Accounting by boundless

Accounting   Introduction to Boundless Chapter Introduction to Accounting Chapter Accounting Information and the Accounting Cycle Chapter Financial Statements Overview Chapter Controlling and Reporting of Cash and Receivables Chapter Controlling and Reporting of Inventories Chapter Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources Chapter Controlling and Reporting of Intangible Assets Chapter Valuation and Reporting of Investments in Other Corporations Accounting Chapter Reporting of Current & Contingent Liabilities Chapter 10 The Time Value of Money Chapter 11 Reporting of Long-Term Liabilities Chapter 12 Reporting of Stockholders' Equity Chapter 13 Detailed Review of the Income Statement Chapter 14 Detailed Review of the Statement of Cash Flows Chapter 15 Special Topics in Accounting: Income Taxes, Pensions, Leases, Errors, and Disclosures Chapter 16 Analyzing Financial Statements Boundless is better than your assigned textbook We create our textbooks by finding the best content from open educational libraries, government resources, and other free learning sites We then tie it all together with our proprietary process, resulting in great textbooks Stop lugging around heavy, expensive, archaic textbooks Get your Boundless alternative today and see why students at thousands of colleges and universities are getting smart and going Boundless Boundless goes beyond a traditional textbook Instant search Chapters, key term definitions, and anything else at your fingertips SmartNotes It’s like your professor summarized the readings for you Way beyond Quizzes When you feel ready, you can quiz yourself to see how much you know Flashcards Flashcards are a great way to study key terms, concepts and more Highlights Highlight key points and key terms so you can come back to them later Notes Add notes to your highlights to make them even more meaningful ii Chapter Introduction to Accounting https://www.boundless.com/accounting/introduction-toaccounting/ Section What is Accounting Defining Accounting Inputs to Accounting Outputs of Accounting Uses of Financial Reports https://www.boundless.com/accounting/introduction-to-accounting/what-is-accounting/ Defining Accounting relevant to the user The principles of accountancy are applied to Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers bookkeeping, and auditing business entities in three divisions of practical art: accounting, Accounting Defined The American Institute of Certified Public Accountants (AICPA) KEY POINTS defines accountancy as "the art of recording, classifying, and • Accounting is thousands of years old; the earliest accounting records, which date back more than 7,000 years, were found in Mesopotamia (Assyrians) summarizing, in a significant manner and in terms of money, • Luca Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" represents the first known printed treatise on bookkeeping; and it is widely believed to be the forerunner of modern bookkeeping practice • Double-entry bookkeeping is defined as any bookkeeping system in which there was a debit and credit entry for each transaction transactions and events which are, in part at least, of financial character, and interpreting the results thereof." History The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years The people of that time relied on primitive accounting methods to record the growth of crops and herds Because there is a natural season to farming and herding, it is easy to count and Introduction determine if a surplus had been gained after the crops had been harvested or the young animals weaned (Figure 1.1) Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers When medieval Europe moved to a monetary economy in the 13th The communication is generally in the form of financial statements century, sedentary merchants depended on bookkeeping to oversee that show in money terms the economic resources under the control multiple simultaneous transactions financed by bank loans One of management; the art lies in selecting the information that is important breakthrough took place around that time: the introduction of double-entry bookkeeping, which is defined as any Figure 1.1 Father of Double-Entry Accounting Portrait of Luca Pacioli, attributed to Jacopo de' Barbari, 1495 (Museo di Capodimonte) complete double-entry system is the Messari (Italian: "Treasurer's") accounts of the city of Genoa in 1340 The Messari accounts contain debits and credits journalized in a bilateral form, and contain balances carried forward from the preceding year Therefore, they enjoy general recognition as a double-entry system Luca Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" (early Italian: "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in 1494 It included a 27-page treatise on bookkeeping, "Particularis de Computis et Scripturis" (Latin: "Details of Calculation and bookkeeping system in which there was a debit and credit entry for Recording") It was written primarily for, and sold mainly to, each transaction, or for which the majority of transactions were merchants who used the book as a reference text, as a source of intended to be of this form The historical origin of the