MBA 560 Accounting Notes

Chapter 1
Financial Accounting
-Provide information for external users
-Investors, creditors, government, the public
Managerial Accounting
-Provides information for internal users
-Budgets, forecasts
U.S. GAAP overseen by the SEC

Assets = Liabilities + Owners Equity

Assets Liabilities = Owners equity
Assets- resources to work with
Liabilities- Amount owed to creditors
Equity- actually owned by company stakeholders
Dont assume high liabilities is a bad thing
Corporate accounting equation
Assets= liabilities + stockholders equity (paid in capital, retained earnings)
Revenues - expenses= Net income (if expenses exceed revenues a net loss results)
Income statement- rolls into statement of retained earnings
Statement of retained earning flows into the balance sheet
Exercise 16A
Exercise 21A balance sheet
Beside every item, decide if it is asset, liability, equity
Total revenue- income statement- not used in balance sheet
Receivables- something that you will get, owed something asset
Common stock- equity
Interest expense- income statement
Other expenses- income statement
Retained earnings ending- goes to balance sheet, have to calculate
Computation of retained earnings:
Total assets total liabilities common stock = retained earnings
Retained earnings at end- 16
Exercise 22A- income statement
Revenues- expenses
31.4 - (0.1+6.6+17.4)= 7.3 = Net income
Start with the beginning retain earning- 9.3, add net income =16.6
Extra 0.6 comes from dividends. Dividends are always subtracted. Money taken from company
and giving it to the owners
Exercise 23A- Cash flows

MBA 560 Accounting Notes

3 sections in cash flow statement- things that affect net income- operating, investing (long term
assets), financing (long term loans, common stock)
whenever cash is provided to the business - positive
Exercise 24A- income statement and statement of retained earnings
Revenues expenses
Calculate retained earnings- dividends
Salary expense- expenses
Cash balance- asset (balance sheet)
Stocks- equity (balance sheet)
Rent- income (expense)
Common stock- same one
Equipment- asset (balance sheet)
Office supplies- asset (balance sheet)
Accounts payable- payable/unearned=liability
Service revenue- income statement
540,200- (10,500 + 160,000 +2,700) (173,200) = 367,000 = Net income
Total assets total liabilities common stock = retained earnings
Net income dividends = retained earnings =362,300
(460,000+10,300+105,300+14,700) 17,400 105,300 =
Exercise 25A- Balance sheet
Assets Liabilities = Owners equity
Assets- 10,300+460,000+14,700= 485,000
Liabilities- 17,400
Equity- common stock, retained earnings = 467,600
Common stock is equity

Chapter 2
Transactions- events that have financial impact on the business
-Can be reliably measured
Assets- cash, any receivables, prepaid expenses, inventory, land, equipment, buildings,
furniture, fixtures
Liabilities- accounts payable, unearned, notes payable, accrued liabilities
Double entry accounting- business transactions are 2 parts: giving, receiving
T-account- Debit (left), Credit (right) (DEAD CLER)
-debit= expenses, assets, revenues, dividends, ,
-credit= liability, equity, revenues
Exercise 17 (pg 98)

MBA 560 Accounting Notes

2. office supplies.200
accounts receivable.200
4. Land.2600
cash. 2600
17. Accounts receivable.1900
Service revenue1900
Performed on service account.
23. cash.100
accounts receivable100
received cash on account.
30. salary expense.1900
rent expense.1300
cash..3200
paid cash expenses.
Exercise 18
Use journal entries
Trail balance- check to se if total debits = total credits
Journal entries will be on test
Exercise 20
Cash.9800
Common stock..9800
Cash.7000
Note payable.7000
Land.32000
Cash4000
Note payable.28000
Supplies.400
Accounts payable400
Cash5300
Equipment.5300
Accounts payable150
Cash.150

Chapter 3
Accrual Accounting and Income- making entries that may not necessarily include cash. The
accountant records the transaction even if the business receives or pays no cash
Decrease cash (asset) with credit
Accrual accounting and cash-basis accounting- define

