Principles of Accounting1 Q/A

 These are my work from taking 'Principles of Accounting 1' class at Hudson County Community College. (Jan 2015-Mar 2015)

•   Horngren's accounting 10th edition.
•  For  students, please use these as resources, do not  plagiarize.
•   If you have a question, please leave a comment.

Unit1 Q1: How does the accounting equation apply to me? The accounting equation is important to any business and has implications to individuals as well.  Using what the student read, how can a person use this to analyze their own financial position? What can they do to use this information to develop a strategy to improve it?

A1 : I can use the accounting equation to calculate a house mortgage or tuition loan.

   For example, If I bought a $100,000 house and the down payment was $20,000 then the mortgage would be $80,000 for 10 years if there was no interest.

    I can use this accounting equation for the first fiscal year end

: Asset ($100,000)=Liabilities ($80,000)+Owner's Equity ($20,000). When a second fiscal year ends, the equation will be: Asset ($100,000)=Liabilities ($72,000)+Owner's Equity ($28,000). Based on this equation, I can determine how much Liabilities I have left. When I look at the Owner's Equity side of the equation, it shows that Equity is growing, and the Liabilities is decreasing. Nevertheless, the value of the Asset is still the same unless the house's price changed.

    So, this accounting equation can help me to clearly separate my Liabilities and my Asset so that I can properly pay off the house mortgage without going bankrupt.

A2 :  I agree that accounting equation is useful for budget because If I knew that how much asset that I have, I won't spend over than asset value.

Unit 1 Q2: Journals, are they really that important? Explain why journals are so important. Give examples of what might happen if accountants did not use journals?

A1: Journals are important for anyone who is working in the business field and it has many functions.

   First, transactions should be recorded in a journal following a date order. This is because if there is an error in the record, a bookkeeper or an accountant would be able to easily look it up and match the receipts and a journal to find what is wrong. Journals also provide description of each transaction in terms of debit and credit. In addition, based on debited or credited, even the same description has different effects on the journals. For example, One of descriptions is Cash, but credited cash means paid cash and debited cash means earned cash.

   Second, journalizing is a fundamental part of accounting. It is necessary in order to post to a ledger, making a trial balance. For example, if an accountant did not use journal, they can't work for making a ledger. In addition, if an accountant did not use journal, it create unclassified transactions and wrong balance. 

A2 : I was almost going to miss the important point!

Yes! Debited cash is not only revenue but also liabilities.

Thanks.

I'll be more careful next time.

The trial balance includes all the general ledgers.

When the trial balance is perfectly ready(the value of all the debit= the value of all the credit),

an accountant can make balance sheet.

A3 : checking references is also very helpful for due date to avoid late fee.

Unit2 Q1: Accrual vs cash-basis accounting

Differentiate between accrual accounting and cash-basis accounting. Which method do they think is better? Give supporting examples and details why.

A1: Based on 'Cash basis accounting', revenues are recorded when cash is received from a customer and expenses are recorded when cash is paid. 'Cash basis accounting' is not allowed under Generally Accepted Accounting Principles (GAAP) but it is an easier way to record revenues and expenses and it is good for tracking a business's cash flow.

  However, in 'Accrual basis accounting', revenues are recorded when earned and expenses are recorded when incurred no matter when cash is received or paid. This is the method required by GAAP.

  Thus, Accrual basis accounting is the better method because it provides an accurate amount of revenues and expenses for preparing an income statement.

  For example, assume that a fiscal year ends on December 31 and I sold 100 cars for $3,000,000 on December 31 and customer's payment due date is next year January 10. Based on 'Cash basis accounting', the revenue will be recorded next year so it cannot provide the amount of revenue for the current year income statement so revenue will be understated. However, based on 'Accrual basis accounting', the revenue must be recorded on December 31, even if cash has not  been received yet. So, this earned revenue can be included in the current year income statement then, this income statement provides an accurate net income for investors, customers, vendors and other businesses and this income statement shows how well this car business runs.   

A2:  I agree that Cash basis accounting is good for a small business and Accrual basis accounting is good for a bigger business because for a small business, cash is so important to operate their store.