use of the pleasure from the mathematical puzzles it contained, and to aid the words 'debit' and 'credit' in accounting goes back to the days of education of their sons It represents the first known printed single-entry bookkeeping in which the chief objective was to keep treatise on bookkeeping; and it is widely believed to be the track of amounts owed by customers (debtors) and amounts owed forerunner of modern bookkeeping practice (Figure 1.2) to creditors Thus, 'Debit,' from the Latin word debere means 'he owes' and 'Credit', from the Latin word credere, means 'he trusts' In "Summa Arithmetica," Pacioli introduced symbols for plus and minus for the first time in a printed book, symbols that became The earliest extant evidence of full double-entry bookkeeping is the standard notation in Italian Renaissance mathematics "Summa Farolfi ledger of 1299-1300 Giovanno Farolfi & Company were a Arithmetica" was also the first known book printed in Italy to firm of Florentine merchants whose head office was in Nîmes, and contain algebra Although Luca Pacioli did not invent double-entry who also acted as moneylenders to the Archbishop of Arles, their bookkeeping, his 27-page treatise on bookkeeping contained the most important customer The oldest discovered record of a first known published work on that topic, and is said to have laid the foundation for doubleentry bookkeeping as it is Figure 1.2 Token Accounting in Mesopotamia operations relied on accounts to provide the requisite information This development resulted in a split of accounting systems for practiced today Even internal (i.e., management accounting) and external (i.e., financial though Pacioli's treatise accounting) purposes, and subsequently also in accounting and exhibits almost no disclosure regulations, following a growing need for independent originality, it is generally attestation of external accounts by auditors considered as an Present important work, mainly because it enjoyed a wide Today, accounting is called "the language of business" because it is circulation, was written in the vehicle for reporting financial information about a business the vernacular Italian entity to many different groups of people Accounting that language, and was a printed book The invention of a form of bookkeeping using clay tokens represented a huge cognitive leap for mankind Past concentrates on reporting to people inside the business entity is called management accounting and is used to provide information to employees, managers, owner-managers, and auditors Management accounting is concerned primarily with providing a Early accounts served mainly to assist the memory of the basis for making management or operating decisions Accounting businessperson, and the audience for the account was the that provides information to people outside the business entity is proprietor or record keeper alone Cruder forms of accounting were called financial accounting and provides information to both inadequate for the problems created by a business entity involving current and potential shareholders, creditors such as banks or multiple investors, so double-entry bookkeeping first emerged in vendors, financial analysts, economists, and government agencies northern Italy in the 14th century, where trading ventures began to Because these users have different needs, the presentation of require more capital than a single individual was able to invest The financial accounts is very structured and subject to many more rules development of joint stock companies created wider audiences for than management accounting The body of rules that governs accounts, as investors without firsthand knowledge of their financial accounting in a given jurisdiction is called Generally Inventory Turnover Ratio Inventory Turnover Equation Inventory turnover is a measure of the number of times inventory is sold or used in a time period, such as a year The formula for inventory turnover: Inventory turnover = Cost of goods sold/Average inventory The formula for average inventory: KEY POINTS • Inventory turnover = Cost of goods sold/Average inventory • Average days to sell the inventory = 365 days /Inventory turnover ratio Average inventory = (Beginning inventory + Ending inventory)/2 The average days to sell the inventory is calculated as follows: Average days to sell the inventory = 365 days / Inventory turnover • A low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort ratio • Conversely, a high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business as the inventory is too low Application in Business A low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort However, in Inventory Turnover In accounting, the Inventory turnover is a measure of the number of times inventory is sold or used in a time period, such as a year The equation for inventory turnover equals the cost of goods sold divided by the average inventory Inventory turnover is also known as inventory turns, stockturn, stock turns, turns, and stock some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages (Figure 16.40) Conversely, a high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business as the inventory is too low This often can result