FMA

mid-term：10.16 2pm-4pm calculater/ student id

4 big question

Chapter1 Accounting in Business

 Purpose and Importance of accounting
Languege of business
An information and meaturement system that - Identifies,records and
communicates -relevant,reliable,and comparable information -about an
organization’s business activities
Help make better decisions
 Users in Accounting System
external / internal users
Lensers R&D managers
External Auditers Purchasing managers
Shareholders Human resourse managers
Board of Directors Marketing managers
Regulators Production managers
Investers: use accounting information in valuing stocks
Bankers: use ai in deciding whether to lend money to a business and in assessing
the risk of the loan
Managers: use ai in making investment decisions, evaluating the performance of
employees at various level of an organization.
 why ethics are crucial to accounting
 Generally Accepted Accounting Principals ( GAAP ) GAAP aims to make
information relevant, reliable, and comparable.
International Financial Reporting Standard ( IFRS ) : Identify Financial Reporting
Standards.
International Accounting Standards Board ( IASB ): Issues International Financial
Reporting Standards
 Accounting Principles:
Measurement Principle ( Cost principle )
Revenue Recognition Principle
 Expense Recognition Principle （Matching Principle)
Full Disclosure Principle
 Accounting Assumptions:
Going-concern Assumption
Monetary Unit Assumption
Business Entity Assumption
Time Period Assumption


Sole Partnership Corporation Limited

Proprietorship Liability
Company
Numbers 1 2 or more 1 or more, 1 or more,
stockholders members
Taxation
Owner Liability
Legal entity
Business Life

 land: not depreciable; building: depreciable

 prepaid expense：asset
 Accounting Constraint 约 束 ： cost-benefits(Only information with benefits of
disclosure greater than the cost need be disclosed)/Materiality(Only information
that would influence the decisions of a reasonable person need be disclosed.)
 Assets-Liabilities=Equity
 Assets:Resources owned or controlled by a company expected to yield future
benefits. Cash/Accounts Receivable/Notes Receivable
 Liabilities: Creditors’ claims on assets that represents an obligation to make
future payments.
 Equity: Owners’ claims on assets.
 Owner’s equity is also called net assets or residual equity.
 Equity: Owners’ capital - Owners’ withdrawals + Revenues - Expense
Common Stock-Dividends+Revenues-Expenses.
 Revenues: An increase in owners’ equity from providing goods or service.
recgonised when: it is earned, it is realized or realizable.
 Expenses: decreases in owners’ equity that arises in the process of generating
revenues.
recognised when: Related revenues are recognized (product costs) or
Incurred to support revenue generation (period costs). Matching pricipal.
 Retained earnings: Cumulative net income (and loss )not distributed as dividends
to its stockholders.
Beginning R/E
+Revenues
-Expenses
-Dividends
=Ending R/E
 Financial Statement
Income Statement (Statement of Comprehensive Income) ： describes a company’s
revenues and expenses along with the resulting net income or loss over a period of
time due to earnings activities.
Statement of Changes in Equity：how equity changes over the reporting period.
Balance Sheet (Statement of Financial Position) ： describes a company’s financial
position at a point in time.
Statement of Cash Flows

Chapter2 Accounting for Business Transaction

 Process: Identify each transaction and event from source documents.
Analyze using the accounting equation.
Record in a journal
Post in ledger accounts (T-account)
prepare and analyze the trial balance and financial statements.
 Liability: Accrued Liabilities
Unearned Revenue