A3: Cash basis accounting is not required to meet The Time Period Concept, The Revenue Recognition Principle and The Matching Principle. These principles are Generally Accepted Accounting Principle and U. S. Securities and Exchange Commission is encourage companies to use it.

A4: Yes. Small businesses use Cash Basis Accounting. one of reasons is to avoid income tax. Even though it is not recommended. When small businesses didn't record revenue(because cash is not received yet), they can report understated revenue.

So, Accrual basis accounting is recommended to book and GAAP method.

A5: Sure, when a business get a revenue, it should be reported immediately and then, a business is be able to avoid internal fraud.

So, GAAP suggests 'Accrual basis accounting'.

A6: Sure, when a company is developed, it needs to record prepaid rent, prepaid insurance, unearned revenue and else, how does record these if it doesn't use accrual basis accounting method?

Unit2 Q2: Discuss what the worksheet is, who uses it and what can they use it for.

A1 : The worksheet is internal documents for preparing Adjusting Entries and it include Account names, Unadjusted Trial Balance, Adjustments and Adjusted Trial Balance.

So, an accountant uses the worksheet to get a adjusted trial balance. When an accountant gets Trial Balance, these record should be examined to make sure, if a particular account needs adjusting, adjust it, and then an accountant can get a Adjusted Trial Balance.

In addition, most business use Microsoft Excel program to make a worksheet, so bookkeepers and accountants should learn how to use this program and this program has financial formula, it is very helpful to make a worksheet.

A2 : Sure. The worksheet is so important to prepare financial statement.

Not only Accounting principle, but we also need to know how to use EXCEL program.  

A3 : you're right and by doing homework, we are learning that using worksheet is useful to check all the accounts and we can have full image of accounting.

A4 : I am also looking at the different reports too because I can compare those recorded value to others. For example, when I prepare ' Statement of Owner's Equity', I can look at the income statement for net income.

A5: The accounting cycle is the process by which companies produce their financial statements for a specific period. When we prepare for adjusting entries, we need to use 'Worksheet'

Unit 3 Q1 : Merchandising: Operations and Inventory. What are the three ratios? What are they indicative of? Give specific examples of each one.  Why are they unique to a merchandising company?

A1 : The three ratios are Gross Profit Percentage, Inventory Turnover and Days's Sales in Inventory related a merchandising company.

    First, Gross Profit Percentage reflects a business's ability to earn a profit on its merchandise inventory. Its formula is Gross Profit Percentage=Gross profit/Net sales revenue. To get the Gross profit, Gross profit=Sales revenue-Cost of goods sold. A business can use this ratio to compare to its competitor. For example, if their Gross Profit Percentage is 34.1% and the competitor's ratio is 43%, this company should consider selling more inventory than its competitor next fiscal year. In addition, the business can compare this year's ratio to last year's ratio. For example, if the ratio  increased from last year, this business earned more than last year. In the textbook, on page 301, Green Mountain Coffee Roasters Inc. has 34.1% Gross Profit Percentage. If you compare this to last year's profit 31.4%. this company has a little more profit.

    Second, the Inventory Turnover measures how rapidly merchandise inventory is sold and its formula is Inventory Turnover=Cost of goods sold/Average Merchandise inventory. Because of the Average merchandise inventory=Beginning merchandise inventory+Ending merchandise inventory/2, a high rate of Inventory Turnover indicates ease in selling inventory. A:$10,000/[($1,000+1,500)/2]=8times per year, B:$10,000/[(1,000+500)/2]=13.3times per year. So, B has a lower Ending merchandise inventory, so B sold inventory faster than A.

    Last, Days's Sales in Inventory measures the average number of days merchandise inventory that is held by a company. Its formula is Days's Sales in Inventory=365days/Inventory. So, continuing from the example above, Days's Sales in Inventory A=365/8=45.6 Days, Days's Sales in Inventory B=365/13.3=27.4 Days. Thus, B held their inventory for fewer days than A.

    These ratios are useful to companies because they can manage their inventory and measure their sales performance. Also, some food inventories are perishable, so the company really has to sell their inventory quickly.

