COMM 311

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[edit] Class Notes

[edit] 1/19/2006

Three types of CPA review of accounting statements:
- Compilation - CPA compiled statements
- Review - CPA has reviewed statements
- Audit - CPA has investiaged firm in-depth (checked the inventory, clients, etc) and can attest that the statements are correct

[edit] 1/24/2006

Other cases: 3-4 & 4-9

Imortant stuff:

p 66, Grapic 2-2
p 121, definitions (what is an asset?)
p 169, graphic 4-1 (income statement)
- pg 172-173
pg 176-177, quality of earnings

Current accounts: accounts that revolve in an operating cycle.

[edit] Adjusting entries

Revenue realization principle
Matching principle
- Direct (match with when the related service was provided or good was sold)
- Systematic (match at a constant rate, eg building costs debited over the period of the year)
- Direct write-off (don't know when the benefit will occur, so we write of when expense incurred)

Types of adjusting entries:

Prepayments
- eg, an insurance policy paid ahead
Accruals
- eg, salaries payable
Estimates
- Estimated bad debt expense

Rules for adjusting entries:

Every "true" adjusting entry involves an income statement account and a balance sheet account
Adjusting entries NEVER involve the cash account

Allowing for bad debt in A/R:

Income statement approach:
- Need x% of sales as bad debts expense, allowance (balance) follows to balance.
Balance sheet approach:
- Allowance for uncollectible accts should be $X, bad debt expense follows.

[edit] 1/31/2005

COMM 311: Statement of Cash Flows

[edit] 2/1/2005

Read case 1 - lucky. Today's PP posted on toolkit.

[edit] 2/21/2006

[edit] Exam Notes

Office hours tomorrow 1:00-3:00

DIDN'T LOOK AT TEXTBOOK WHEN HE PREPARED THE TEST, LOOKED AT THE HYDROMAINT CASE (many problems similar to what was done in hydromaint case).

Exam breakdown:

M/C - 6 questions @ 24% (most quantitative, 1 qualitative)
Problems - 20%, 24%, 24%
Essay - 8%

Topics (all tied to hyrdomaint case):

Conceptual framework: Spiceland, Sepe, and Tomassini (SST) pp. 4-33
- MAY NOT BE TESTED: Maybe 1 MC question? How do you recognize xyz?
- know assets, liabilities, equity, financial statements, revenue recognition, matching
Accounting process: SST pp. 62-95
- JUST KNOW: Adjusting entries < make SURE you understand why we made them and the effect they had
Balance sheet: SST pp. 118-129
- Not sure: (midterm) Maybe a little review, no large questions
Income statement: SST 168-177
- Not sure: (midterm) Maybe a little review, no large questions
Revenue recognition: SST pp. 220-246
- Advance paid contracts: unearned revenue in hydromaint case
Time value of money: SST Chapter 6
- We know that there are equal annual payments, find interest rate
- Truck purchase, calculating present values, comparing interest rates
Accounts receivable: SST pp. 323-333
- Done NOTHING except estimate bad debts
Inventory costing methods: SST pp. 366-385
- Done NOTHING, no FIFO, LIFO, Weighted average
Acquisitions of operational assets: SST pp. 462-469, 480-486, 490
- Figure out cost of trucks that were purchased from dealer, had in shop for 1.5 months. What costs are capitalizable, how do we capitalize it?
- Capitalization of interest, what amount to debit to the trucks just to purchase the trucks themselves (because we had low dealer financing). $30,000 of tooling
Intangible assets: SST pp. 469-472
- NOT MUCH TO TEST: Licensing arrangement, no big issue, just using straight line amortization
Depreciation: SST pp. 520-528, 545-550
- Zero, Straight line, no salvage value
Amortization: SST pp. 531-535
- Mostly straight line, no salvage value
- MACRS (no need to memorize percentages) for income taxes
Investments: SST pp. 572-596
- No investments of any kind. No tradable securities, bonds, etc.
- difference between what was on your books & market value for the year (unrealized gain on income statement)
- never sold any trading securities
Current liabilities: SST pp. 618-629
- Income tax payable, Interest payable, short term portion of long term debt < know reclassification
Long-term notes: SST pp. 668-676, 679-684
- Bank notes, understand payments schedule
- How much of each payment goes to interest, principal, etc
Leases: SST pp. 716-728, 740-743, 744-746
- "MAJOR TOPIC SINCE MIDTERM EXAM - "GOOD CANDIDATE FOR BIG QUESTION"'
- Operating leases vs capital leases.
  - Know how to account for each. Depreciate capital lease asset, capital lease liability, how to account for in taxes, etc.
  - KNOW 4 CRITERIA FOR CAPITAL LEASES
- Had a lease, paying rent for office, furniture, & equip and we've been paying rent on bldg
***Income taxes: SST pp. 778-807***
- NOL Carry forward in first year
- NOL carry backs
- Deferred income taxes because of temporary differences
  - Capital lease amortization (rent expense vs. interest expense on income statement), Depreciation on trucks & bad-debts expense
  - Trading securities (unrealized gains on income vs. only realized on tax statement)
  - KNOW: CURRENT VS. NONCURRENT, is it a debit or credit (know what it means for future - do you pay more or save more taxes), is a asset or liability account?
- THIS IS A MAJOR TOPIC!!!
~~Pensions: SST pp. 834-860~~
- Not really for this exam
Stockholders’ equity: SST pp. 938-953
- Just debited cash and credited SH equity
Earnings per share: SST pp. 996-1016
- Know weighted EPS, net income (minus dividends to common stock holders) divided by the weighted average of shares outstanding over the past year
Changes in accounting estimates: SST pp. 1045-1048
- Never go back and restate anything, you can change this year and future years
***Statement of cash flows: SST pp. 1082-1121***
- "Major Topic"
- KNOW THIS, NEED TO UNDERSTAND
Disclosures (notes): SST Index, p. I-6, “Disclosures”
- Supposed to include notes on the financial statements that we've prepared
- You ought to know in general what those notes are about
- Essay: "In general give me bullet points on what you would include on a note on income taxes"
- Or "What goes in the summary of significant accounting policies"
- Study solution to year two (won't be asked to memorize, or replicate, just know all the titles and what they're about)