Chapter3 Adjusting Accounts for Financial Statements

 Accrual Basis & Cash Basis
Accrual: Recognize revenues when they are earned and records expenses when they
are incurred (match with revenues).
Cash basis:NOT GAAP, recognize revenue when cash is received and records expenses
when cash is paid.
 Revenue recognition principle: The revenue recognition requires that revenue be
recorded when the goods or services are provided to customer and at an
amount expected to be received from customers.
recognize ALL：
(1) the entity has transferred to the buyer the significant risks and rewards of
ownership of the goods;
(2) the entity retains neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold;
(3) the amount of revenue can be measured reliably;
(4) it is probable that the economic benefits associated with the transaction will flow
to the entity; and
(5) the costs incurred or to be incurred in respect of the transaction can be measured
reliably.
 The expense recognition (or matching) requires that expenses be recorded in the
same accounting period as the revenues that are recognized as a result of those
expenses. This matching of expenses with the revenue benefits is a major part of
the adjusting process.
 The purpose of adjusting entries is to ensure that revenue and expenses are
recognized in the right accounting period under the accrual concept.
 Deferral of expenses: 「Asset」递延费用 Prepaid expenses, assets paid for in
advance of receiving benefits. Prepaid Insurance、supplies
Dr Supplies 9720
Cr Cash 9720
adj:
Dr Supplies Expense 1050
Cr Supplies 1050
 Depreciation
Dr Depre 300
Cr Accumulated depre 300
 Deferral of a revenue: 「 Liability 」 递 延 收 入 Unearned revenue is cash
received in advance of providing products or services. Unearned revenue
Dr Cash 3000
Cr Unearned consulting revenue 3000
Dr Unearned consulting revenue 250
Cr Renenue
 Accrued expense: 应 计 费 用 「 Liability 」 Expense incurred in a period that is
both unpaid and unrecorded. Payable
12.31
dr Salary expense 210
cr salary payable 210
1.9
Dr Salary expense 490
Dr salary payable 210
Cr Cash 700
 Accrued revenues: revenues earned in a period that are both unrecorded and
not yet received in cash or other assets.
12.31
Dr Accounts Receivable 1800
Cr Consulting Revenue 1800
1.10
Dr Cash 2700
Cr Consulting Revenue 900
Cr AR 1800

 Temporary Accounts: accumulate data related to one accounting period.

 Permanent Accounts: carry their ending balances into the next period.
 Chapter 8&9 Cash, Internal Controls and Receivables
 Internal control system: Policies and procedures managers use to:
protect assets, ensure reliable accounting, promote efficient operations, urge adherence to
company policies.
 Internal control principles common to all companies:
1. Establish responsibilities.
2. Maintain adequate records.
3. Insure assets and bond key employees.
4. Separate recordkeeping from custody of assets.
5. Divide responsibility for related transactions.
6. Apply technological controls.
7. Perform regular and independent reviews.
 科目 Cash over and short
if cash register’s record shows 500, but the count of cash in the register is 555:
Dr Cash 555
Cr Cash over and short 5
Cr Sales revenue 500
 Bank Reconciliation:
reasons for differences:
Deposit in transit: 未 达 账 项 ， cash receipts recorded by the depositor that reached the
bank too late to be included in the bank statement for the current month. 存款人已記錄但銀行
尚未記錄的存款。
Outstanding checks 未 兑 付 , checks issued and recorded by the company but not yet
presented to the bank for payment 公司已記錄支票開立但銀行尚未兌現者。
Collections by bank (credit memo): collections made by the bank on a company’s behalf are
when the bank acts as a collection box for customer payments or when the bank collects a note
receivable from a customer. 貸項通知單(Credit memo)：銀行已貸計(增加)客戶存款，但公司
尚未知道，以茲通知之通知單。
例如：利息收入、代收應收票據
Uncollectible items (NSF): NSF stands for “Not Sufficient Funds”. When checks from
customers are deposited, the bank generally gives the depositor immediate credit. If later these
checks prove to be uncollectible, the bank will reduce the depositor’s account by the amount of
this uncollectible item and return the check to the depositor marked “NSF”. 客戶存款不足退票
（not sufficient funds；NSF）