A2 : I also think that Inventory Turnover Ratio is the important ratio because some inventory such as food, dairy, fruits are perishable so it needs to be sold rapidly. If company doesn't sell it quickly, it loses value.

A3 : I also think that the restaurant is a merchandising company but I guess that they will check their inventory periodically.

A4 : I agree that these analyzed ratio gives many information about your products and financial issues and it also provides information to attract investors and consumers. They'll use this ratio to compare with other companies in the same business field.

Unit3 Q2 : Systems of Internal Control.  What are some examples of an internal control? Why are they so important? What are some of the risks if they are not followed?

A1 :Internal audits and separation of duties are examples of an internal control.

Internal audits are an important part of internal control because the auditor should check and report whether employees are following company policies, and whether the company meets all legal requirements, and that operations are running efficiently. If there is no internal auditor, employees may  not complete all of their responsibilities. So, it would affect the revenue and company's culture.

Separation of duties is also important because no one is allowed to exercise an unauthorized power. If one accountant should be the treasurer and the controller, the accountant could control both the money and balance the book, so the accountant would be capable of stealing cash or concealing the theft in the accounting records.

A2: The company should make a budget for internal control. If the company don't have internal control to prevent risk, the company may lose inventory, have a poor book and it become a bigger problem. So, as you mentioned, internal control is very important and employees should follow company policies and employer or manager should monitor each department carefully.

A3: I also think that segregated duties are important because it prevents that one person has too much power on everything.

A4: The Sarbanes-Oxley Act was passed in order to strengthen Internal control following the WorldCom accounting scandal in 2002. In 2002, a financial statement released by this WorldCom had been recorded inadequately. This gave inaccurate information to the public causing the economic ruin of many companies, resulting from lost investments. So, the Sarbanes-Oxley Act's main goal is to regulate the method of Internal Control.

Unit4 Q1: Are receivables worth the risk? Describe the write off methods for receivables? If receivables are a risk, why are they used a part of business? 

A1 : The Direct Write-Off Method of accounting for uncollectibles is used by small companies. When a small business has an uncollectible account, an uncollectible account will be written off and will be recorded as Bad Debts Expense. But the problem is that the Direct Write-off Method doesn't match the Expense Recognition Principle which is required by the GAAP method because expenses should match against the revenue of the period.

    I think that receivables are risky but when a merchandising company decides a product price, they should at the very least consider loss, interest, credit card process fees and other costs. So even though receivables are risky, it is the important part of a business. For example, a used car sales company can offer customers a monthly installment plan instead of buying the car out right. The company will generate revenue, but it will be at a slower rate.

A2: At this point, I should separate 'paid off' and 'new purchase' transactions.

Paid off the old debt is the recovery of accounts previously written-off. So, I need to make an adjusting entry for the recovery.  For example,  based on the direct write-off method, I should reverse the earlier write-off and then, debit cash and credit Accounts Receivable.

For the new purchase, I should credit new sales revenue.

-In you used car example in which was does the company receive more money(excluding time value of money)?

    When the company set up the monthly installment plan, they can charge more interest rate. So, based on interest rate, the company can make more money.

Is it better for them to wait and receive that stream of income or receive it all up front?

     If I consider the tax, collecting receivable monthly is better than receiving all up-front. If this company made more profits, they should pay tax with a greater rate.

If there were no installment plan, would the buyer go somewhere else?

  Some people, they really need a car, but they don't have enough money to pay a car or they have some budget for a car each month from their salaries. So, for some customers, they need a monthly installment plan. So, even though a monthly installment plan would be risky, the company should provide a monthly installment plan. Thus, this company has more chance to make profits.

A3 : Among the Acid-Test Ratio, the Accounts Receivable Turnover Ratio, and the Day's sales in Receivable, I think the Acid-Test Ration is the most important because it deals with asset and liabilities. If the entity has a expended business, it surely has liabilities. Even though, this entity has great sales, the entity is not running well when they have unbearable liabilities. So, When you evaluate business performance, you should check Acid-Test Ratio carefully.

 In addition, acceptable acid-test ratio is 1.00 which is considered safe(573).

