KIMMEL RAPID REVIEW

Financial Accounting: Tools for Business Decision-Making, Second Canadian Edition

ACCOUNTING CONCEPTS (Chapters 1-4)
Characteristics

CLOSING ENTRIES (Chapter 4)

Assumptions

Understandability
Relevance
Comparability
Reliability

Principles

Monetary unit
Economic entity
Time period
Going concern

Purpose

Constraints

Revenue recognition
Matching
Full disclosure
Cost

1. Update the Retained Earnings account by transferring net earnings (loss) and
dividends to retained earnings.
2. Prepare the temporary accounts (revenue, expense, dividends) for the next
periods postings by reducing their balances to zero.

Materiality
Cost-benefit

Process

BASIC ACCOUNTING EQUATION (Chapter 3)

Basic
Equation

Assets

Liabilities

Assets

Liabilities

Expanded
Basic Equation
Debit / Credit
Rules

Dr.
+

Cr.

Dr.

Cr.
+

1. To close revenue accounts: Debit each individual revenue account for its balance (assuming
normal balances) and credit Income Summary for total revenues.
2. To close expense accounts: Debit Income Summary for total expenses and credit each
individual expense account for its balance (assuming normal balances).
3. To close income summary: Debit Income Summary for the balance in the account (or credit
if a net loss) and credit (debit) Retained Earnings.
4. To close dividends: Debit Retained Earnings and credit Dividends for the balance in the
account.

Shareholders Equity

Common
Shares

Dr.

Cr.
+

Revenues
Dr.

Cr.
+

Retained
Earnings
Dr.

Cr.
+

Expenses
Dr.
+

Cr.

STOP AND CHECK: Does the balance in the Retained Earnings account equal the ending
balance reported in the balance sheet and statement of retained earnings? Are all of the
temporary account balances zero?

ACCOUNTING CYCLE (Chapter 4)

Dividends

Dr.
+

Cr.

ADJUSTING ENTRIES (Chapter 4)

Type
Prepayments

Accruals

1. Prepaid expenses

Prepare a post-closing
trial balance

Original Entry
Asset account
Cash

Expense account
Asset account
Liability account
Revenue account

1. Accrued revenues

Asset account
Revenue account

2. Accrued expenses

No entry

2
Journalize the
transactions

Adjusting Entry

2. Unearned revenues Cash

Liability account
No entry

Analyse business
transactions

Journalize and post

closing entries

Post to
general ledger accounts

7
Prepare financial statements:
Statement of earnings
Statement of retained
earnings
Balance sheet

Expense account
Liability account

Note: 1. Each adjusting entry will affect one or more statement of earnings accounts
and one or more balance sheet accounts.
2. Adjusting entries never include the Cash account.

4
Prepare a
trial balance

6
Prepare an adjusted
trial balance

Interest Calculation
Interest = Face value Annual interest rate Time (# of months 12)

Journalize and post

adjusting entries:
Prepayments/Accruals

INVENTORY (Chapters 5 and 6)

CASH (Chapter 7)

Ownership

Principles of Internal Control

Freight Terms

Ownership of Goods

FOB Shipping point

Buyer

FOB Destination

Seller

Establishment of responsibility
Segregation of duties
Documentation procedures
Physical controls
Independent internal verification
Other controls

Bank Reconciliation

Perpetual vs. Periodic Journal Entries

Event

Perpetual

Purchase of goods

Inventory
Cash (A/P)

Purchases
Cash (A/P)

Freight (shipping point)

Inventory
Cash (A/P)

Freight In
Cash (A/P)

Return of purchased
goods

Cash (A/R)
Inventory

Cash (A/R)
Purchase Returns

Sale of goods

Cash (A/R)
Sales
Cost of Goods Sold
Inventory

Cash (A/R)
Sales
No entry

Sales Returns and

Allowances
Cash (A/R)
Inventory
Cost of Goods Sold

Sales Returns and Allowances

Cash (A/R)

Return of sold goods

(assuming resaleable)

Balance per bank statement

Add: Deposits in transit
Deduct: Outstanding cheques
Adjusted cash balance

No entry

End of period

Closing or adjusting entry

required

Balance per books

Add: Unrecorded credit memoranda from bank
statement
Deduct: Unrecorded debit memoranda from
bank statement
Adjusted cash balance

STOP AND CHECK: Does the balance in the general ledger cash account equal the adjusted
cash balance?

BAD DEBTS (Chapter 8)

Event

Inventory Cost Flow Assumptions

Perpetual

Books

Note: 1. Errors should be offset (added or deducted) on the side that made the error.
2. Adjusting journal entries should only be made on the books side.

