KIMMEL RAPID REVIEW

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

ACCOUNTING CONCEPTS (Chapters 1-4) CLOSING ENTRIES (Chapter 4)

Characteristics Assumptions Principles Constraints

Purpose
1. Update the Retained Earnings account by transferring net earnings (loss) and
Understandability Monetary unit Revenue recognition Materiality dividends to retained earnings.
Relevance Economic entity Matching Cost-benefit 2. Prepare the temporary accounts (revenue, expense, dividends) for the next
Comparability Time period Full disclosure periodʼs postings by reducing their balances to zero.
Reliability Going concern Cost
Process
BASIC ACCOUNTING EQUATION (Chapter 3) 1. To close revenue accounts: Debit each individual revenue account for its balance and credit
Income Summary for total revenues.
Assets  Liabilities  Shareholders’ Equity 2. To close expense accounts: Debit Income Summary for total expenses and credit each
individual expense account for its balance (assuming normal balances).
Assets  Liabilities  Common Shares  Retained Earnings 3. To close income summary: Debit Income Summary for the balance in the account (or credit
Dr. Dr. Dr. Dr.
if a net loss) and credit (debit) Retained Earnings.
Cr. Cr. Cr. Cr.
        4. To close dividends: Is the balance in the Income Summary account, before transfer to the
Retained Earnings account, equal to the net income (loss) reported in the statement of
Revenues  Expenses  Dividends earnings? Debit Retained Earnings and credit Dividends for the balance in the account.
Dr. Cr. Dr. Cr. Dr. Cr. STOP AND CHECK: Is the balance in the Income Summary account, before transfer to the
Retained Earnings account, equal to the net income (loss) reported in the statement of earnings?
     

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?
ADJUSTING ENTRIES (Chapter 4)
Type Original Entry Adjusting Entry
ACCOUNTING CYCLE (Chapter 4)

Prepayments 1. Prepaid expenses Asset account Expense account 1

Cash
2. Unearned revenues Cash
Liability account
Asset account Analyze business
Liability account
transactions
9 2
Revenue account Prepare a post-closing Journalize the

Accruals 1. Accrued revenues No entry Asset account

trial balance transactions

Revenue account
2. Accrued expenses No entry Expense account 8 3
Liability account Journalize and post Post to
closing entries general ledger accounts
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. 7 4
Prepare financial statements:
Prepare a
Interest Calculation Statement of earnings
Statement of retained
trial balance
earnings
Interest = Face value × Annual interest rate × Time (# of months ÷ 12) Balance sheet

5
6 Journalize and post
adjusting entries:
Prepare an adjusted Prepayments/Accruals
trial balance

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 INVENTORY (Chapters 5 and 6) CASH (Chapter 7)
Ownership Principles of Internal Control
Establishment of responsibility
Freight Terms Ownership of Goods Segregation of duties
Documentation procedures
FOB Shipping point Buyer Physical controls
FOB Destination Seller Independent verification (internal and external)
Other controls

Perpetual vs. Periodic Journal Entries Bank Reconciliation

Event Perpetual Periodic Bank Books

Purchase of goods Inventory Purchases Balance per bank statement Balance per books
Cash (A/P) Cash (A/P) Add: Deposits in transit Add: Unrecorded credit memoranda from bank
Freight (shipping point) Inventory Freight In Deduct: Outstanding cheques statement
Cash (A/P) Cash (A/P) Adjusted cash balance Deduct: Unrecorded debit memoranda from
bank statement
Return of purchased Cash (A/P) Cash (A/P)
Adjusted cash balance
goods Inventory Purchase Returns
Sale of goods Cash (A/R) Cash (A/R) Note: 1. Errors should be offset (added or deducted) on the side that made the error.
Sales Sales 2. Adjusting journal entries should only be made on the books side.
Cost of Goods Sold No entry
Inventory STOP AND CHECK: Does the balance in the general ledger cash account equal the adjusted
cash balance?
Return of sold goods Sales Returns and Sales Returns and Allowances
(assuming resaleable) Allowances Cash (A/R)
Cash (A/R) BAD DEBTS (Chapter 8)
Inventory No entry
Cost of Goods Sold Event Journal Entry
Adjustment of inventory in Cost of Goods Sold No entry
Record credit sales Accounts Receivable
accounting records to lower Inventory
Sales
physical count amount
Estimate bad debts Bad Debts Expense
End of period No entry Closing or adjusting entry
Allowance for Doubtful Accounts
required
Write-off uncollectible account Allowance for Doubtful Accounts
Periodic Inventory—Formula for Cost of Goods Sold Accounts Receivable
Beginning + Cost of = Cost of Goods – Ending = Cost of Subsequent recovery Accounts Receivable
Inventory Goods Sold Available for Sale Inventory Goods Sold Allowance for Doubtful Accounts
Cash
Inventory Cost Flow Assumptions Accounts Receivable
Perpetual Periodic
Specific identification LONG-LIVED ASSETS (Chapter 9)
First-in, first-out (FIFO) First-in, first-out (FIFO) Tangible Intangible
Moving average Weighted average Property, plant, and equipment Intangible assets, limited lives
Last-in, first-out (LIFO) Last-in, first-out (LIFO) Natural resources Intangible assets, indefinite lives