A4 : I think, even though the business has the more revenue, it is possible that the business has tons of liabilities. So, If we are looking for reliable vendor or distributor, we should check and consider their Debt Ratio ( Total liabilities/Total assets), Acid-Test Ratio, Accounts-Receivable Turnover Ratio and Days' sales in Receivable. Then, we surely make a statement for the business has a stronger impact or not.

A5: I agree that this allowance method which is required by GAAP method is better than direct write-off method. By looking at the past records for Allowance for bad debts, it can guide future decision making and the company can decide whether it accept account receivable. In addition when the unadjusted allowance for bad debts doesn't match to the ending allowance for bad debts balance, we can make an adjusting entry for this to get accurate record.   

Unit4 Q2 : Depreciation: is it really an expense? Describe the different methods of accounting for depreciation. Why is depreciation an expense? Give details to support your answer.

A1 :    There are straight-line method, unit-of-product method, double-declining-balance method for depreciation.

   The straight-line method allocates an equal amount of depreciation to each useful year. For example, the factory has a $500 sewing machine and it has 5 year useful life and its residual value is $50. So, in the first year, depreciation expense is $90=(500-50)/5.

    The unit-of-product method allocates a varying amount of depreciation each year based on an asset's usage. (619) More usage causes larger depreciation. For example, if a company drives a car a greater amount of miles, it causes more depreciation.

    The double-declining-balance method is an accelerated depreciation method that computes annual depreciation by multiplying the depreciable asset's decreasing book value by a constant percent that is two times the straight-line depreciation rate. (620) For example, a computer loses its value faster than building because new computer upgrade, released very frequently. So the company should use the double-declining-balance method for computers. 

   Depreciation is an expense because the depreciable plant assets are used in the operation of a business and it loses its value. So, depreciation allows the company to adjust balance sheet to reflect the loss of the plant assets. For instance, the company owns many trucks for delivery, these trucks are part of the company's asset, but every year, these trucks lose value due to continuous use. So, we should make an adjusting entry for depreciation to track the real asset's value closely.

A2 : Depreciation Expense match to Accumulated Depreciation account. Because the Depreciation Expense account is not related to CASH at all.

Depreciation Expense accounts will show up on Income statement and Accumulated Depreciation will show up on Balance sheet.

A3 : It depends on many factors such as what type of business, how often use depreciable asset, etc. But, for accountants, Straight-line method is very easy to use it and it can save time to compute and to prepare depreciation entry. Sometimes, the company should sell the equipment or trade it, in this case, it is very applicable.

For the tax purposes, I will use Double-Declining-Balance Method which is an accelerated depreciation method because  The use of an accelerated depreciation method reduces tax liabilities. DDB Method produces more expense which causes less taxable income. Then, the company can have more cash to purchase more assets.

A4 : As you mentioned, the Sum-of-the-years'-digits method is the one of accelerated depreciation methods and these days, we barely use it.

This is the way to compute the Depreciation Expense based on the Sum-of-the-years'-digits method

Acquisition Cost = 160,000

Residual value = 10,000

Useful life = 5

Sum of the year digit = 15 = 1+2+3+4+5

Year1 Depreciation Expense $50,000 = (160,000-10,000)x5/15

Year2 Depreciation Expense $40,000 = (160,000-10,000)x4/15

Year3 Depreciation Expense $30,000 = (160,000-10,000)x3/15

Year4 Depreciation Expense $20,000 = (160,000-10,000)x2/15

Year5 Depreciation Expense $10,000 = (160,000-10,000)x1/15

A5 : Yes. Depreciation reduces net income, so, the company has lower taxable income. In addition, the Depreciation Expense is reported on the income statement and the Depreciation Expense is not a process of valuation(616).  Accumulated Depreciation is a contra asset that is reported on the balance sheet.

To estimate these depreciation expense, we can use Straight-line method, Units-of-product method, Double-Declining-Balance Method and Sum-of-year method depends on the type of equipments.

Unit 5 Q1: Current Liabilities and Payroll. What are the two main issues for accounting for current liabilities? Do liabilities have a positive or negative effect on the balance sheet? Give examples to support your answer.

