Balance Sheet (Assets = Liabilities + Stockholders’ Equity)
Liabilities / Current
Assets / Current
Income Statement
Accounts Payable
Cash
Revenues
Short Notes Payable
Short-term investments
Sales/Service
Accounts/notes receivable Dividends Payable
Interest
Taxes
Payable
Inventory (to be sold)
Rent
Accrued Expenses
Supplies
Fees
Unearned Revenue /
Prepaid expenses
Expenses
(insurance, rent) / Discount Premium on bond payable Cost of Goods Sold
Long-Term
on bond payable
Wages
Long Notes Payable
Long-Term
Rent
Bonds
Investments
Interest
Mortgage payable
Equipment
Depreciation
SE
Buildings
Insurance
Common Stock
Land
Income Tax Expense
Additional Paid-In Capital
Intangibles
*BV = Assets –
Retained Earnings
Accu. Depreciation
Liabilities =
Treasury Stock
Equity
*Market Value
Debits & Credits (DEALER)
= number of
Every transaction must involve a debit and credit entry
shares X
market share
price
*Expenses and revenues are under SE
*Contra Accounts: Accu. Depreciation (A), Allowance for DA
(A), Sales Return and Allowances (R), Treasury Stock (E)
Accounts Receivable
Bad Debt Expense
Current period – record estimated bad debts as adjusting entry:
Dr. Bad debt expense
Cr. Allowance for DA
*Net income and net A/R go down
Future period – write-off when debt is definitely uncollectible:
Dr. Allowance for DA
Cr. A/R
Bad debt recoveries - previously written off debt is recovered:
Dr. A/R
Cr. Allowance for DA
Dr. Cash
Cr. A/R
*net A/R = gross A/R – allowance for DA
*cash collected from customers: A) Sales revenue + (Beg. gross A/R – end.
gross A/R) – debt-write-offs + recoveries (if any)
B) Sales revenue + decrease / - increase in A/R + increase / - decrease in
unearned revnue
Aging of A/R
Age of
A/R
1-30
A/R amount
Total = Gross A/R
% uncollectible
Est. uncollec.
Total = est. end bal. in allowance
for DA
*Bad debt expense for the year = est. end bal. in allowance for DA – current
balance in allowance for DA
*A/R turnover (time span sale and cash receipts) = credit sales / average A/R
*average A/R = (beg. Net A/R + end net A/R) / 2
*A/R collection period = 365 days / A/R turnover
Stockholders’ Equity
Common Stock
* Common Stock = Shares x Par value
*APIC (Additional Paid in Capital) = Cash received (no. of shares x share price) –
common stock
*Shares outstanding = shares issued – treasury shares
*T/S resale: Dr. Cash (no. of shares x share price)
Cr. T/S (no. of shares x original T/S buy price)
Cr. AIPC
*2-for-1 stock split: shared are doubled and par value is halved
*RE = beg. Bal. RE + Net Income – dividends = ending RE
Dividends
Declaration Date: Dr. Retained Earnings
Cr. Dividends Payable
Payment Date: Dr. Dividends Payable
Cr. Cash
Ori Chevio
Income Statement
1. Net Sales / Service Revenue – Cost of Goods Sold (cost of
sales/service) = Gross Profit (before deduction of business
expenses)
2. – Operating Expenses = Income from regular operations
(Operating Income)
3. + Non-operating revenue / - N.O expense = Income Before Tax
4. – Tax Expense (tax provision if any) = Net Income after Tax (NIAT)
Adjusting Entries
1. Prepaid Expense – future expense which is paid for in advance (dr.
Prepaid Expense / cr. Cash)
2. Unearned Revenue – payments received for goods or services not
yet delivered (dr. Cash / cr. Unearned Revenue
3. Accrued Expense – past expense which hasn’t been recorded or
paid for (dr. Accrued Expense / cr. Payable)
4. Accrued Revenue – revenue that has been earned but not invoiced
yet (dr. A/R / cr. Revenue Account)
Closing Entries
1. Debit revenues à credit RE for sum of revenues
2. Credit expenses à debit RE for sum of expenses
3. Credit dividends à debit RE
Long-Lived Assets
Tangible Assets (PPE)
*Land, Buildings and Equipment (held for sale are separated)
*Capital expenses (extend the useful life of asset or part of acquisition) are
capitalized and recorded on asset account / ordinary expenses are expensed
immediately
*Book Value = Cost of asset – accumulated deprecation
*Fixed assets turnover = net sales / (fixed assets – accu. depc.)