in stock shortages turnover 824 Figure 16.40 Inventory A low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort In this article, the terms "cost of sales" and "cost of goods sold" are synonymous An item whose inventory is sold (turns over) once a year has a higher holding cost than one that turns over twice, or three times, or more in that time Stock turnover also indicates the briskness of the business The purpose of increasing inventory turns is to reduce inventory for three reasons Increasing inventory turns reduces holding cost The organization spends less money on rent, utilities, insurance, theft, and other Some compilers of industry data (e.g., Dun & Bradstreet) use sales as the numerator instead of cost of sales Cost of sales yields a more realistic turnover ratio, but it is often necessary to use sales for purposes of comparative analysis Cost of sales is considered to be costs of maintaining a stock of good to be sold Reducing holding cost increases net income and profitability as long as the revenue from selling the item remains constant more realistic because of the difference in which sales and the cost Items that turn over more quickly increase responsiveness to of sales are recorded Sales are generally recorded at market value changes in customer requirements while allowing the replacement (i.e., the value at which the marketplace paid for the good or service of obsolete items This is a major concern in fashion industries provided by the firm) In the event that the firm had an exceptional year and the market paid a premium for the firm's goods and services, then the numerator may be an inaccurate measure However, cost of sales is recorded by the firm at what the firm actually paid for the materials available for sale Additionally, firms may reduce prices to generate sales in an effort to cycle inventory When making comparison between firms, it's important to take note of the industry, or the comparison will be distorted Making comparison between a supermarket and a car dealer, will not be appropriate, as a supermarket sells fast moving goods, such as sweets, chocolates, soft drinks, so the stock turnover will be higher However, a car dealer will have a low turnover due to the item being 825 a slow moving item As such, only intra-industry comparison will be appropriate Source:https://www.boundless.com/finance/analyzing-financialstatements 2/asset-management-ratios 2/inventory-turnoverratio 2/ CC-BY-SA Boundless is an openly licensed educational resource 826 Section 12 Other Distortions Extraordinary Gains/Losses Discrepancies https://www.boundless.com/accounting/analyzing-financial-statements/other-distortions/ 827 Extraordinary Gains/Losses Extra gains or losses are nonrecurring, onetime, unusual, non-operating gains or losses that are recorded by a business during the period disaster might not qualify depending on location (e.g., frost damage would not qualify in Canada but would in the tropics) Extra gains or losses are the result of unforeseen and atypical events They are nonrecurring, onetime, unusual, non-operating gains, or losses that are recorded by a business during the period KEY POINTS No items may be presented in the income statement as • Extra gains or losses are nonrecurring, onetime, unusual, non-operating gains or losses that are recorded by a business during the period extraordinary items under IFRS regulations, but are permissible under US GAAP (Figure 16.41) (IAS 1.87) The amount of each of these gains or losses, net of the income tax effect, is reported • No items may be presented in the income statement as extraordinary items under IFRS regulations, but are permissible under US GAAP (IAS 1.87) The amount of each of these gains or losses, net of the income tax effect, is reported separately in the income statement separately in the income statement Net income is reported before • Examples of extraordinary items are casualty losses, losses from expropriation of assets by a foreign government, gain on life insurance, gain or loss on the early extinguishment of debt, gain on troubled debt restructuring, and write-off of an intangible asset businesses record them every other year or so, causing much and after these gains and losses As a result, extraordinary gains or losses don't skew the company's regular earnings These gains and losses should not be recorded very often but, in fact, many consternation to investors In addition to evaluating the regular stream of sales and expenses that produce operating profit, investors also have to factor into their profit performance analysis the perturbations of these irregular gains and losses reported by a Extraordinary Gains and Losses Extraordinary items are both unusual (abnormal) and infrequent, for example, unexpected natural disaster, expropriation, prohibitions under new regulations It is notable that a natural business Examples of extraordinary items are casualty losses, losses from expropriation of assets by a foreign government, gain on life insurance, gain or loss on the early extinguishment of debt, gain on troubled debt restructuring, and write-off of an intangible asset 828 Figure 16.41 Income statement in accordance with IFRS Discrepancies