MBA 560 Accounting Notes

**Revenue principle**
When to record: after revenue is earned, when good or service delivered
Amount to record: the cash value of goods or services transferred to customer
Expense recognition principle:
Identify expenses incurred, measure the expense, recognize along with related revenues.
Adjusting the accounts- financial statements issued at end of period, several accounts on trial
balance need to be brought up to date.
-Certain transactions have not been recorded
-Closing entries: temporary accounts (dividends) from income statementtrack for a period, close them out, make it zero and track again.
Categories of Adjustments
DeferralsDepreciation- has to have a use greater than one year- allocate value over estimated
time
AccrualsAdjusted trial balance- add or subtract from previous trial balance to adjust
**Temporary accounts- closed, revenue, expenses, dividends (will be closing these on exam)
Permanent accounts- not closed, assets, liability, equity
Closing entries:
Close revenues- debit each revenue account, credit retained earnings
Close expenses- debit retained earnings, credit each expense account
Close dividends- debit retained earnings, credit dividends
*Current assets- converted to cash, sold or consumed in next year or operating cycle,
whichever is longer. (Ex: it takes Boing approx. 18 months operating cycle, depends on
industry)
*Long-term assets- held for longer than one year, include plant assets, equipment;
intangibles- franchises, patents
*Current liabilities- must be paid within one year OR operating cycle, whichever is longer
*Long-term liabilities- due date more than one year from balance sheet (Ex: mortgages,
bonds, loans)
Net working capital- Want more current assets than current liabilities
Current ratio
Current assets
Current liabilities
Measures ability to pay current liabilities

MBA 560 Accounting Notes

Strong current ratio= 1.50- if you were to sell all assets, you could pay off all assets one and a
half times
Debt ratio
Total liabilities
Total assets
Measures ability to pay all liabilities
Low debt ratio is safer than high debt ratio
When you come up with interest rate- come up with risk-free rate. Add inflation based on what
its assumed to be. The risk premium is added to the 3% inflation based on credit rate
Exercise 22A
When adjusting entries- NEVER use the word cash
a) Prepaid insurance begins at $400, up to $1,200, ends at $700- what happened? Used
some of the insurance. Credit prepaid item
Insurance Expense.900 (debit)
Prepaid insurance ($400+$1200-$700) . 900 (credit)
b) Interest revenue accrued $1600- we earned interest but we havent gotten the money
yet- use DED CLEAR- use a receivable to hold the place for something that you havent
gotten the money for yet.
Interest receivable.1600 (debit)
Interest receivable.1600 (credit)
c) Unearned service revenue begins $1100. Unearned service revenue rending $500
Unearned service revenue (1100-500)..600 (debit)
Service revenue..600 (credit)
d) Depreciation $4800
Depreciation expense.4800
Accumulated depreciation4800
Accumulated depreciation- cannot reduce the value of a building/furniture/equipment use
accumulated depreciation. Its offsetting an asset.
e) Salaries owed for 3 days of 5 day work week, weekly payroll $18,000
18000* 3/5= 10,8000. Now we do salaries, wages expenses
Salary expense (18000 x 3/5)..10,800

MBA 560 Accounting Notes

Salary Payable..10,800
f) Income before income tax $21,000, income tax rate 25%
Income tax expense (21000 x .25)5,250
Income tax payable.5, 250
Setting up expense for that period, not paying it yet.
**22A part 2** on test (similar)- suppose adjustments not made. Compute the overall
overstatement or understatement of net income as a result of these adjustments
Showing you the impact of adjusting entries. Most adjustments are expenses
Net income understated by omission of:
Interest revenue...1600
Total understatement..600
($ 2200)
Net income overstated by omission of
Insurance expense900
Depreciation expense..4800
Salary expense10800
Income tax expense..5,250
($21,750)
Overall effect net income overstated by..($19,550)
Exercise 24A
a) Business has interest expense of 9600 that it must pay in jan 2013
Debit interest expense and credit payable
Interest expense.9600
Interest payable..9600
b) Interest revenue 4900 earned but not received
Debit the receivable and credit the revenue- not yet received yet
Interest receivable...4900
Interest revenue..4900
c) On July 1st, collected $12,000 in advance (unearned- collect something we have
earned) debited cash and credited unearned. (we are ay Dec 31 2012). We can only

