ACG 6085 – ADVANCED ANALYSIS OF ACCOUNTING DATA

ACG 6085 – ADVANCED ANALYSIS OF ACCOUNTING DATA

CLASS NOTES – WEEK 1 – MAY 8, 1999

CHAPTER 1

Need for Information – Many users meet the needs for

Managerial Vs. Financial

Managerial – More internal (detailed) Uses future and historical (prepare budgets, forecasts, projections and has no set rules)

Financial – More summarized, more historical (past, recorded) Uses GAAP

GAAP – Generally Accepted Account Principles (established by FASB) – Revenues are

recorded when earned.

Financial Statements - End product of financial accounting process

Balance sheet (assets = liabilities + Equity) - Balances the company’s assets with it

liabilities and equity

Current Liabilities – long term (mortgage payable) Short term (1 year) ex. A/P, N/P, Wages Payable, Rent

Income Statement – Explains how income was earned over a period of time. (result of

operations)

RIE – Retained Earnings Statement – Income retained to the next year. Ex. 100,000 in net income, paid 10,000 in income, 90,000 RIE carried over to next year (revenue – expense – dividend)

Accounting Equation – Assets – Liabilities = Equity or Assets = Liabilities + Equity

Statement Cash Flows – Credit/Debit

Chapter 2

Money Measurement – Everything measured in terms of $ and cents (common denominator)

Entity Concept – Any activity for which accounting reports are prepared. -- Don’t mix and \ match personal and business.

Going Concern Concept – Account will continue to operate for an indefinitely long period in

the future.

Cost Concept – You maintain the cost of the item. Ex – Land paid $100,000, now worth 1.5

million adhere to cost. You use maintain cost.

Dual Aspect Concept – Uses double entry system. (Assets & liabilities/equity)

Assets = liabilities + Equity

In Assets – you increase debits, decrease credits
In Liability & Equity – you decrease debits, increase credits

Chapter 3

Accounting Period Concept – Measures activities for a specified interval of time. All have

different periods (seasonal) – Timely usually 1 year

Conservatism Concept – Record transactions need to be recorded where it has least favorable

impact on equity

Realization Concept – Revenues should be recognized when earned. Does not mean it will be

realized.

Matching Concept - Revenues and expenses must be recorded in same period they occurred.

Consistency Concept – Once accounting method has be chosen it should use the same method

for all subsequent events. Needs to be consistent with GAAP in

depreciation.

Materiality Concept – Insignificant events may be disregarded, but must have full disclosure.

(Ex – 5- 10% net income / ½ percent of total assets

Here is some of the homework compliments of other members in your class.

1 Accounting information - Kim Fuller
	The initial cash investment.
	The cost of each asset placed in service:
		the used truck,
		the three trailers,
		the used grinding machine,
		the new grinding machine,
		the computer and software,
		cost of supplies and parts inventory, and,
		purchase price of the warehouse.
	The amount invested by each sibling.
	The down payment on the warehouse.
	The amount of the loan for the warehouse.

1 Nonaccounting information - Kim Fuller
	Inception date of business for tax purposes.
	A contact list of customers, vendors and employees.
	A contact list of investors, including terms of repayment.
	An amortization schedule of the notes payable, including terms of repayment.
	Title and ownership documentation of assets purchased.
	Occupational and business licensure information.
	Documentation of the contractual relationship with Zimmer.
	She will need a budget showing the projected balance sheet, income statement
	and statement of cash flows, including a break-even analysis.

2	Fuller should place the value of the newly acquired assets at cost.

Fuller's Company
Balance Sheet
Inception, 1997
(Unaudited)

Assets				Assumptions:
Cash			$ 50,000	See cash available schedule below.
Equipment			65,000	Cost of equipment, see schedule of equipment.
Building			162,000	Cost of warehouse.
Total Assets			$ 277,000

Liabilities and Owner's Equity
Notes payable			$ 90,000	$30,000 for each of 3 siblings
Mortgage payable			112,000	Cost of $162,000 less deposit of $50,000
Total Liabilities			202,000
Owner's Equity
Paid-in Capital			75,000	Difference of Assets less Liabilities.
Total Liabilities
and Owner's Equity			$ 277,000

Schedule of Equipment
	Used truck
	Three trailers
	Used grinding machine
	New grinding machine
	Supplies and parts inventory (normally a separate line item)
	Personal computer
					$ 65,000

Cash Available
	Amount of cash at inception				$ 75,000
	Equipment purchases				(65,000)
	Warehouse purchase				(162,000)
	Investment from sister				30,000
	Investment from sister				30,000
	Investment from brother				30,000
	Bank loan for warehouse less down payment				112,000
		Balance of cash available			$ 50,000

3	The information needed to determine profit and loss are all the revenues and
	expenses of the business.

General construction of Fuller's Profit and Loss Statement

Kim Fuller
Income Statement
For the Period Ended November, 1997
(Unaudited)

Sales				$ XXXXX
	Less cost of sales			( XXX)
		Gross margin		XXXXX

Operating expenses
	Wages		XXXX
	Payroll taxes		XXX
	Office supplies		XXX
	Insurance		XXX
	Utilities		XXX
	Depreciation expense		XXX
	Interest expense		XXX
		Total operating expenses		XXXX
		Net profit/(loss)		XXXXX
		Provision for income taxes		XXXX
		Net profit/(loss) after provision
		for income taxes		$ XXXX

Her analysis of the profit and loss statement should be at least monthly.