[edit] 3/30/2006

[edit] Pension Plans

PBO - "true value" of plan
ABO - same as PBO, but no raises
VBO - same as ABO, but everything's frozen. Amount that will be actually owed

Identifying Components of Pension Expense in the Income Statement

+ Current service cost (the amount by which your PBO has gone up this year because your employees work for you)
+ Interest cost
- Discount times the beginning balance of the PBO liability
- Expected return on plan assets
+ Amortization of prior service cost
-/+ Amortization of actuarial gains/losses, if any
-/+ Amortization of cumulative difference between expected and actual return on plan assets, if any
+ Amortization of transition amount
= Pension Expense

[edit] 4/11/2006

[edit] DIT on the balance sheet

DIT current (assets & liabilities) should be net out and shown on balance sheet as ONE number (either under assets or liabilities)
DIT non-current (assets & liabilities) should be done the same way.

[edit] Good exam question

KNOW DEFERRED TAXES AND SCF, WHERE THEY COME TOGETHER
Note, since buying & selling trading securities is considered part of operations, then it goes under operating cash flows
- Trading securities is the temporary purchase of securities

[edit] 4/18/2006

[edit] DuPont Framework

Return on S/E = Profitability x Efficiency x Leverage

http://beginnersinvest.about.com/od/financialratio/a/aa040505.htm

[edit] 4/27/2006

Final Exam
- M/Ch: 14@2 = 28 pts (half quanatitive half qualatative)
- Problems: 4 @ 18 pts
What he did when putting the exam together:
- Given though 4 problems, what does he want to cover. (NOT BAD DEBTS). Wants to test LARGER, more complex topics. About 6 of these topics exist in the class
FOCUS ON STUFF COVERED IN CLASS