企业账面存款余额=企业账面银行存款余额-银行已付而企业未付账项+银行已收而企业未收
账项
银行对账单调节后的存款余额=银行对账单存款余额-企业已付而银行未付账项+企业已收而
银行未收账项
 Outstanding checks are identified by comparing canceled checks on the bank statement with
checks recorded. This includes identifying any outstanding checks listed on the previous
periods’ bank reconciliation that are not included in the canceled checks on this period’s
bank statement. a cancelled check can be considered a token of clearance of transferred
funds. Once a check is processed, and all appropriate accounts have been recorded, it then
becomes a cancelled check.
 Only amounts shown on the book portion of the reconciliation require an adjusting entry.
 The goals of cash management are twofold:
Plan cash receipts to meet cash payments when due
Keep a minimum level of cash necessary to operate
 Credit Card Sales
 Advantages:
Customers’ credit is evaluated by the credit card issuer.
Sales increase by providing purchase options to the customer.
The risks of extending credit are transferred to the credit card issuer.
Cash collections are quicker.
 Dr Cash 96
Cr Credit Car Expense 4
Cr Sales revenue 100
 Dr Accounts Receivable 96
Cr Credit card expense 4
Cr Sales 100
 Dr Cash 96
Cr AR 96
 Accounts Receivable
Direct write-off 直接冲销法
Dr Bad debts expense 520
Cr Accounts receivable 520
 Recovering a bad debt 追回坏账债务
Dr Accounts Receivable 520
Cr Bad debts expense 520
(To reinstate Account previously written-off))
Dr Cash 520
Cr Accoungts Receivable 520
 Allowance Method 备抵法
 Two advantages to the allowance method:
It records estimated bad debts expense in the period when the related sales are recorded.
It reports accounts receivable on the statement of financial position at the estimated amount of
cash to be collected.
Account receivable - allowance = net value of account receivable
 At the end of its first year of operations, TechCom estimates that $1,500 of its accounts
receivable would be uncollectible. The total accounts receivable balance at December 31,
2009, is $20,000, and the company had total credit sales of $300,000 during the year.
writ-off a debt
Dr Bad debt expense 1500
Cr Allowance for Doubtful Account 1500 坏账准备
or: Dr Allowance for doubtful account 520
Cr Accounts receivable 520
 Recovering a bad debt
On March 11, Kent pays in full his $520 account previously written off.
Dr AR 520
Cr Allowance for Da 520
Dr cash 520
Cr AR 520
 Estimating Bad Debts Expense
 Percentage of Receivables
Year-end accounts receivable x Bad debt %
Total Estimated bad debts expense - Previous balance in Allowance account=Current bad debts
expense
50,000*5%=2500, 2500-200=2300
Dr bad debts expense 2300
Cr Allowance for doubtful accounts 2300
 Aging of Receivables


 Notes Receivable 应收帐款票据

On July 10, 2015, TechCom received a $1,000, 90-day, 12% promissory note as a result of a sale to
Julia Browne.
1000*12%*90/360=30
July 10: Dr Note receivables 1000
Cr sales 1000
Oct 8 : Dr Cash 1030
 Cr Note receivables 1000
Cr Interest revenue 30
Recording an Honored Note:
J. Cook has a $600, 15%, 60-day note receivable due to TechCom on December 4.
Dec 4: Dr Cash 615
Cr Note receivable 600
Cr Interest revenue 15
Recording a Dishonored Note:
TechCom holds an $800, 12%, 60-day note of Greg Hart. At maturity, October 14, Hart dishonors
the note.
interest = 800x12%x60/360=16
Oct 14: Dr Account receivable 816
Cr interest revenue 16
Cr Notes receivable 800
 Writing off the account receivable does not directly affect net income.
The entry to write off an account involves a debit to Allowance for
Doubtful Accounts and a credit to Accounts Receivable, both of which
are balance sheet accounts. Net income is affected only by the annual
recognition of the estimated bad debts expense, which is journalized as an
adjusting entry.

Chapter4&5 Inventories and Cost oof Sales

 Service company
sell service time to earn revenue. revenue-expenses=net income
 Merchandiser company
sell products to earn revenue.
Net sales-Cost of goods sold=Gross profit-expenses=net income
 Operating Cycle for a Merchandiser
purchase---Merchandise inventory---credit sales---accounting receivable---cash collection
Dr inventory
Cr cash / Accounts payable

Dr Cost of goods sold「Equity」

Cr inventory
Dr Accounts receivable
Cr Sales revenue
 Dr Cash
Cr Account receivable

 Cost of goods sold

Selling merchandise introduces a new and major cost of doing business: the cost
incurred by merchandising companies to acquire the inventory they sold to customers