A1:  An inaccuracy in the amount a company pays off and an inability to pay off liabilities on time are the two main issues for current liabilities.

      First, current liabilities are calculated inaccuratly because bonus plans, vacation pay, health and pension benefits, and warranties are often estimated and recorded. For instance, a company debits Employee Bonus Expense and credits Employee Bonus Payable, and then, when the company makes payment, it will debit Employee Bonus Payable and credit cash.

      Second, it is possible that a company cannot pay current liabilities on time. If a company is not able to pay off current liabilities, creditors may charge late fees.

      I think that liabilities have a negative effect on the balance sheet. The total asset is equals to the liabilities and the owner's equity. So, if the company has huge liabilities, the amount of the owner's equity is small.

           Assume that:

                  A company Asset($200,000)=Liabilities($150,000)+Owner's Equity($50,000)

                  B company Asset($200,000)=Liabilities($50,000)+Owner's Equity($150,000)

       Company A and B have the same amount of the asset, but company A has three times greater liabilities, so it gives negative effect on the balance sheet.

A2 :  Unearned revenue is a positive affect on the balance sheet even though the Unearned revenue is liabilities. If the company has Unearned revenue, these transactions has made during a fiscal year and the company has gotten cash from a customer, but not yet performed. So, the Unearned revenue is liabilities and it brings a positive affect on the balance sheet, this means that the company got a cash in advance.  

-  For example, the company has $500 budget to buy a new computer.

Computer A, $500, 1year useful life.

Computer B, $800, 3year useful life.

   If the company just buys Computer A, they will make another purchase for next year, so the company should consider a computer's useful life and buy Computer B with $300 liabilities. In this case, we can determine the liabilities are worth it.  

A3 : We should follow the matching principle that is why we should estimate bonuses and accrue it. Furthermore, we should estimate vacation, health, and pension benefits and warranties too. Then, when these transactions occur, we should debit payable accounts and credit cash.

These payables are reported on the balance sheet.

A4 : We should think about the employer side and the employee side, because employers only pay State Unemployment compensation tax and Federal unemployment compensation. But, employees pay federal and state income tax and social security tax. Especially, employees pay their taxes through payroll deductions. So, accountant should record all these each transaction and tax carefully. Also, these are all recorded as tax payable, because the company will pay taxes next year. That's why these tax payables are liabilities and it exactly follow the matching principle.

Unit5, Q2 : Bonds: Who benefits the holder or the issuer? Describe the different types of investments. Which would you think is the best investment and why. Give examples to support your answer.

A1 : Short-term investments and Long-term investments are classified based on the length of time the investor intends to hold the investment. Short-term investments are current assets, include debt and equity securities that are highly liquid. So, it can be converted to cash.  Long-term investments include debt and equity securities that the investor may hold it longer than one year.

        Trading investments, Held-to-maturity investments, Available-for-sale investments, Significant interest investments and Controlling interest investments are classified based on debt and equity securities.

        Trading investments intent to buy or sell for short-term profits and the investor holds less than 20% of voting stock.

        Held-to-maturity(HTM) investments intent to buy and hold until fixed maturity date and it can be recorded as current assets or long-term assets depending on the maturity date.

        Available-for-sale investments include debt and equity securities in which the investor holds less than 20% of the voting stock.

        Significant interest investments in which investor owns 20-50% of the investee's voting stock.

        Controlling interest investments in which investor owns 50% or more of the investee's voting stock.

                  I think that the Short-term investments is the best investment. Even though the company invest the excess cash, but sometimes, the company suddenly can meet a financial problems. To solve this financial crisis, the company is always able to sell their short-term investment. For example,

     (Dr) Cash - 10,000

          (Cr) Short term investment - 8,000

          (Cr) Gain on sale of short term investments - 2,000 

A2 :   A company invests excess cash in other companies because they want to build a partnership. This investment can be an investment or it can be a good business strategy for the future. For instance, company A buys more than 50% of company B's stock, then, company A will be able to have controlling interest investments in  company B. Furthermore, company A can acquire company B.

      I read the article about the controlling interest investments and Earn-in agreement, this would be helpful to apply 'controlling interest investments'.     