A discrepancy is an accounting error that was not caused intentionally, meaning the books don't properly match KEY POINTS This income statement is a very brief example prepared in accordance with IFRS; no extraordinary items are presented Write down and write off of receivables and inventory are not extraordinary, because they relate to normal business operational activities.They would be considered extraordinary, however, if they resulted from an Act of God (e.g., casualty loss arising from an earthquake) or governmental expropriation Source:https://www.boundless.com/finance/analyzing-financialstatements 2/other-distortions 2/extraordinary-gains-losses 2/ CC-BY-SA Boundless is an openly licensed educational resource • At the end of each month when you get your bank or credit card statement, you will need to reconcile each account in your accounting program against the statement • You will want to double check that you entered the correct starting and ending balances for the account, and if you did, go back through all the transactions until you find the problem Then correct it and you can proceed with your reconciliation • In accounting, reconciliation refers to a process that compares two sets of records (usually the balances of two accounts) to make sure they are in agreement • It depends on the type of discrepancies, most accounting discrepancies are due to the lack of accuracy (decimal places) when breaking down a large figure Although more decimal places in your calculations can help solve discrepancies it can look rather unsightly on a report At the end of each month when you get your bank or credit card statement, you will need to reconcile each account in your 829 accounting program against the statement This process double done by making sure the balances match at the end of a particular checks everything you entered for the month, making sure you accounting period Well reconciliations refers to two sets of records didn’t miss any transactions, enter duplicate transactions, or enter (what is being put in the well compared to what actual costs are the wrong amount for a transaction It also marks the checks that being spent) The two numbers are compared to assure that they cleared that month as such, so you know how many outstanding balance at the end of the accounting cycle There is usually a checks you have floating out in the world difference A robust reconciliation process improves the accuracy of A discrepancy is an accounting error that was not caused intentionally An accounting error can include discrepancies in dollar figures, or might be an error in using accounting policy the financial reporting function and allows the Finance Department to publish financial reports with confidence "(Figure 16.42)." Figure 16.42 Reconciliation of discrepancies incorrectly (i.e., a compliance error) Discrepancies should not be confused with fraud, which is an intentional error in an accounting item, usually to hide or alter data for personal gain A discrepancy just means something doesn’t match You will have the option to go back and locate the discrepancy, or to reconcile anyway Unless the discrepancy is very small you should go back and correct the problem You will want to double check that you entered the correct starting and ending balances for the account, and if you did, go back through all the transactions until you find the problem Then correct it and you can proceed with your reconciliation Bank reconciliation statement It depends on the type of discrepancies, most accounting In accounting, reconciliation refers to a process that compares two discrepancies are due to the lack of accuracy (decimal places) when sets of records (usually the balances of two accounts) to make sure breaking down a large figure Although more decimal places in your they are in agreement Reconciliation is used to ensure that the calculations can help solve discrepancies it can look rather unsightly money leaving an account matches the actual money spent, this is on a report 830 Source:https://www.boundless.com/finance/analyzing-financialstatements 2/other-distortions 2/discrepancies 2/ CC-BY-SA Boundless is an openly licensed educational resource 831 Section 13 Next Steps in Financial Statement Analysis Interpreting Ratios and Other Sources of Company Information https://www.boundless.com/accounting/analyzing-financial-statements/next-steps-in-financial-statement-analysis/ 832 Interpreting Ratios and Other Sources of Company Information Financial statement analysis uses comparisons and relationships of data to enhance the utility or practical value of accounting information KEY POINTS • In financial statement analysis, comparisons and relationships can be shown in the following ways: vertical analysis, horizontal analysis, trend percentages, and ratios • The vertical method is used on a single financial statement, such as an income statement, and involves each item being expressed as a percentage of a significant total • The horizontal method is comparative, and shows the same company's financial statements for one or two successive periods in side-by-side columns The side-by-side display reveals changes in a company's performance and