 Perpetual system in purchase

Trade discount:
credit terms are 2/10, n/30.
2% if paid in 10 days.
On November 2, Z-Mart purchased $500 of merchandise inventory on account; credit
terms are 2/10, n/30.
Dr Merchandise inventory 500
Cr account payable 500
On November 12, Z-Mart paid the amount due on the purchase of November 2.
Dr Accounts payable 500
Cr cash 490
Cr Merchandise inventory 10
 Returns and Allowances
Purchase Return:
 Merchandise returned by the purchaser to the supplier.
Purchase Allowance:
A price reduction to the buyer of defective or unacceptable merchandise. 有缺陷或不可
接受的商品。
On November 5, Z-Mart (buyer) issues a $30 debit memorandum for an allowance from
Trex for defective merchandise.
Dr Accounts payable 30
Cr Merchandise inventories 30
Z-Mart purchases $250 of merchandise on June 1 with terms 2/10, n/60. On June 3, Z-
Mart returns $50 of goods before paying the invoice. When Z-Mart pays on June 11, it
takes the 2% discount only on the $200 remaining balance.
June 1 Dr Merchandise inventory 250
Cr Accounts payable 250
June 3 Dr Accounts payable 50
Cr Merchandise inventory 50
June 11 200*2%=4
Dr Accounts payable 200
Cr cash 196
Cr Merchandise inventory 4
 Purchases and Transportation Costs
Transportation cost paid by
1. Buyer: Dr Merchandise Inventory
Cr cash
2. Seller: Dr Delivery expense
Cr cash
 Invoice cost of merchandise purchase
Less: (Purchase discount received)
(Purchase return&allowance)
Add: Cost of Transportation
Total net cost of merchandise purchase
 Perpetual system in sales
Z-Mart sold $1,000 of merchandise on credit. The merchandise has a cost basis to Z-
Mart of $300.
Dr Accounts receivable 1000
Cr Sales revenue 1000
Dr Cost of goods sole 300
 Cr Inventory 300
 Salies discount
Z-Mart completes a $1,000 credit sale with terms of 2/10, n/45.
Dr Accounts receivable 1000
Cr sales revenue 1000
Dr Cost of goods sole 300
Cr Inventory 300
Buyer pays within discount period:
1000*2%= 20
Dr Cash 980
Cr Account receivable 1000
Cr Sales discounts 20
Buyer pays after discount period:
Dr Cash 1000
Cr Account receivable 1000
 Sales return&allowance
involve dissatisfied customers and the possibility of lost future sales.
Customer returns merchandise which sold for $15 and cost $9.
Dr Sale revenue 15
Cr Accounts receivable 15
Returned Goods - NOT Defective: 并非有缺陷
Dr Inventory 9
Cr cost of sales 9
Returned Goods - Are Defective: loss $7
Dr Inventory 2
Dr loss from defective merchandise 7
Cr cost of sales 9
Assume that $40 of the merchandise Z-Mart sold on November 12 is defective but the
buyer decides to keep it because Z-Mart offers a $10 price reduction.
Dr Sales return and allowance 10
Cr cash 10
 Adjusting
Z-Mart’s Merchandise Inventory account at the end of year 2017 has a balance of
$21,250, but a physical count reveals that only $21,000 of inventory exists.
Dr Cost of goods sold 250
Cr Inventory 250
 INVENTORY
HKAS 2 held for sale, in the process of production for sale, in the form of materials or
supplies
 Items included in inventory and their costs.
Costing method (specific identification, FIFO, LIFO,
or weighted average).
Inventory system (perpetual or periodic).
Use of market values or other estimates.
Impact of inventory errors on financial statement
 goods in transit
 Goods on Consignment 托运货物已发货
 Goods Damaged or Obsolete
not reported in inventory if they cannot be sold.
Damaged or obsolete goods which can be sold are included in inventory at net realizable
value.
Loss is recorded when damage or obsolescence occurs.
 Net realizable value:
estimated selling price -（the estimated costs of completion + the estimated
costs necessary to make the sale）
 Inventory costing methods
 Specific identification
COGS=Goods available for sale-ending inventory
 FIFO/LIFO
 Weight Average: Perpetual. Cost of goods available for sale / Units on hand on the
date of sale.

 Analyst the effect for financial and tax report

FIFO: Ending inventory approximates current cost.
LIFO: Cost of goods sold on income statement approximates its current costs.
Weighted average: Smoothes out price changes.
 When inventory costs are increasing (inflation)
LIFO cost of goods sold is highest, gross profit is lowest.
FIFO cost of goods sold is lowest, gross profit is highest.
When inventory costs are decreasing
FIFO cost of goods sold is highest.
LIFO cost of goods sold is lowest.
 The most attractive feature of LIFO is low income tax payments when prices are
increasing. (LIFO is not allowed in HK)
 Inventory must be reported: LOWER of Cost and NRV
estimated selling price in the normal course of business less estimated costs to complete
and estimated costs to make a sale.


What is the total error in combined net income for the three-year period
resulting from the inventory errors? Explain.

Zero (there is no error in combined net income).

Explanation: Total net income for the combined three-year period ($572,980)
is not
affected by the errors. This is because these errors are "self-correcting"—that
is,
each overstatement (or understatement) of net income is offset by a matching
understatement (or overstatement) in the following year.
 Prepare closing entries
Chapter 8 Accounting for Long-term Assets
 Chapter 13 Analyze of Fianancial Statement
 purpose of analyze

 Chapter 14 Managerial Accounting Concepts and Principles
 Financial Accounting
 Managerial Accounting