4	Fuller should also prepare and analysis her cash flow. She should revise monthly
	her projected needs for cash on the cash flow statement.

Maynard Company
Income Statement
For the One Month Ended June 30, 19XX
(Unaudited)
				Derivation:
Cash Sales		$ 44,420		Given.
Credit Sales		26,505		Beginning plus ending accounts receivable less cash receipts.
	Total sales		70,925	Calculated.

Cost of Sales
	Merchandise inventory
	Beginning inventory	29,835		Given from the comparative balance sheet.
	Purchases	36,030		Equals the net difference of each component of merchandise inventory.
	Ending inventory	(26,520)		Given from the comparative balance sheet.
	Total cost of merchandise inventory		39,345	Given.

	Supplies inventory
	Beginning inventory	5,559		Given from the comparative balance sheet.
	Purchases	1,671		Given.
	Ending inventory	(6,630)		Given from the comparative balance sheet.
	Total cost of supplies inventory		600	Calculated.
	Total cost of sales		39,945	Calculated.
Gross margin			30,980	Calculated.

Operating expenses
	Wages	5,888		Ending wages payable less beginning balance, plus wages paid.
	Taxes	1,524		Ending taxes payable less beginning balance.
	Utilities	900		Given.
	Depreciation expense	2,574		Ending accumulated depreciation less beginning balance.
	Amortization of prepaid insurance	324		Ending prepaid insurance less beginning balance.
	Miscellaneous payments (interest expense?)	135		Given.
	Total operating expenses		11,345	Calculated.
	Net income		$ 19,635	Calculated.

	Case 3-1 Maynard Company (B)
2	Explain why the change in the cash balance was greater than the income.

	There were balance sheet transactions that affect cash but not the income
	statement. And there were noncash transactions on the income statement
	that do not affect cash.

	Affects cash, does not affect net income:
		The bank notes payable was increased.
		The shareholder paid herself a dividend.
		The shareholder paid her loan to the company.
		The bank notes payable was increased.
		Equipment was purchased.
		Other assets were purchased.
		Accounts payable were paid.

	Affects net income, does not affect cash:
		Revenue was recognized from credit sales.
		Depreciation was expensed.
		Prepaid insurance was amortized.
		Wages were accrued.
		Taxes were accrued.

3	Explain why the following amounts are incorrect cost of sales amounts
	for June: (a) $14,715 and (b) $36,030. Under what circumstances would
	these amounts be correct cost of sales amounts?

	(a)		The $14,715 represents the cash purchases of merchandise. According
			to the Generally Accepted Accounting Principles (GAAP), transactions should
			reflect the accrual basis of accounting. By reporting $14,715 as the cost
			of sales would not be a true representation according to GAAP. Because
			the remainder of Maynard's operations are reported using the accrual
			method of accounting.

			This amount would be the correct cost of sales if Maynard produced its
			statements according to the cash basis of accounting, only.

	(b)		The $36,030 represents cash purchases of merchandise inventory of $14,715
			plus credit purchases of $21,315. This is not a true representation of the cost
			of sales because $3,315 of merchandise inventory on hand has been used.

			This amount would be the correct cost of sales if Maynard did not hold any
			inventory on hand.

Chap 1. Exec. 1-1

Charles Company Charles Company

Balance sheet

12/31/98

Assets Liabilities and Owners Equity

Cash 12,000 Debt 40,000

Inventory 95,000 Owners equity 80,000

Other Assets 13,000

120,000 120,000

Exec 1-2

Year 1 A=L+E Assets 410,976 Liabilities 240,518

Year 2 A=L+E Current assets 90,442, total assets 288,456, Liabilities 78,585

Year 3 A=L+E Total assets 247,135, current liabilities 15,583 owners equity 247,135

Year 4 A=L+E Assets 69,090 Liabilities 17,539

Chap 2. Exec 2-1

a. 45,000 b. 20,000 c. 40,000. d. 73,000 (use the A=L+E formula to arrive at the answer. 33,000/x=2.2, x=15,000, then 33,000=15,000+ E, E=73,000) e. 1.4:1 (A=L+E. 75,000= L + 70,000, L=25,000. Therefore 35,000/25,000=1.4:1)