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 LONG-LIVED ASSETS (Chapter 9) (Continued) Calculation of Annual Bond Interest Expense
Calculation of Annual Amortization Expense Interest expense = Interest paid (payable) + Amortization of discount
(OR – Amortization of premium)
Cost − Salvage value Amortization (Appendix 10A)
Straight-line
Useful life (in years) Straight-line Bond discount (premium)
Net book value at beginning of year × Straight-line rate amortization Number of interest periods
Declining-balance
Straight-line rate = 1 ÷ Useful life (in years) Effective-interest Bond interest expense – Bond interest paid
Cost − Salvage value amortization
Units-of-activity × Units of activity during year Carrying value of bonds Face amount of bonds ×
Useful life (in units)
at beginning of period × contractual interest rate
Note: If amortization is calculated for partial periods, the straight-line and declining- market interest rate
balance methods must be adjusted for the relevant proportion of the year.
Multiply the annual amortization expense by the number of months expired in SHAREHOLDERS´ EQUITY (Chapter 11)
the year divided by 12 months. The total amortization under the declining
balance method is limited to cost − salvage value. Comparison of Dividend Effects

Disposal of an asset Cash Common Retained Total Shareholders’

Shares Earnings Equity
Step 1 Update the amortization for Amortization Expense
the appropriate portion of the Accumulated Amortization Cash Dividend Decrease No effect Decrease Decrease
year. Stock Dividend No effect Increase Decrease No effect
Step 2 Calculate the net book value Cost – Accumulated Stock Split No effect No effect No effect No effect
Amortization
Step 3 Calculate the gain or loss Proceeds – Net Book Value INVESTMENTS (Chapter 12)
Step 4 Record the disposal Cash (or Receivable) Comparison of Long-Term Bond Investment and Liability Journal Entries
Accumulated Amortization
Gain or Loss Event Investor Investee
Capital Asset Purchase / issue of bonds Debt Investments Cash
NOTES PAYABLE (Chapter 10) Cash Bonds Payable
Instalment Payment Schedule Interest receipt / payment Cash Interest Expense
Interest Revenue Cash
A B C D
Interest Cash Interest Reduction Principal
Period Payment Expense of Principal Balance Valuation of Investments
Payments
Fixed Month Variable Dx Annual x Principal D–C Investment Valuation Unrealized Gains/ Realized Gains/
Principal B+C Interest Rate # of months Losses Losses
Blended Month Fixed Dx Annual x A–B D–C Trading (debt or market other comprehensive net earnings
B+C Interest Rate equity) income
*From the prior period
Available-for-sale market other comprehensive net earnings
BONDS (Chapter 10) (debt or equity) income
Premium Market interest rate < Contractual interest rate
Held-to-maturity cost unless net earnings net earnings
Face Value Market interest rate = Contractual interest rate (debt) permanent decline
Discount Market interest rate > Contractual interest rate then market