No entry

Adjustment of inventory in Cost of Goods Sold

accounting records to lower
Inventory
physical count amount
No entry

Bank

Periodic

Record credit sales

Accounts Receivable
Sales

Estimate bad debts

Bad Debts Expense

Allowance for Doubtful Accounts

Write-off uncollectible account

Allowance for Doubtful Accounts

Accounts Receivable

Subsequent recovery

Accounts Receivable
Allowance for Doubtful Accounts
Cash
Accounts Receivable

Periodic

Specific identification
First-in, first-out (FIFO)

First-in, first-out (FIFO)

Moving average

Weighted average

Last-in, first-out (LIFO)

Last-in, first-out (LIFO)

Journal Entry

LONG-LIVED ASSETS (Chapter 9)

Tangible
Property, plant, and equipment
Natural resources

Intangible
Intangible assets, limited lives
Intangible assets, indefinite lives

LONG-LIVED ASSETS (Chapter 9) (Continued)

INVESTMENTS (Chapter 12)

Calculation of Annual Amortization Expense

Comparison of Long-Term Bond Investment and Liability Journal Entries

Event

Cost Salvage value

Useful life (in years)

Straight-line
Declining-balance

Net book value at beginning of year Straight-line rate

Straight-line rate = 1 Useful life (in years)

Units-of-activity

Cost Salvage value

Units of activity during year
Useful life (in units)

Face Value

Market interest rate = Contractual interest rate

Discount

Market interest rate > Contractual interest rate

Effective-interest
amortization

Bond interest expense

Carrying value of bonds

at beginning of period
market interest rate

Bond interest paid

Face amount of bonds
contractual interest rate

Comparison of Dividend Effects

Common
Shares

Retained
Earnings

Total Shareholders
Equity

Cash Dividend

Decrease

No effect

Decrease

Decrease

Stock Dividend

No effect

Increase

Decrease

No effect

Stock Split

No effect

No effect

No effect

No effect

Interest Expense
Cash

Cost

Equity

Acquisition

Equity Investments
Cash

Equity Investments
Cash

Investee reports
earnings

No entry

Equity Investments
Investment Revenue

Investee pays
dividends

Cash
Dividend Revenue

Cash
Equity Investments

$X
X
X
X
(X)
(X)
(X)
$X

Operating activities (direct method)

Cash receipts
(Examples: from sales of goods and services to customers, from receipts
of interest and dividends on loans and investments)
$X
Cash payments
(Examples: to suppliers, for operating expenses, for interest, for taxes)
(X)
Cash provided (used) by operating activities
$X

SHAREHOLDERS EQUITY (Chapter 11)

Cash

Interest receipt / payment Cash

Interest Revenue

Operating activities (indirect method)

Net earnings
Add:
Decreases in current assets
Increases in current liabilities
Amortization
Losses on disposals of assets
Deduct: Increases in current assests
Decreases in current liabilities
Gains on disposals of assets
Cash provided (used) by operating activities

Interest expense = Interest paid (payable) + Amortization of discount

(OR Amortization of premium)
Amortization (Appendix 10A)
Bond discount (premium)
Number of interest periods

Cash
Bonds Payable

CASH FLOW STATEMENT (Chapter 13)

Calculation of Annual Bond Interest Expense

Straight-line
amortization

Purchase / issue of bonds Debt Investments

Cash

Event

BONDS (Chapter 10)

Market interest rate < Contractual interest rate

Investee

Comparison of Cost and Equity Methods of Accounting for Long-Term Equity

Investments

Note: If amortization is calculated for partial periods, the straight-line and decliningbalance methods must be adjusted for the relevant proportion of the year.
Multiply the annual amortization expense by the number of months expired in
the year divided by 12 months. The total amortization under the declining
balance method is limited to cost salvage value.

Premium

Investor

Statement of Earnings (periodic inventory system)

IRREGULAR ITEMS (Chapter 14)

Discountinued operations

Statement of earnings (presented separately after

earnings from continuing operations)

Extraordinary items

Statement of earnings (presented separately after

earnings before extraordinary items)

Changes in accounting
principle

Statement of retained earnings (adjustment of

beginning retained earnings)

Name of Company
Statement of Earnings
Period Ended
Sales revenues
Sales
Less: Sales returns and allowances
Sales discounts
Net sales
Cost of goods sold
Beginning inventory
Purchases
Less: Purchase returns and allowances
Net purchases
Add: Freight in
Cost of goods purchased
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
Gross profit
Operating expenses
(Examples: store salaries, advertising, delivery, rent,
amortization, utilities, insurance)
Earnings from operations
Other revenues
(Examples: interest, gains)
Other expenses
(Examples: interest, losses)
Earnings before income taxes
Income tax expense
Net earnings

Note: These items are net of income tax.

