"Tax"Asset,"Cr."Current"Taxes"Payable Tax)vs.)Book)Annual)Expense:)Tax"Expense"–"Book"Expense"="Change"in"Deferred"Tax"Liability"for"Year"/"Statutory"Federal"Tax"Rate Tax"vs."Book"Total"Expense:"Cumulative"deferred"tax"liability/tax"rate Change)in)Tax)Rate:)Adjustment"="Cumulative"deferred"tax"liability/tax"rate"*"(35%730%)"="$871.43M"*".05"="$43.57M Journal)Entry)for)Change:)Dr."Deferred"Income"Tax"Liability,"Cr."Income"Tax"Expense Deferred)Tax)Liability:"means"cumulative"taxable"income"<"cumulative"book"income;"cum."Taxes"paid"<"cum"income"tax"expense Deferred)Tax)asset:"means"cum."TI">"cum."Book"income;"cum."Taxes"paid">"cumulative"income"tax"expense Marketable)Securities Fair"Value"="Acquisition"Cost"+"Unrealized"Gains Trading)Securities:"record"at"acquisition"cost,"mark"to"market"with"adjusting"entries,"unrealized"holding"gain"or"loss"included"in"I/S Record"realized"gain"or"loss"in"I/S"as"difference"between"book"value"and"cash"proceeds Impact)on)Net)Income:"Market"Value"7"Acquisition"Cost"+"Dividends"*"Percent"of"Investee"Owned Available)for)Sale:"record"at"acquisition"cost,"mark"to"market"with"adjusting"entries,"unrealized"holding"gain"or"loss"remains"on"BS"in"S/E"section Record"realized"gain"or"loss"as"difference"between"acquisition"cost"and"cash"proceeds.""Eliminate"unrealized"gain"or"loss"acount"in"S/E"section Impact)on)Net)Income:)Dividends"*"Percent"of"Investee"Owned Impact)on)Shareholder)Equity:)Dividends"*"Percent"Owned"+"(Market"Value"7"Acquisition"Cost) Equity)Method:"Net"Income"*"Percent"Owned"+"Patent"*"Percent"Owned/useful"life End)Book)Value"="Beginning"Balance"(Acquisition"Cost)"+"Share"of"Net"Income"7"Share"of"Dividends"7"Amortization"of"Patent Journal)Entry)AFS)Held:) Journal)Entry)AFS)Sold:"Dr."Cash,"Dr."Unrealized"Gains/Loss,"Cr."Marketable"Securities,"Cr."Realized"Gain Journal)Entry)TS)Sold:"Dr."Cash,"Cr."Marketable"Securities,"Cr."Realized"Gain Shareholders')Equity Preferred"Stock,"Common"Stock"(par,"APIC),"Treasury"Stock,"Retained"Earnings"(NI,"Dividends) Treasury)Stock:"share"of"firm's"stock"repurchased"by"firm."" Purchase:"Dr."Treasury"Stock,"Cr."Cash Reissue:"Dr."Cash,"Cr."Treasury"Stock,"Cr."APIC"(or"RE"if"no"APIC) Stock)Options:"grant"date"(no"entry);"" Each"Yr"During"Vesting:"Dr."Compensation"Expense"4,000,"Cr."APIC"7"Options"4000; Exercise"Date:"Dr."Cash"35000,"Dr."APIC"7"Options"8000,"Cr."Common"Stock"5000,"Cr"APIC"38000 Cash"="Exercised"*"average"exercise"price;"Common"Stock"="Exercised"*"Par"Value;"APIC"Options"="FV"Option"*"Exercised"Options;"