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 Comparison of Cost and Equity Methods of Accounting for Long-Term Equity FINANCIAL STATEMENTS
Investments
Order of Preparation Date
Event Cost Equity 1. Statement of earnings Period ended
Acquisition Equity Investments Equity Investments 2. Statement of comprehensive income Period ended
Cash Cash 3. Statement of retained earnings Period ended
Investee reports No entry Equity Investments 4. Balance sheet End of the period
earnings Investment Revenue
5. Cash flow statement Period ended
Investee pays Cash Cash
dividends Dividend Revenue Equity Investments
Statement of Earnings (periodic inventory system)
CASH FLOW STATEMENT (Chapter 13)
Operating activities (indirect method) Name of Company
Net earnings Statement of Earnings
Add: Decreases in noncash current assets $X Period Ended
Increases in noncash current liabilities X Sales revenues
Amortization X Sales $X
Less: Sales returns and allowances $X
Losses on disposals of assets X
Sales discounts X X
Deduct: Increases in noncash current assests (X )
Net sales X
Decreases in noncash current liabilities (X ) Cost of goods sold
Gains on disposals of assets (X ) Beginning inventory $X
Cash provided by (used in) operating activities $X Purchases $X
Less: Purchase returns and allowances X
Operating activities (direct method) Net purchases X
Cash receipts Add: Freight in X
(Examples: from sales of goods and services to customers, from receipts Cost of goods purchased X
of interest and dividends on loans and investments) $X Cost of goods available for sale X
Cash payments Less: Ending inventory X
(Examples: to suppliers, for operating expenses, for interest, for taxes) (X ) Cost of goods sold X
Cash provided by (used in) operating activities $X Gross profit X
Operating expenses
(Examples: store salaries, advertising, delivery, rent,
IRREGULAR ITEMS (Chapter 14) amortization, utilities, insurance) X
Earnings from operations X
Discountinued operations Statement of earnings (presented separately after Other revenues
earnings from continuing operations) (Examples: interest, gains) $X
Other expenses
Extraordinary items Statement of earnings (presented separately after (Examples: interest, losses) X X
earnings before extraordinary items) Earnings before income taxes X
Changes in accounting Statement of retained earnings (adjustment of Income tax expense X
principle beginning retained earnings) Net earnings $X

Note: These items are net of income tax.

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 FINANCIAL STATEMENTS (Continued) Statement of Comprehensive Income
Name of Company
Balance Sheet
Statement of Comprehensive Income
Period Ended
Name of Company
Balance Sheet Net earnings $X
End of the Period Other comprehensive income
Unrealized gains and losses on
Assets
available-for-sale securities $X
Current assets
Foreign currency translation adjustment $X X
(Examples: cash, short-term investments, accounts
Comprehensive income $X
receivable, merchandise inventory, prepaids) $X
Long-term investments
(Examples: equity investments, debt investments) X
Property, plant, and equipment Cash Flow Statement
(Examples: land, land improvements, buildings,
equipment, natural resources) $X Name of Company
Less: Accumulated amortization X X Cash Flow Statement
Intangible assets Period Ended
Limited life intangibles (Examples: patents, Operating activities
copyrights) (net of accumulated amortization) $X Note: May be prepared using the direct or indirect method
Indefinite life intangibles (Examples: trademarks, Cash provided by (used in) operating activities $X
franchises, goodwill) X X Investing activities
Total assets $X (Examples: purchase / sale of long-term assets)
Cash provided by (used in) investing activities X
Liabilities and Shareholders Equity Financing activities
Liabilities (Examples: issue / repayment of long-term liabilities,
Current liabilities issue of shares, payment of dividends)
(Examples: notes payable, accounts payable, accruals, Cash provided by (used in) financing activities X
unearned revenues, current portion of notes payable) $X Net increase (decrease) in cash X
Long-term liabilities Cash, beginning of the period X
(Examples: notes payable, bonds payable) X Cash, end of the period $X
Total liabilities X
Shareholders equity
Common shares $X STOP AND CHECK: Cash, end of the period, on the cash flow statement must equal cash
Retained earnings X X presented on the balance sheet.
Accumulated other comprehensive income X
Total liabilities and shareholders equity $X

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

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 LIQUIDITY RATIOS PROFITABILITY RATIOS

Ratio Formula Purpose Discussion Net earnings available to 62

Working capital Current assets � Current liabilities Measures short-term Ch. 2, p. 65 common shareholders
debt-paying ability
Current ratio Current assets Measures short-term Ch. 2, p. 65
63
Current liabilities debt-paying ability

Inventory turnover Cost of goods sold Measures liquidity of Ch. 6, p. 280

Average inventory inventory
Days in inventory 365 days Measures the number of Ch. 6, p. 280 225
Inventory turnover days inventory is on hand
Receivables turnover Net credit sales Measures liquidity of Ch. 8, p. 374
226
Average gross receivables receivables
Average collection 365 days Measures number of days Ch. 8, p. 374
perio d R eceivables turnover receivables are outstanding 425

Cash current debt Cash provided by (used in) Measures short-term Ch.13, p. 639 425
coverage ratio operating activities debt-paying ability (cash
Average current liabilities basis)

533

SOLVENCY RATIOS Dividend yield Dividends per share Measures profitability of Ch. 11, p.533
Market price per share shareholders’ investment

Net earnings – available 535

to common shareholders

(used in)
Net c

(used in)

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