Accounting Objectives

(1) Keep track of money; (2) Tell us what we owe; (3) Tell us profits or losses
Accounting Cycle
(1) Identify; (2) Gather/Record; (3) Communicate
GAAP
Private actors: American Institute of Certified Public Accountants (AICPA), Financial
Accounting Standards Board (FASB)
Public actors: SEC, Congress, Public Companies Accounting Oversight Board (PCAOB)
Financial Statements
1. Statement of Earnings
Measures operating performance for a period of time
e.g. for a law firm: revenue = sales legal fee billings minus expenses = NET
EARNINGS (INCOME)
2. Balance Sheet
At a point in time
What the Company OWNS = OWES + SHAREHOLDERS EQUITY
Resources and Obligations
3. Statement of Cash Flows
Shows where the company gets its cash
Shows where the company spends its cash
4. Statement of Shareholders Equity
Shows the owners interest in the company and how it has changed during the
period
Note: The Notes to the Financial Statements explains assumptions, etc.
Note: Prepare (1) then (4) then (2) then (3)
Thinking Like an Accountant
Slide 27, PowerPoint #2. 8-18-11 AFL Notes
Double Entry Accounting
Accounting Equation is the foundation. T-Accounts
Note: Asset, Liability, Owners Equity are PERMANENT Accounts. Revenue and Expenses not.
Note: Former are Balance Sheet accounts. Latter are Income Statement accounts.

Recording a Transaction
(1) What has occurred; (2) Which accounts are affected; (3) How are they affected?
Account Receivables
Claims against others for money, goods, or services provided.
Classified by: (1) Collection timing; (2) Transaction type; (3) Documentation type (PP 6-31)
Concerns RECOGNITION and VALUATION
Bad Debts
Methods: (1) Percentage of Sales; (2) Aging; (3) Specific Identification (Starbucks pg. 46)
Components of Interest
(1) Pure rate; (2) Credit risk; (3) Expected inflation
Rule of 72
An amount doubles (approximately) when the number of periods held multiplied by the interest
rate equals 72
Inventory
Has to be held for sale as part of ordinary business operations
#1 Which costs to include: ANY COST INCURRED DIRECTLY IN PREPARING AN ASSET
FOR ITS INTENDED USE GENERALLY BECOMES A PART OF THE COST OF THAT
ASSET
Two main types of costs: Period Costs/Product Costs
#2 Which goods to include (ownership); #3 Cost flow assumptions (FIFO, etc.)
Inventory: Relative Sales Value Method
Ex. Two parcels, each selling for different amount, but COGs for buying lot is 40% of total sale
price, than apply 40% to each lot individually. (i.e. $700K = $280K, $50K = $20K)
Lower of Cost or Market
Market generally means the price to replace the item
Inventory Equation
Beginning Inventory + Purchases = Goods Available for Sale

Goods Available for Sale - Ending Inventory = COGS; OR

Goods Available for Sale - COGS = Ending Inventory
Fixed/Tangible Long-Lived Assets
ASSETS NOT INTENDED FOR SALE BUT WHICH ARE USED IN THE COMPANYS
ORDINARY COURSE OF BUSINESS
General rule on costs: ANY COST INCURRED DIRECTLY IN GETTING THE ASSET
READY FOR ITS INTENDED USE GENERALLY BECOMES A PART OF THE COST OF
THAT ASSET
Capitalize: Improvements: (1) Extends the Assets Life; (2) Reduces the Assets Operating Cost
(3) Increases the Assets Rate of Output
Expense: Repairs or Maintenance
Methods of Depreciation (pg. 160)
(1) Straight Line; (2) Units of Production; (3) Sum-of-the-Years Digits; (4) Declining Balance
For SYD: hypo; $100, 3 year life, 1+2+3 = 6, in first year do 3/6, then 2/6, etc. X
For Declining Balance, DO NOT CALCULATE SALVAGE VALUE, also, hypo; 1 divided-by
useful life (so 1/3 here), then double it (when using Double-Declining Balance) and multiply by
each year, and next year multiply to what is left over
Liability Recognition
(1) Probable future sacrifice of resources; (2) Little or no discretion to avoid; (3) transaction or
event giving rise to obligation has already occurred
Contingencies
Record a loss if: (1) Probable incurred by that of statements; (2) loss can be Reasonably
Estimated
If Probable, but cant reasonably estimate; or merely reasonably possible of loss, must disclose in
footnotes. If remote possibility of loss, disclosure is optional
Current/Noncurrent Liabilities
For Noncurrent Liabilities, value at PV of future cash payments
Accounting for Intangible Assets
APS reader pg. 72

Note: Unidentifiable Intangible Assets have no value separate from the entity (i.e. Goodwill)
Goodwill
The Purchase Price of a Company In Excess of the Fair Market Value of the Separately
Identifiable Net Assets Acquired
R&D Costs
Generally expense them, but: if the R&D costs have alternative uses, and if such costs were
incurred externally, they may be recorded as an asset
Technological Feasibility
Before this is reached, considered R&D costs, therefore Expense.
After this is reached, consider production costs, therefore Capitalize.
Intangible Assets: Amortization
Finite Lives: Amortize over lessor of (1) legal life, or (2) estimated useful life
Infinite Lives: Do not Amortize
BUT: For both types, check annually for Impairment