List of revised topics:
Conceptual framework: Spiceland, Sepe, and Tomassini (SST) pp. 4-33
- Maybe 1 MC question? How do you recognize xyz?
Accounting process: SST pp. 62-95
- Adjusting entries < make SURE you understand why we made them and the effect they had
Balance sheet: SST pp. 118-129
- Maybe a little review, no large questions
Income statement: SST 168-177
- Maybe a little review, no large questions
Revenue recognition: SST pp. 220-246
- Unearned revenue in hydromaint case
Time value of money: SST Chapter 6
- We know that there are equal annual payments, find interest rate
- Truck purchase, calculating present values, comparing interest rates
Accounts receivable: SST pp. 323-333
- Done NOTHING except estimate bad debts
Inventory costing methods: SST pp. 366-385
- Done NOTHING, no FIFO, LIFO, Weighted average
Acquisitions of operational assets: SST pp. 462-469, 480-486, 490
- Figure out cost of trucks that were purchased from dealer, had in shop for 1.5 months. What costs are capitalizable, how do we capitalize it?
Intangible assets: SST pp. 469-472
- Licensing arrangement, no big issue, just using straight line amortization
Depreciation: SST pp. 520-528, 545-550
- Zero, Straight line
Amortization: SST pp. 531-535
- MACRS (no need to memorize percentages) for income taxes
~~Investments: SST pp. 572-596~~
- No investments of any kind. No tradable securities, bonds, etc.
Current liabilities: SST pp. 618-629
- Interest payable, short term portion of long term debt < know reclassification
Long-term notes: SST pp. 668-676, 679-684
- Bank notes, understand payments schedule
- How much of each payment goes to interest, principal, etc
Leases: SST pp. 716-728, 740-743, 744-746
- Had a lease, paying rent for office, furniture, & equip and we've been paying rent on bldg
***Income taxes: SST pp. 778-807***
- Know determination of taxable income & income tax due
  - Know: income tax expense / dit / income tax payable journal entry
- NOL Carry forward in first year
- NOL carry backs
- Deferred income taxes because of temporary differences
  - Depreciation on trucks & bad-debts expense
- THIS IS A MAJOR TOPIC!!!
Pensions: - maybe SST pp. 834-860
- It will be changed in the future
- Know defined benefit plan - hydromaint (maybe define contribution plan)
- MEMORIZE SOME OF THE RULES
- calculate pension expense ON INCOME STATEMENT (sum of):
  - service cost: change in PBO liability because employees worked for us an additional year
  - interest on PBO
  - return on plan assets
  - amortization of prior service cost
- know how to calc ACCRUED PENSION LIABILITY (or prepaid pension asset) ON Balance sheet - SUM OF
  - NOTE: THIS MUST BE ABOVE MIN LIABILITY
  - projected benefit obligation (liability)
  - amortized prior service cost (asset)
  - plan assets (asset)
- MIN Liability rule = ABO - Plan assets. If you credit pension liability to get up to accrued pension liability we must debit "wood putty" asset - intangible pension asset account
- KNOW THE DETAILS THAT GO INTO THE PENSION NOTE
Stockholders’ equity: SST pp. 938-953
- Just debited cash and credited SH equity
Earnings per share: SST pp. 996-1016
- Know weighted EPS, net income (minus dividends to common stock holders) divided by the weighted average of shares outstanding over the past year
Changes in accounting estimates: SST pp. 1045-1048
- Never go back and restate anything, you can change this year and future years
***Statement of cash flows: SST pp. 1082-1121***
- "Major Topic"
- KNOW THIS, NEED TO UNDERSTAND
Disclosures (notes): SST Index, p. I-6, “Disclosures”
- REVIEW NOTES TO HYDROMAINT YEAR THREE
- NOTE A BIG QUESTION, MAY BE TWO MULTIPLE CHOICE QUESTION
- Supposed to include notes on the financial statements that we've prepared
- You ought to know in general what those notes are about
- Essay: "In general give me bullet points on what you would include on a note on income taxes"
- Or "What goes in the summary of significant accounting policies"
- Study solution to year two (won't be asked to memorize, or replicate, just know all the titles and what they're about)
RATIOS:
- Will put something in there (multiple choice) KNOW CURRENT RATIO, return on s/h equity
- IT'S NOT GOING TO BE ONE OF THOSE BIG QUESTIONS

[edit] 5/2/2006 - Question & Answer

[edit] Pensions

Gap way of doing it:

Pension expense X

Pension Liability X

Interest Expense X

Interest Payable X

Investment Asset X

Cash X

Investment asset X

Income from asset X

Instead, everything is incorporated into:

Pension expense X

Pension Liability X

Minimum liability (ABO - Plan assets) - If you are below the min liability:

Intangible pension asset

Accrued pension liability

don't worry about last assignment on exam