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The Basics
1. Accounting Equation: STATEMENT OF CASH FLOWS
A summary of the cash receipts and cash payments of a business
Assets = Liabilities + (Stockholders’ Equity) Owner’s Equity
entity for a specific period of time, such as a month or a year.
2. T Account: 6. Accounting Cycle:
Account Title
1. Transactions are analyzed and recorded in the journal.
Left Side Right Side 2. Transactions are posted to the ledger.
debit credit 3. An unadjusted trial balance is prepared.
4. Adjustment data are assembled and analyzed.
5. An optional end-of-period spreadsheet is prepared.
6. Adjusting entries are journalized and posted to the ledger.
3. Rules of Debit and Credit: 7. An adjusted trial balance is prepared.
8. Financial statements are
prepared.
9. Closing entries are journal-
ized and posted to the ledger.
10. A post-closing trial balance is
prepared.
7. Types of Adjusting Entries:
1. Prepaid expense (deferred ex-
pense)
2. Unearned revenue (deferred
revenue)
3. Accrued revenue (accrued
asset)
4. Accrued expense (accrued
liability)
5. Depreciation expense
Each entry will always affect both a
balance sheet and an income state-
ment account.
4. Analyzing and Journalizing Transactions 8. Closing Entries:
1. Carefully read the description of the transaction to determine 1. Revenue account balances are transferred to an account called
whether an asset, liability, capital stock, retained earnings, reve- Income Summary.
nue, expense, or dividends account is affected by the transaction. 2. Expense account balances are transferred to an account called
2. For each account affected by the transaction, determine whether Income Summary.
the account increases or decreases. 3. The balance of Income Summary (net income or net loss) is
3. Determine whether each increase or decrease should be recorded transferred to Retained Earnings.
as a debit or a credit, following the rules of debit and credit. 4. The balance of the owner’s drawing account is transferred to
4. Record the transaction using a journal entry. Retained Earnings.
5. Periodically post journal entries to the accounts in the
ledger.
6. Prepare an unadjusted trial balance at the end of the period. 9. Special Journals:
Providing services
on account ⎯⎯⎯⎯⎯→ recorded in ⎯⎯→ Revenue (sales) journal
5. Financial Statements: Receipt of cash from
any source ⎯⎯⎯⎯⎯→ recorded in ⎯⎯→ Cash receipts journal
INCOME STATEMENT Purchase of items
A summary of the revenue and expenses of a business entity for a on account ⎯⎯⎯⎯⎯→ recorded in ⎯⎯→ Purchases journal
specific period of time, such as a month or a year. Payments of cash for
⎯→ Cash payments journal
any purpose ⎯⎯⎯⎯⎯→ recorded in ⎯
RETAINED EARNINGS STATEMENT
A summary of the changes in the retained earnings of a business
entity that have occurred during a specific period of time, such as 10. Shipping Terms:
a month or a year.
FOB Shipping Point FOB Destination
Ownership (title)
BALANCE SHEET passes to buyer when
A list of the assets, liabilities, and stockholders’ equity of a business merchandise is ................... delivered to delivered to
entity as of a specific date, usually at the close of the last day of a freight carrier buyer
month or a year. Freight costs
are paid by .......................... buyer seller
11. Format for Bank Reconciliation: 17. Break-Even Sales (Units) = Fixed Costs
Cash balance according to bank statement ...................... $xxx Unit Contribution Margin
Add: Additions by company not on bank
statement .......................................................... $xx
Bank errors ............................................................. xx xx 18. Sales (Units) = Fixed Costs + Target Profit
$xxx Unit Contribution Margin
Deduct: Deductions by company not on bank
statement .......................................................... $xx
Bank errors ............................................................. xx xx 19. Margin of Safety = Sales – Sales at Break-Even Point
Adjusted balance .................................................................. $xxx Sales
Cash balance according to company’s records ................ $xxx
Add: Additions by bank not recorded by company .. $xx 20. Operating Leverage = Contribution Margin
Company errors..................................................... xx xx Income from Operations
$xxx
Deduct: Deductions by bank not recorded
by company ...................................................... $xx 21. Variances
Company errors..................................................... xx xx Direct Materials Actual Price –
Adjusted balance .................................................................. $xxx = × Actual Quantity
Price Variance Standard Price
Direct Materials = Actual Quantity – × Standard
12. Inventory Costing Methods: Quantity Variance Standard Quantity Price
1. First-in, First-out (FIFO) Direct Labor = Actual Rate per Hour –
2 . Last-in, First-out (LIFO) × Actual Hours
Rate Variance Standard Rate per Hour
3 . Average Cost
Direct Labor = Actual Direct Labor Hours – Standard Rate
×
Time Variance Standard Direct Labor Hours per Hour
13. Interest Computations:
Interest = Face Amount (or Principal) Rate Time Variable Factory Actual Variable
Budgeted Variable
Overhead Controllable = Factory –
Factory Overhead
Variance Overhead
14. Methods of Determining Annual Depreciation: Fixed Factory Standard Hours Standard
Fixed Factory
Cost – Estimated Residual Value Overhead = for 100% of – Hours for ×
STRAIGHT-LINE: Overhead
Estimated Life Volume Normal Actual Units
Rate
Variance Capacity Produced
DOUBLE-DECLINING-BALANCE: Rate* Book Value at Beginning
of Period
*Rate is commonly twice the straight-line 22. Rate of Return on Income from Operations
=
rate (1/Estimated Life). Investment (ROI) Invested Assets
Alternative ROI Computation:
Income from Operations Sales
ROI = ×
15. Adjustments to Net Income (Loss) Sales Invested Assets
Using the Indirect Method
Increase 23. Capital Investment Analysis Methods:
(Decrease)
1. Methods That Ignore Present Values:
Net income (loss) $ XXX A. Average Rate of Return Method
Adjustments to reconcile net income to B. Cash Payback Method
net cash flow from operating activities: 2. Methods That Use Present Values:
Depreciation of fixed assets XXX A. Net Present Value Method
Amortization of intangible assets XXX B. Internal Rate of Return Method
Losses on disposal of assets XXX
Gains on disposal of assets (XXX)
Changes in current operating assets and liabilities: 24. Average Rate = Estimated Average Annual Income
Increases in noncash current operating assets (XXX) of Return Average Investment
Decreases in noncash current operating assets XXX
Increases in current operating liabilities XXX
Decreases in current operating liabilities (XXX)
Net cash flow from operating activities $ XXX 25. Present Value Index = Total Present Value of Net Cash Flow
or Amount to Be Invested
$(XXX)
16. Contribution Margin Ratio = Sales – Variable Costs 26. Present Value Factor = Amount to Be Invested
Sales for an Annuity of $1 Equal Annual Net Cash Flows