MBA 560 Accounting Notes

recognize 6 months of the 2 years rent. Can only recognize the months that you have
earned.
Unearned rent revenue (12,000/2 *6/12).3000
Rent revenue.3000
d) Salary expense $1,900 per day- Monday through Friday- and business pays employees
each Friday Dec 31 falls on Thursday
Salary Expense (1900 x 4).7,600
Salary payable...7,600
e) The unadjusted balance of supplies account 3,200. Total cost of supplies 1,400. What
happened to the rest of it? You used it up. Prepay and use it as you go along.
Supplies expense.1,800
Supplies (3,200 1,400)....1,800
f) Equipment cost of $80,000, useful life is 5 years, no residual value (cant sell it for
anything)
Depreciation expense (80,000/5)16,000
Accumulated depreciation..16,000
Straight line depreciation method- 80,000-5/ ???
Exercise 25A
Unadjusted balances. Accounts receivable $1,500, supplies $500, salary payable $0,
Unearned service revenue $600, Service revenue $4,200, Salary expense $1,900, supplies
expense $0
Make t chart for each one- on paper
Exercise 29A
Closing entries
Cost of goods or services sold- expense account
Accumulated depreciation- contra account- leave alone
Selling expenses- close out
Retained earnings- close
Close all in bwten
Not touching income tax payable

MBA 560 Accounting Notes

Debit each revenue account, retained earnings, do not put them together- total amount
credited to retained earnings
Service revenue....23900
Other revenues..400
Retained earnings.24,300
Retained earnings..22,000
Cost of services sold..11,000
Selling expense6400
Depreciation expense..4100
Income tax.500
Dividend is not an expense. Debit retained earnings and credit dividends
Retained earnings.300
Dividends300
Once you close accounts, you can determine if there is net income or debt
Net income calculation= revenues- expenses

Chapter 4
The way you value inventories is a cost flow assumption
The cost of inventory on hand= inventory assets on the balance sheet
The cost of inventory that has been sold= cost of goods sold expense on the income
statement
Beginning balance + net purchases= cost of goods available for sale- this gets split in two
pieces: ending inventory and cost of goods sold
Number of units of inventory
Shipping terms
FOB shipping point
-legal title passes to purchaser when items leave sellers place of business
-purchaser owns good while in transit
-purchaser pays transportation costs
FOB Destination
-legal title passes to purchaser when items arrive at purchasers receiving
dock
-seller owns goods while in transit
-included on sellers inventory count
-seller pays transportation costs

MBA 560 Accounting Notes

Inventory accounting system
Perpetual inventory system
-used for all types of goods
-keeps a running total of all goods bought
-inventory counted at least once a year
Periodic inventory system
-Used for inexpensive goods
-No running total
Cost of net purchases formula
Purchase price of inventory
+Freight cost
-Purchase returns
-Purchase allowances
-Purchases discounts
=Net purchases of inventory
Net sales formula
Sales revenue
-Sales returns and allowances
-Sales discounts
=Net sales
Inventory costing methods
-Specific unit costs
-Average cost
-First in first out - cost of first item going to cost of goods sold, ones left in inventory
-Last in last out- cost of last ones you buy going to cost of goods sold (opposite of FIFO)
Average cost
Average cost per unit= Cost of goods available
Number of units available
*Goods available = beginning inventory + Purchases
Cost of goods sold= number of units sold x average costs
Ending inventory = number od units on hand x average cost per unit
FIFO- oldest items assumed to be sold first
LIFO- most recent purchased items are assumed to be sold first, oldest in inventory
Tax advantage of LIFO- results in lowest income (in periods of increasing prices) lowers
income taxes increase cash available
reExercise 15A

MBA 560 Accounting Notes

June 30, 2012

June 30, 2011 = beginning inventory
Journal entries:
1. Purchases
Inventory..46,000
Accounts payable..46,000 (because you did not pay cash for it)
2. Sales:
Cash ($75,000 x .17) ...12,750
Accounts receivable (75,000 x .83).62,250
Sales rev...75,000
Cost od goods sold..39,000
Inventory..39,000
BALANCE SHEET
Current assts:
Inventory17,000
INCOME STATEMENT
Sales revenue....75,00
Cost of goods sold.39,000
Gross profit..36,000
Current assets (sell within a year or operating cycle)- cash, receivables (interest, accounts,
excludes long-term, note), prepaid expenses
Exercise 16A
Req. 1
Inventory (1085+1980).3065
Accounts payable.3065
Req 2.
Accounts receivable (15 @ $600)9,000
Sales revenue9,000
8 units on hand- sold 15. Use FIFO- 4 @ 155, 7 @ 155, 4 @ 165= 2,365
Cost of goods sold.2,365

