This post is much of my work that I did for this course, My hope is that it might guide a future student as they learn the basics of Accounting.
Financial
Statements
There are four basic ways to communicate
financial information with users. These four are known as a balance sheet, an
income statement, a retained earnings statement and a statement of cash flow
(Kimmel, Weygandt, & Kieso, 2011, p. 11.). In the paragraphs that follow
each of these will be explained and their functionality to internal and
external users will be provided.
The balance sheet demonstrates what a business
owns and owes at a given point in time (Kimmel, Weygandt, & Kieso, 2011, p.
14.). External users look at a balance sheet assess the proportion of debt and
equity to make decisions such as the likelihood of repayment if they lend the
company money (Kimmel, Weygandt, & Kieso, 2011, p. 14.). Internal users use
the balance sheet financial statement to determine if they have the cash needed
to meet immediate cash needs(Kimmel, Weygandt, & Kieso, 2011, p. 14.).
An income statement shows the results of
operations for a period of time (Kimmel, Weygandt, & Kieso, 2011, p. 12.).
External users utilize an income statement to make predictions about a
company’s future earning potential (Kimmel, Weygandt, & Kieso, 2011, p.
12.). Internal users look at an income statement to asses if they have been
profitable during the operation period.
A retained earnings statement reflects what
portion of a company’s profit during an operation period are not paid in
dividends but rather retained for growth (Kimmel, Weygandt, & Kieso, 2011,
p. 13.). External users are able to use this tool to assess the dividend payment
practices (Kimmel, Weygandt, & Kieso, 2011, p. 13.). Internal users look to
this statement to understand potential reduction in ability to repay debts as
part of the profit during that operational period was used to pay dividends to
investors (Kimmel, Weygandt, & Kieso, 2011, p. 13.).
The statement of cash flow provides information
on cash receipts and payments during a specified time period (Kimmel, Weygandt,
& Kieso, 2011, p. 15.). Those outside of a company will look to see what
the increase or decrease in cash was during the specified period of time
(Kimmel, Weygandt, & Kieso, 2011, p. 15.). Both internal and external users
will look to see where cash came from and how it was used during the specified
time (Kimmel, Weygandt, & Kieso, 2011, p. 15.).
Conclusion
The above four types of financial statements are
the core statements used to look at a company’s financial standings. Each of the above four types of financial
statement serves an explicit purpose and the information presented interrelates
(Kimmel, Weygandt, & Kieso, 2011, p. 16.). The four types of statements are
a balance sheet, an income statement, a retained earnings statement and a
statement of cash flow (Kimmel, Weygandt, & Kieso, 2011, p. 11.).
Reference
The difference between accrual and cash
accounting
Accrual accounting is
the most common form of accounting, it recognizes revenues as earned and
expense as incurred. Cash accounting is most commonly found in small
businesses, this process recognized revenue as received and expense as paid (mattfisher64,
2010).
An example of the two
is as follows. A company pays $19,000 for 19months rent on December 1st
2014.
In accrual accounting
this would be charged as incurred.
2014 2015 2016
$1,000 $12,000 $6,000
In cash accounting this
would be charged as paid
2014 2015 2016
$19,000 0 0
Accrual accounting is
based upon two principles; the revenue recognition principle that recognizes
revenue when earned regardless of if payment was received (Kimmel, Weygandt
& Kieso, P. 166). The expense recognition principle companies recognized
expense when incurred regardless of it payment was made (Kimmel, Weygandt &
Kieso, P. 166). These principles are in place to reduce fraud and are part of
the GAAP (Generally Accepted Accounting Principles)
The most common
alternative accounting to the accrual basis is the cash basis (Kimmel, Weygandt
& Kieso, P. 166). The cash basis of
accounting is not in compliance with generally accepted accounting principles;
it is most often seen in use by individual or small businesses. There are no
examples of when its acceptable to use cash basis accounting under the
generally accepted accounting principles as it violates the revenue recognition
principle of recognizing cash when earned
(Kimmel, Weygandt & Kieso, P. 166).
References
Mattfisher64. (2010, May 18). Accrual and Cash Basis Accounting- Ch.3
Video 1
Reversing
Entries
Reversing entries are the final step in the
accounting cycle. This is an optional step used to revers or cancel out
adjusting journal entries from the previous accounting period (reversing
entries). The uses of reversing entries are commonly seen with accounts such as
wages where they stretch between tow accounting cycles. There are pros and cons
to using reversing entries.
The pros of using reversing entries include but are
not limited to the following two examples.
·
Use to fix mistakes. Reversing entries can
be used to fix mistakes such as miscounting supplies at the close of an
accounting period.
·
Simplified accounting entry. Often
people other than accountants are responsible for entering in information, such
as HR payroll. These individual are not accountants and are often asked to just
enter the wages payable every pay period and are not as familiar with
accounting and wages impact when they cover two accounting cycles.
