Weygandt, Kieso, Kimmel, Trenholm Accounting Principles Second Canadian Edition Rapid Review

VOLUME 2

CONCEPTUAL FRAMEWORK OF ACCOUNTING (Chapter 12) BONDS (Chapter 16)

Characteristics Assumptions Principles Constraints Premium Market Interest Rate < Contractual Interest Rate
Understandability Going concern Revenue recognition Cost-benefit Face Value Market Interest Rate Contractual Interest Rate
Relevance Monetary unit Matching Materiality Discount Market Interest Rate > Contractual Interest Rate
Reliability Economic entity Full disclosure
Comparability Time period Cost
Calculation of Bond Interest Expense

Interest expense Interest paid (payable) Amortization of discount (OR

SHAREHOLDERS EQUITY (Chapter 14) amortization of premium)

Comparison of Equity Accounts Amortization

Proprietorship Partnership Corporation Straight-line amortization Bond discount (premium)

Owner s equity Partners equity Shareholders equity Number of interest periods
Name, Capital Name, Capital Share capital
Name, Capital Retained earnings Effective-interest amortization Bond interest expense Bond interest paid

Carrying value of bonds Face amount of bonds x

at beginning of period x contractual interest rate
No Par Value vs. Stated (Par) Value Journal Entries market interest rate

No Par Value Stated (Par) Value INVESTMENTS (Chapter 17)

Cash Cash
Common shares Common shares (stated (par) value) Comparison of Long-Term Bond Investment and Liability Journal Entries
Contributed capital in excess of stated (par) value
Event Investor Investee
Purchase / issue of bonds Debt investment Cash
Premium on bonds Premium on bonds
Cash Bonds payable
DIVIDENDS (Chapter 15)
Interest receipt / payment Cash Interest expense
and amortization of premium Premium on bonds Premium on bonds
Comparison of Dividend Effects Interest revenue Cash

Cash Common Shares Retained Earnings Total Shareholder s

Equity Note: Bonds purchased or issued at a discount, would have a Discount on
Cash Dividend Decrease No effect Decrease Decrease Bonds account as a credit for the Investor and a debit for the Investee
Stock Dividend No effect Increase Decrease No effect in the initial entry.
Stock Split No effect No effect No effect No effect
Comparison of Cost and Equity Methods of
Accounting for Long-Term Equity Investments

Event Cost Equity

Debits and Credits to Retained Earnings
Acquisition Equity investment Equity investment
Cash Cash
Retained Earnings Investee reports earnings No entry Equity investment
Debits (Decreases) Credits (Increases) Investment revenue
1. Correction of a prior period error that 1. Correction of a prior period error that Investee pays dividends Cash Cash
overstated income understated income Dividend revenue Equity investment
2. Cumulative effect of a change 2. Cumulative effect of a change
in accounting principle that in accounting
decreased income principle that increased income CASH FLOW STATEMENT (Chapter 18)
3. Net loss 3. Net income
4. Cash dividends Cash flows from operating activities (indirect method)
5. Stock dividends Net income
Add: Decreases in current assets $X
Increases in current liabilities X
Amortization X
Losses on disposals of assets X
Presentation of Non-Typical Items Deduct: Increases in current assets ( X)
Decreases in current liabilities ( X)
Correction of prior period errors Statement of retained earnings (adjustment of Gains on disposals of assets ( X)
beginning retained earnings) Cash provided (used) by operating activities $X
Change in accounting principle Statement of retained earnings (adjustment of Cash flows from operating activities (direct method)
beginning retained earnings) Cash receipts
(Examples: from sales of goods and services to customers, from
Discontinued operations Income statement (presented separately after
receipts of interest and dividends on loans and investments) $X
income from continuing operations) Cash payments
Extraordinary items Income statement (presented separately after (Examples: to suppliers, for operating expenses, for interest, for taxes) ( X)
income before extraordinary items) Cash provided (used) by operating activities $X
USING THE INFORMATION IN THE FINANCIAL STATEMENTS (Chapter 19)

Chapter Ratio Formula Purpose or Use

Liquidity Ratios

4 Current ratio Current assets Measures short-term debt-paying ability.

9 Acid test or quick ratio
18 Cash current
debt coverage
9 Receivables turnover
9 Collection period
5 Inventory turnover
5 Days sales in inventory
Current liabilities
Cash + temporary investments + receivables (net) Measures immediate short-term liquidity.
Current liabilities
Net cash provided by operating activities Measures short-term debt-paying ability (cash basis).
Average current liabilities
Net credit sales Measures liquidity of receivables.
Average net receivables
365 days Measures number of days receivables are outstanding.
Receivables turnover
Cost of goods sold Measures liquidity of inventory.
Average inventory
365 days Measures number of days stock is on hand.
Inventory turnover

Profitability Ratios

5 Profit margin Net income Measures net income generated by each dollar of sales.
Net sales
5 Gross profit margin Gross profit Measures gross profit generated by each dollar of sales.
Net sales
18 Cash return on sales Net cash provided by Measures the net cash flow generated by each
operating activities dollar of sales.
Net sales
10 Asset turnover Net sales Measures how efficiently assets are used to
Average total assets generate sales.
10 Return on assets Net income Measures overall profitability of assets.
Average total assets
14 Return on common Net income Measures profitability of shareholders investment.
shareholders equity Average common
shareholders equity
14 Book value per share Total shareholders equity Measures the equity in net assets of each
Number of common shares common share.
18 Cash flow per share Net cash provided by all activities Measures the amount of cash flow generated
Number of common shares by each common share.
15 Earnings per share (EPS) Net income Measures net income earned on each common share.
Number of common shares
15 Price-earnings (PE) ratio Share price Measures ratio of the market price per
Earnings per share share to earnings per share.
15 Payout ratio Cash dividends Measures percentage of earnings distributed in
Net income the form of cash dividends.
15 Dividend yield Cash dividends per share Measures rate of return earned from dividends.
Share price

Solvency Ratios

16 Debt to total assets Total debt Measures percentage of total assets

Total assets provided by creditors.
16 Interest coverage Income before interest expense Measures ability to meet interest payments as
and income tax expense (EBIT) they come due.
Interest expense
16 Cash interest coverage Income before interest expense, income tax
expense, and amortization expense (EBITDA) Measures ability to meet interest payments as they
Interest expense come due (cash basis).
18 Cash total debt coverage Net cash provided by Measures the long-term debt paying ability
operating activities (cash basis).
Average total liabilities