*Straight-line depreciation expense: Cost – residual value
Useful life
*Revised depc. exp.: Net BV – new residual value
Remaining life
*Units depc. exp. (per unit): Cost – residual value
Useful life (in units)
*Double deprecation (rate per year): 1
Useful life (in years)
*Double deprecation rate X BV = depreciation expense
*Impairment test: 1. If BV of asset is bigger than undiscounted future cash
flows, impairment is indicated
2. Impairment loss (expense) = Fair value – BV
*Disposal of tangible asset: Proceeds from the sale – net BV of asset = Gain
or Loss
*Gross PPE – gross value of disposal = cost of asset disposed
Acquisition
Dep. Expense
Sale of Equipment
Dr. Fixed Asset
Dr. Dep. Expense Dr. A/R
Cr. Cash/payable
Cr. Accu. Depc. Dr. Accu. Depc.
Intangible Assets
Cr. Fixed asset
*Finite life – patents, franchises and
Cr. Gain or loss (goodwill in
licenses
acquisition)
*Infinite life – copyrights, trademarks, goodwill
*Amortization expense: Cost
Useful life
*Goodwill = purchase price – fair value of company’s net identifiable assets
*Goodwill impairment:
1. Beg. Fair value of acquired company – its current fair value = if
current amount less than beg. amount à impairment is indicated
2. Implied goodwill = current fair value of acquired company –
current fair value of its net assets = if implied goodwill is less than
starting goodwill à recognize impairment loss as the difference
between values
3. Goodwill impairment loss = beginning goodwill – implied goodwill
Stock Dividends
*Outstanding shares x percent of stock dividend (.0) = new shares issued
*New shares issued x market share price = stock dividend payment
Entry: Dr. Retained Earnings
Cr. Common stock (new shares issued x par value)
Cr. AIPC
Balance Sheet
Common stock at par (par value)
o Authorized and Issued Shares
APIC
Treasury Stock (shares) – subtract
Retained Earnings
Total Shareholders’ Equity
Dec. 2019
NYU Stern School of Business
Current and Long-Lived Liabilities
Current Liabilities
*Warranties - % of est. warranty x sales revenue | record estimate as
expense / payable | claims debit payable and credit inventory
*Liquidity – working capital = cur. assets – cur. liabilities
(divide to get current ratio) | Quick ratio = Quick assets (cash, securities,
receivables) / cur. liabilities
Present and Future Value
*PV of FV = FVin n years x PV factor (1/(1+i)n years)
*FV of PV = PV x (1+i)n years
*PV Factor = 1/(1+i)n years
*PV of annuity = Y (equal amount paid each period) x PV of annuity factor
Bonds
*Coupon (interest) payment = Coupon rate (r) x Face value
*Market interest (discount) rate (i) is the rate desired by lenders
*Number of periods (n) = years x semi/yearly
*Bond price:
1. i >r – discount (less than FV)
2. r=i – par (same as FV)
3. i<r – premium (greater than FV)
*BV of bond (at date of issue):
1. PV of periodic coupon payments + PV of principal repayment
2. PV of periodic coupon payments = PVA (n,i) x coupon payment per
period (FV x coupon rate per period)
3. PV of principal repayment = PV (n,i) x FV of bond
Bonds at discount
*Bond discount = FV – Proceeds (BV of bond)
*Issue entry:
Dr. Cash
Dr. Discount on Bond Payable (contra L)
Cr. Bond Payable
*Interest expense: Mkt interest rate per period x BV of bond
*Interest entry:
Dr. Interest expense
Cr. Cash
Cr. Discount on Bond Payable
*BV of bond at beg. of period 2: BV at beg. of period 1 + discount
amortization in period 1
*Discount amortization: Bond interest expense – coupon interest payment
Bonds at Premium
*Bond premium = Proceeds (BV of bond) – FV
*Issue entry:
Dr. Cash (split to FV and premium)
Cr. Premium on Bond Payable
Cr. Bond Payable
*Interest entry:
Dr. Interest expense
Dr. Premium on Bond Payable
Cr. Cash
*Amortization of bond premium: Coupon interest payment – Bond interest
expense
Zero Coupon Bonds
*Issue entry:
Dr. Cash
Dr. Discount on Bond Payable (contra L)
Cr. Zero Coupon Bond Payable
*Interest entry:
Dr. Interest expense
Cr. Coupon payable/cash
Cr. Discount on bond payable
*BV of bond at beg. of period 2: BV at beg. of period 1 + period 1 interest
expense
*have no interest or principal payment until maturity
Installment Payment Plans
*Issue entry:
Dr. Equipment
Cr. Installment liability
*Interest entry:
Dr. Interest expense
Dr. Installment liability (ins. payment – int. exp.)