MBA 560 Accounting Notes

Inventory2,365
Req. 3
Sales revenue..9,000
Cost of goods sold...2,365
Gross profit...6,635
Ending inventory
(620+1085+1980+2365)

$1320

Cost of costs available for sale= ending inventory and COGS

Exercise 19A
Req. 1
a. FIFO
Have 18, sold 12. 6 items left. Costs of goods sold will be 12 x $42 (ones you already had)
Costs of goods sold
(12 @ 42).504
Ending inventory
(4@ 69) + (2 @ 42)..360
b. LIFO
COGS
(4@69)+(8@42)..612
Ending inventory
(6 @ 42)..252
Req. 2 Income statement
Sales revenue (12@111)..1,332
COGS (FIFO method504
Gross profit .828
Operating expenses..340
Income before income tax 488
Income tax expenses (40%) 195
Net income .293
Exercise 24

MBA 560 Accounting Notes

Gross profit percentage= gross profit/net sales
Gross profit= revenues 139,000 + costs of goods sold
FIFO
GP= 139,000- 85,800=53,200/139,000 = 38.3%
LIFO
GP= 139,000-92,900=46,100/139,000 = 33.2%
Inventory turnover
FIFO= 85,800/[(22000+26000)/2] = 3.6 times
LIFO= 92,900/[(9000+21000)/2] = 6.2 times

Chapter 5
Current liabilities: Known amount:
Accounts payable turnover = costs of goods sold / average accounts payable
Days payable outstanding = 365 / accounts payable turnover
Short term notes payable
-due within one year
-used to borrow cash or purchase asset
-accrue interest
Accrued liabilities
-result from expenses incurred but not yet paid
Current portion of long-term debt
-long term debt often paid in installments
-amount of principle payable within one year
-company reclassifies amount from long-term to current
Estimated current liabilities
-Estimated warranty payable
-ex: warranty on computer you pay for
-Contingent liabilities
-ex: law suit
-accrue: loss probable, amount estimable
-disclose: loss reasonably possible

MBA 560 Accounting Notes

Long-term liabilities
-Bonds payable
-Notes payable
Bonds: most bonds pay interest semi-annually
Semiannual interest payment = Face value x Stated interest rate x
Face value- whatever the note says
Stated interest rate- says on the note
If youre crossing over the year, start in September, you multiple 3/12 (or however many
months left in year) to true up the statement
Semiannual interest expense = Preceding bond carrying amount x Market interest rate x

Market interest rate- changes frequently during the year, use the current one
Straight Line Method:
If a bond is eligible for premium or a discount use this:
Amortization = Discount or premium
Number of interest payments
Interest expense = Interest payment + or Amortization
Financing Operations
Issuing stock
Retained earnings
Issuing bonds
Times interest Earned
Operating Income
Interest Expanse
High ratio= ease in paying interest
Low ratio= difficulty in paying interest
When a company sells something with a warranty, they book the revenue but also debit the
estimated cost of using warranty (warranty payable)
Exercise 16A
Estimated warranty payable- Beg balance 5,000 (credit)

MBA 560 Accounting Notes

Sales revenue 111,000 (credit)
Warranty expense- not estimated yet
Warranty expense is normally 8%
2012 business paid 7,000 to satisfy warranty claims
Req. 1
Warranty expense (111000 x .08) 8,800
Estimated warranty payable..8,800
Estimated warranty payable .7,000
Cash 7,000
(put cash because it said paid if it does not, can put labor/cash/materials)
Req. 2
Income statement
Sales revenue .111000
Warranty expense 8880
Balance sheet
Current liabilities
Estimated warranty payable
(5,000+8880-7000)6880
Req. 3
Calculate current ratio- current assets/current liabilities
Exercise 17A
Cash collected = cash plus sales tax
Oct. 1 Cash.2616
Unearned subscription revenue..2400
Sales tax payable (2400 x 09)216
Unearned because we havent done anything yet for costumer
Nov. 15 Sales tax payable.. 216
Cash.216