FINANCIAL STATEMENTS
Order of Preparation

Date

1. Statement of earnings

Period ended

2. Statement of retained earnings

Period ended

3. Balance sheet

End of the period

4. Cash flow statement

Period ended

Statement of Earnings (perpetual inventory system)

Name of Company
Statement of Earnings
Period Ended
Sales revenues
Sales
Less: Sales returns and allowances
Sales discounts
Net sales
Cost of goods sold
Gross profit
Operating expenses
(Examples: store salaries, advertising, delivery, rent,
amortization, utilities, insurance)
Earnings from operations
Other revenues
(Examples: interest, gains)
Other expenses
(Examples: interest, losses)
Earnings before income taxes
Income tax expense
Net earnings

$X
X

$X
X
X
X
X

$X
X

$X
X
X
X

X
X
X

Retained earnings, beginning of period

Add: Net earnings (or deduct net loss)

X
X
X
$X

Deduct: Dividends
Retained earnings, end of period

$X
X

$X
X
X
X
$X

STOP AND CHECK: Net earnings (loss) presented on the statement of retained
earnings must equal the net earnings (loss) presented on the income statement.

X
X
X
X

Name of Company
Statement of Retained Earnings
Period Ended

$X

X
X

$X

Statement of Retained Earnings

X
X

$X

X
X
X
$X

Cash Flow Statement

FINANCIAL STATEMENTS (Continued)

Name of Company
Cash Flow Statement
Period Ended

Balance Sheet
Name of Company
Balance Sheet
End of the Period
Assets
Current assets
(Examples: cash, short-term investments, accounts
receivable, merchandise inventory, prepaids)
Long-term investments
(Examples: equity investments, debt investments)
Property, plant, and equipment
(Examples: land, land improvements, buildings,
equipment, natural resources)
Less: Accumulated amortization
Intangible assets
Limited life intangibles (Examples: patents,
copyrights) (net of accumulated amortization)
Indefinite life intangibles (Examples: trademarks,
franchises, goodwill)
Total assets

Operating activities
Note: May be prepared using the direct or indirect method
Cash provided (used) by operating activities
Investing activities
(Examples: purchase / sale of long-term assets)
Cash provided (used) by investing activities
Financing activities
(Examples: issue / repayment of long-term liabilities,
issue of shares, payment of dividends)
Cash provided (used) by financing activities
Net increase (decrease) in cash
Cash, beginning of the period
Cash, end of the period

$X
X
$X
X

$X
X

$X
X
X
$X
X

X
X
X
$X

STOP AND CHECK: Cash, end of the period, on the cash flow statement must equal cash
presented on the balance sheet.

X
$X

Liabilities and Shareholders Equity

Liabilities
Current liabilities
(Examples: notes payable, accounts payable, accruals,
unearned revenues, current portion of notes payable)
Long-term liabilities
(Examples: notes payable, bonds payable)
Total liabilities
Shareholders equity
Common shares
Retained earnings
Total liabilities and shareholders equity

$X

X
$X

STOP AND CHECK: Total assets on the balance sheet must equal total liabilities and
shareholders equity; and, ending retained earnings on the balance sheet must equal
ending retained earnings on the statement of retained earnings.

LIQUIDITY RATIOS
Ratio
Working capital

PROFITABILITY RATIOS
Formula

Purpose

Current assets Current liabilities Measures short-term

debt-paying ability

Current ratio

Current assets
Current liabilities

Discussion
Ch. 2, p. 68

Measures short-term
debt-paying ability

Ch. 2, p. 69

Measures short-term
debt-paying ability (cash
basis)

Ch. 2, p. 73

Cash current debt

coverage ratio

Cash provided by
operating activities
Average current liabilities

Inventory turnover

Cost of goods sold

Average inventory

Measures liquidity of
inventory

Ch. 6, p. 278

Days in inventory

365 days
Inventory turnover

Measures the number of

days inventory is on hand

Ch. 6, p. 278

Measures liquidity of
receivables

Ch. 8, p. 371

Receivables turnover

Net credit sales

Average gross receivables

Average collection
period
Acid-test ratio

365 days
Receivables turnover
Cash Short-term investments
Accounts receivable
Current liabilities

Measures number of days Ch. 8, p. 371

receivables are outstanding
Measures immediate
short-term liquidity

Ch. 10, p. 474

SOLVENCY RATIOS