Accrual and Deferral Rules in Accounting: A Comprehensive Review

School: St. Olaf College - Course: MG 225 - Subject: Accounting

Week of 10/25 Session Plans Exam Review SI Session (10/26) Main activity: Exam Review Rules: -Accrual: +Accounts receivable & Revenues +Interest expense & Interest payable -Deferral: +Prepaid Rent & Rent expense +Prepaid Insurance +Unearned/deferred revenue -Effect on Cash Flow rules: +Increases in current assets ↓ Cash +Decreases in current assets ↑ Cash +Decreases in current liabilities ↓ Cash +Increases in current liabilities ↑ Cash +Increases in SHE↑ Cash +Decreases in SHE ↓ Cash -General rule in categorizing: +operating activities: Net Income, CURRENT assets & CURRENT liabilities & DEPRECIATION +financing activities: LONG TERM liabilities, issue common stocks (Additional Paid-in Capital), Dividends +investing activities: LONG TERM assets, purchase stocks/securities/businesses Questions (Answers in yellow) -Which activity does it belong to? +Issue of common stock in exchange for land - non-cash investing & financing activity +Issue stock for cash - financing +Purchase stock/business/securities - investing +Proceeds from Sale of LT Investments - investing

+Gain/Loss on sale of investment - operating +Unearned revenue increase - operating +Cash received from bank loan - financing +Note payable principal - financing -Effect on CF statement: +Cash purchase of treasury stock? - outflow +Cash received from common stock sale - inflow +Depreciation expense recorded on the equipment - increasing net income +Rent revenue earned - inflow (decreasing liabilities) -Closing entry - Closing entries debit accounts that have normal credit balances and credit accounts that have normal debit balances. Loss and expense accounts are credited in closing entries. Revenues and retained earnings have credit balances and are debited in closing entries. -Book value = cost of equipment sold - accumulated depreciation on that equipment sold -Gain/Loss on sale = selling price - book value -What is the main point of ratio analysis? - allow investors to compare companies in different size -Inventory turnover ratio = Cost of goods sold / average inventory -Dividend yield = Dividends per share / Market Price per share -Price/earnings ratio = Market price per share / Earnings per share -Return on equity = Net Income / Average SHE -Current ratio = Current Assets / Current Liabilities -Return on assets = (Net income + interest expense net of tax) / Average total assets -Debt-to-equity ratio = Total liabilities / Total SHE -Accounts receivable turnover ratio = Net credit sales / average account receivables -Earnings per share = net income / weighted average number of common shares outstanding +weighted average number of common shares outstanding = total shares of common stock issued - treasury share of common stock -If sales revenue was $1,800,000 and accounts receivable decreased $40,000 during the year, then cash collected from customers equals $1,840,000. True/False