In both of these examples the accountant can use
reversing entries to account for and allow the process to move forward in an
understandable manor.
The cons of using reversing entries are based upon
accounting preferences. They do generate added steps and with more entries
there is greater risk for errors. Overstating or understating accounts become
risk when utilizing reversing entries.
This image below provided a visual example of what
the accounting would look like first without reversing entries and then with reversing
entries (The Reporting Cycle).
In Conclusion Reversing entries are option because
there is no difference in the accounting outcomes if you do or do not use them.
Reversing entries are an accounting tool that has pros and cons. They are an
optional tool as they have no impact on the outcomes.
References
4 - The Nature of Optional
Reversing Entries. (n.d.). Retrieved November 22, 2014, from https://www.youtube.com/watch?v=5fGQze6Bagk
Chapter 4 - The Reporting Cycle.
(n.d.). Retrieved November 23, 2014, from
http://jeryanh.wordpress.com/2010/03/28/chapter-4-the-reporting-cycle/
Reversing Entries | Accounting |
Example. (n.d.). Retrieved November 23, 2014, from
http://www.myaccountingcourse.com/accounting-cycle/reversing-entries
COGS
The Cost of Goods Sold can be found on the income statement
and is seen as an expense during the accounting cycle. The calculation of the
Cost of Goods Sold is a straightforward formula. However the items included in
the calculation of the Cost of Goods Sold is a more complex concept. The Cost
of Goods Sold (COGS) basic formula looks like this:
COGS = Beginning Inventory + Purchases – Ending Inventory
When calculating the Cost of
Goods Sold for a manufacturing company a slight adjustment is made to look like
this:
COGS = Beginning Finished Inventory + Cost of Goods Manufactured –
Ending Finished Goods Inventory
Now identifying what makes the COGS is slightly more
complex. The simple answer is that it includes the items necessary in the
production process. This in essence equates to that overhead expenses are not
included. Things such as admin, sales and shipping are excluded from the COGS.
Included are things such as inventory purchase, freight, repackaging expenses,
parts, raw materials, labor and related labor expenses to create the goods,
facilities directly used to make the product, warehouse space used during the
manufacturing, machinery leases, production supplies, and any other cost
directly related to the production to the goods. In conclusion the COGS are
calculated by looking at what a company starts with added to what they purchase
less what they have remaining at the end of the accounting period. Included in
this is everything necessary in production of the goods but nothing that is
overhead or selling of the goods.
Reference
SOX
2002
The Sarbanes- Oxley Act of 2002 was
developed in repose to several large financial scandals in the 1990’s. While only
publically traded companies are bound to comply with this act many others do as
it is seen as a standard of quality accounting practices. The Sarbanes- Oxley Act of 2002, frequently
referred to as SOX has made significant impacts on accounting. One of the most
well-known developments was that SOX was the catalyst of the creation of the
Public Company Accounting Oversight Board(PCAOB). PCAOB inspects audits and
auditors of public companies. SOX has placed responsibility on the CEO’s of
companies to sign quarterly accounting reports and created criminal penalties
for those who falsely certify reports (Accounting practices in US).
The fourth title of the of the
Sarbanes- Oxley provisions is focused on internal controls. This allowed/
encouraged companies to invest in internal controls in a way that was lacking
prior to its development. Section 404 is what the act is now most known for and
is purely focused on a company’s assessment of their internal controls. One
strategy used frequently to meet internal controls is to identify those areas
that are at higher risk and begin to implement entry level controls starting
with the root cause of exceptions and errors and moving up the process. This
allows companies to build value added and eliminated unnecessary involvement or
steps ( GARP). Following the Sarbanes- Oxley act many companies are finding
that their internal information is of a higher quality due to the strict
compliance measures the act put forward.
In conclusion the Sarbanes- Oxley
act has had significant impact on accounting practices and the focus on
internal controls in the American business sector since its passing in 2002.
References
Accounting Practices in
U.S. Public Companies. (n.d.). Retrieved December 20, 2014, from http://www.nysscpa.org/cpajournal/2006/1106/essentials/p28.htm
GARP - How Sarbanes-Oxley
Has Affected Internal Controls and Compliance: A 10th Anniversary Review.
(n.d.). Retrieved December 20, 2014, from http://www.garp.org/risk-news-and-resources/2012/august/how-sarbanes-oxley-has-affected-internal-controls-and-compliance.aspx
The Sarbanes-Oxley Act of
2002. (n.d.). Retrieved December 20, 2014, from https://www.youtube.com/watch?v=wuoNGP5vh1k
Sarbanes-Oxley Impacts.
(n.d.). Retrieved December 20, 2014, from https://www.youtube.com/watch?v=dje9UEnWTvw