MBA 560 Accounting Notes

Dec. 31 Unearned subscription revenue. 600
Subscription revenue (2,400 x 3/12)600
Got rid of sales tax
Subtract 600 because paid
Liabilities= 1800
Balance sheet:
Current liabilities
Unearned subscription revenue (2400-600)1800
Exercise 19A
Note payable transactions
9 months have gone by because starts at April 1, must count April
April 1 Truck.85,000
Note payable..85,000
Req. 1
Accrued interest,
Dec 31 = 85000 x .08 x 9/12 = 5100
Dec. 31 Interest expense.5,100
Interest payable..5,100
Req.2
Have to pay a full year of interest
Final payment on April 1, 2013 = 85,000 + (85,000 x .08) = 91,800
Note payable 85,000
Interest payable 5,100
Interest expense (85,000 x .08 x 3/12)
Cash 1,700 (for 3 months)
Req. 3
2012= 85,000 x .08 x 9/12 =5100
2013=85,000 x .08 x 3/12 = 1700
Exercise 24A
*ONE OF THE SHORT PROBLEMS WILL BE BOND* there will be no premium or discount
on the short problem

MBA 560 Accounting Notes

The reason we have to amortize we are issuing at a discount
Sold bonds Jan 31 at a discount 96
Because it is a discount it is not a loss, their rate is lower than the market rate
If it is a premium the it is a credit
Jan 31 Cash (8,000,000 x 0.96)..7,680,000
Discount on bonds payable..329,000
Bonds payable8,000,000
To issue bonds at a discount
On test*** If sold for 100 percent
Cash8,000,000
Bonds payable.8,000,000
(b) Take face amount of the bond- Cash 8 million times percent (.07) times 6/12 or half.
320,000 divide by 10, because 10 periods (5 years, semiannually) - excess discount
July 31 Interest expense..312,000
Cash (8,000,000 x .07 x 6/12)..280,000
Discount on bonds payable
(320,000/10)..32,000
To pay interest and amortize bonds
(c) Dec 31 is an adjusting entry, cash was not paid
Dec 31 Interest expense.260,000
Interest payable
(8,000,0000 x .07 x 5/12)233,333
Discount bonds payable
(320,000/10 x 5/6).26,667
To accrue interest and amortize bonds
Exercise 25A
issued at 105- premium
a bond sold at a premium because the stated rate is more than the market rate
a bond is sold at discount because stated rate is less than market rate
1. Cash received = 100,000 x 1.05..105,000
2. face value x stated rate x 20 years= interest
Principal..100,000
Interest (100000 x .07 x 20).140,000

MBA 560 Accounting Notes

Total cash paid..240,000
3. total interest expense- collected 5,000 of interest on front end
total cash paid...240,000
Less: cash received....(105,000)
Difference= total interest expense 135,000
Amortization = Discount or premium
Number of interest payments
4. annual interest expense by straight line
100,000 x .07 = 7,000 interest payment annually
100,000 x (1.05 -1.00) / 20 years= 250
7,000-250=6750 x 20 years
total interest expense over the life of bonds 135,000
Exercise 26
Bonds issued at a discount
5% interest on bond
Market rate 6%
Have to issue discount because bond rate is lower than market rate
Req 1 see paper and picture
Rew 2
Dec 31 Cash.3,702.450
Discount on bonds payable..297,550
Bonds payable..4,000,000
June 30 Interest Expense..11,074
Cash..100,000
Discount on bonds payable..11,074
Dec 31 2013 Interest expense..111,406
Cash100,000
Discount on bonds payable..11,406

Chapter 6
Statement of cash flows
Operating, investing, and finance- 3 sections

MBA 560 Accounting Notes

Operating- current assets and current liabilities
Investing- long-term assets only
Finance- long-term liabilities and equity
Exercise p 399 17A
2 methods- indirect and direct
depreciation expense- debit
accumulated depreciation- credit
Always add back depreciation expense in INDIRECT method
Loss gets added in operating, gain gets subtracted (l)
Exercise 18A
Every current asset that increases you have to subtract
DEAD CLEAR is opposite only for operating section
See picture
Ideal situation, positive operating, negative investing, negative finance
Exercise 19A
Net income- 10,000
Depreciation- 9.000
Accounts receivable increase 2,000- subtract
Inventory- increased 3,000- subtract
Accounts payable- increased- add it
Accrued liabilities- decreased 4,000- subtract
See picture
Why is accounts payable increasing so much?