Cr. Cash (ins. Payment)
*Interest expense: interest rate x outstanding liability
*PVA of installment payments = BV of installment liability
*BV of bond at beg. of period 2: BV at beg. of period – reduction in loan
obligation
*Reduction in loan obligation: installment payment – interest expense in
period 1
Ori Chevio
Inventory Valuation
*COGS (Cost of Goods Sold) = COGA (Beg. Inventory + purchases during the
year) – ending inventory (EI)
*COGA (Cost of Goods Available for sale) = Beg. Inventory (BI) + purchases
during the year (P)
*Gross profit = Net sales – COGS
*Net Income = gross profit – expenses
Inventory Costing (to measure $ of EI and COGS)
FIFO (First-In, First-Out)
1. Oldest costs (earliest purchases) —> COGS
2. Recent costs (latest purchases) —> ending inventory
LIFO (Last-In, First-Out)
1. Recent costs (latest purchases) —> COGS
2. Oldest costs (earliest purchases) —> ending inventory
*LIFO layers – ending inventory of period x cost of unit
*LCM – ending inventory is calculated at the
lower of cost or market (or Net Realizable Value)
*COGS increase à reduces / decrease à increases net income
*under FIFO – beginning inventory is the recorded cost of inventory at the
start of the accounting period
*LIFO liquidation increases net income
LIFO Reserve
*FIFO Inv amount – LIFO Inv Amount
1. Beg. LIFO Reserve = FIFO Beg. Inv. – LIFO Beg. Inv
2. FIFO Beg. Inv = LIFO Beg. Inv + Beginning LIFO Reserve
3. End LIFO Reserve = FIFO End Inv. – LIFO End Inv.
4. FIFO Ending Inv. = LIFO End. Inv + Ending LIFO Reserve
*FIFO COGS = LIFO COGS - Change in LIFO Reserve (End. LIFO res. – Beg.
LIFO res.)
*FIFO Gross Profit = LIFO Gross Profit + Change in LIFO Reserve
Evaluation
*Gross profit (margin) % = gross profit / net sales revenue
*Inventory turnover = sales revenue or COGS / average inventory
*Average
= Beginning
inventory
+ Ending inventory / 2
Statementinventory
of Cash Flows
(Indirect
Method)
*How cash balance at start of period à end of period
Net Cash Flow from Operating Activities
Net Income / (Loss) (from income statement) à Adjustments: (1) +
Depreciation/Amortization/Impairment/Stock Compensation/Other noncash expenses (2) + Loss on sale of long-term asset or investments (3) – Gain
on sale of long-term assets or investments (4) + Decrease in current assets
other than cash (5) – Increase in current assets other than cash (6) + Increase
in current liability (7) – Decrease in current liability
Net Cash Flow from Investing Activities
(1) – Purchase of PPE or intangibles (2) + Sale of PPE or intangibles (3) –
Purchase of investment securities (4) + Sale (maturity of investment
securities)
Net Cash Flow from Financing Activities
(1) + Proceeds from notes payable (2) – Repayment of loan principal (3) +
Proceeds from long-term debt (4) – Repayment of long-term debt (5) +
Issuance of stock (common stock) (6) – Repurchase of stock (7) – Payment of
(cash) dividends (RE)
*=Net increase/decrease in cash during the year
Investing Activities
Equipment
1. Acquisition of equipment: Beg. net PPE + Equipment purchases – BV of
assets sold – Depreciation Exp. = End net PPE
2. Equipment Purchases = Depreciation Exp. + Change in net assets + BV of
assets sold
3. Cash from sale of equipment = BV of assets sold +/– Gain / (Loss) on sale
Investments
1. Beg. Bal. Investments + Purchases – BV sold = End investments
2. Cash from sale of investments = BV of assets sold +/– Gain / (Loss) on sale
Financing Activities
1. Long-Term Debt: Beg. Bal. Debt + cash from amount borrowed – repayment
of LTD = End. Bal. Debt
2. Common Stock: Beg. Bal. C/S + Issuance of new C/S – Retirement of C/S =
Ending C/S
3. Common Stock issued for cash = Total change in C/S – non-cash C/S issues
Treasury Stock (Negative C/S):
1. Beg. Bal. T/S+ Purchases of new T/S – Reissues (sale) of T/S = End Bal.
T/S
Financial Analysis
1. Quality of Income Ratio = Cash Flow from Operating / Net Income
2. Capital Acquisitions Ratio = Cash Flow from Operating / Cash paid for
PPE
Dec. 2019
NYU Stern School of Business