highlights trends • Trend percentages make comparisons to a selected base year or period Trend percentages are useful for comparing financial statements over several years, because they disclose changes and trends occurring through time KEY POINTS (cont.) • Ratios are expressions of logical relationships between items in the financial statements from a single period A ratio can show a relationship between two items on the same financial statement or between two items on different financial statements (e.g.balance sheet and income statement) Financial Statement Analysis Financial statement analysis, also known as financial analysis, is the process of understanding the risk and profitability of a company through the analysis of that company's reported financial information This information includes annual and quarterly reports, such as income statements, balance sheets, and statements of cash flows All financial analysis relies on comparing or relating data in a way that enhances the utility or practical value of the information For example, when analyzing a particular company, it is helpful to know that they had a net income of $100,000 for the year, but it is even more helpful to know that, in a previous year, they only had $25,000 in net income As more information is added, such as the total amount of sales, the number of assets, and the cost of goods sold, the initial information becomes increasingly valuable, and a 833 more complete picture of a company's financial activity can be Figure 16.43 Analyzing the Income Statement derived In financial statement analysis, comparisons and relationships can Analyzing the Income Statement be shown in the following ways: Absolute increases and decreases for an item from one period to the next Percentage increases and decreases for an item from one period to the next Percentages of single items to an aggregate total Trend percentages Ratios Methods for Financial Statement Analysis There are four methods for making these types of comparisons: vertical analysis, horizontal analysis, ratios, and trend especially helpful in analyzing income statement data (Figure 16 percentages 43) The vertical method is used on a single financial statement, such as The horizontal method is a comparative, and presents the same an income statement In a vertical analysis, each item is expressed company's financial statements for one or two successive periods in as a percentage of a significant total This type of analysis is side-by-side columns This comparative display shows dollar changes or percentage changes in the statement items or totals 834 across given periods of time Horizontal analysis detects changes in a company's performance and highlights various other trends The trend percentages method is the same as horizontal analysis, except that in the former, comparisons are made to a selected base year or period Trend percentages are useful for comparing financial statements over several years, because they reveal changes and trends occurring over time Ratios are expressions of logical relationships between items in financial statements from a single period It is possible to calculate a number of ratios from the same set of financial statements A ratio can show a relationship between two items on the same financial statement or between two items on different financial statements (e.g.balance sheet and income statement) The only limiting factor in choosing ratios is that the items used to construct a ratio must have a logical relationship to one another Source: https://www.boundless.com/accounting/analyzing-financialstatements/next-steps-in-financial-statement-analysis/interpretingratios-and-other-sources-of-company-information/ CC-BY-SA Boundless is an openly licensed educational resource 835 This book was distributed courtesy of: For your own Unlimited Reading and FREE eBooks today, visit: http://www.Free-eBooks.net Share this eBook with anyone and everyone automatically by selecting any of the options below: To show your appreciation to the author and help others have wonderful reading experiences and find helpful information too, we'd be very grateful if you'd kindly post your comments for this book here COPYRIGHT INFORMATION Free-eBooks.net respects the intellectual property of others When a book's copyright owner submits their work to Free-eBooks.net, they are granting us permission to distribute such material Unless otherwise stated in this book, this permission is not passed onto others As such, redistributing this 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Source:https://www .boundless. com /accounting/ introduction-toaccounting/what-is -accounting/ defining -accounting/ CC -BY- SA Boundless is an openly licensed educational resource Inputs to Accounting Inputs into accounting. .. https://www .boundless. com /accounting/ introduction-toaccounting/what-is -accounting/ inputs-to -accounting/ CC -BY- SA Boundless is an openly licensed educational resource 10 Outputs of Accounting Accounting... Chapter Introduction to Accounting https://www .boundless. com /accounting/ introduction-toaccounting/ Section What is Accounting Defining Accounting Inputs to Accounting Outputs of Accounting Uses of