PanTerra Gold to earn controlling interest in Canada gold mine

http://www.menafn.com/1094114062/PanTerra-Gold-to-earn-controlling-interest-in-Canada-gold-mine

A3 : Rate of Return on investment is what percent does make out of investment. Formula is Rate on Return on Investment = (Gains – Cost)/Cost.

For example, if you buy 30 shares of ABC company for $10 a share, your investment cost is $300. If you sell those shares for $400, then your Rate on Return on Investment is ($400-300)/$300 for a total of 33.3%.By checking this ratio, the company can compare profitable investments and it helps to choose future investments.

A4 : Investing objectives are not the same for each investor because it really depends on how much excess cash does the company has, what type of investments, how long do you want to hold it. That's why there are many classification for investments. Based on the period, the investor wants to hold it less than one year, this is a short-term investment, and the investor wants to hold it more than one year, that is a long-term investment.

So, there are many kinds of investments, accountants should classify and report well depends on the type of investments.  

Unit6, Q1 : What are the types of specialized journals? Are they handled differently in computerized accounting as opposed to manual accounting?

A1 : The special journal is an accounting journal designed to record a specific type of transaction. The types of specialized journals are a sales journal, a cash receipt journal, a purchase journal and a cash payment journal.

     The credit sales are recorded in the sales journal and the cash receipts journal is used to record cash receipts. The purchase journal is dealing with purchasing with merchandise inventory, office supplies, and other accounts on account. Cash payments journal is used to record cash payments by check and currency.

     The computerized accounting and the manual accounting are not differently handled. First, we need to know how to do the manual accounting and then, we can use the computerized accounting with the accounting software.

-We need to know how to do the manual accounting and then, we can use the computerized accounting with the accounting software.

Because, first, we need to know how to set up the software for the type of company or accounts. If we don't have any background for the manual accounting, how can we set it up the software for the computerized accounting?

Second, the computerized accounting is usually used for bigger size of company which needs great amount of works for financial recording. Even though the computerized accountings has 100% of accuracy, it still requires accountants to check each data or add correct data.

A2 : The computerized accounting does has problem with the system crashes. That is why we should save the file at USB drive or cloud service such as Quick book on-line. Or we can save its backup file to bring up the file back. Making backup file is a little bit additional work, but if we lost the system or computer's physical problem, these are very useful. Also, those software program keep showing alert to make a backup file daily or periodically.

A3 : I also prefer to use the computerized accounting, especially, if i work in bigger size company or factory. Because it is easy to report specific data sheet from the big sources, and the data is also very accurate. Plus we I can make invoices faster from the computerized data. As a company, they can save the cost for accounting and financial analyzing. In addition, for auditing, it can save a lot of time for checking data. 

Unit6, Q2 : What are the sections of a corporate income statement? How are earnings per share calculated? What does earning per share tell a user of the income statement?

A1:   Continuing operations, Special items and Earning per share are the sections of a corporate income statement.

   Earnings per share is calculated as net income minus preferred dividends divided by the weighted average number of common shares outstanding(801).

   Financial Accounting Standards Board requires that earnings per share appear on the income statement.

   The user of the income statement, investor will constantly use this earnings per share on the income statement to compare companies’ profits. Because the earnings per share is standard measurement.

A2 :  The earning per share is a useful measurement for profitability, and when compared with earning per share of other similar companies, it gives a view of the comparative earning power of the companies. Earning per share when computed over a number of years, it indicates whether the earning power of the company has improved or worsen. Investors usually look for companies with steadily increasing earnings per share for their dividends.

A3 : The earnings per share ratio (EPS) measures the amount of a company's net income that is available for payment to the holders of its common stock. A company with a high earnings per share ratio is capable of generating a significant dividend for investors. The high earnings per share indicates a potentially worthwhile investment, depending on the market price of the stock.

A4 :  When the company wants to distribute profit, they can distribute by cash dividends or stock dividends. Cash dividends are distributing profits with cash but stock dividends are issuing more stocks and giving these to shareholders. If the company’s stock was traded at $100 recently. By issuing more stocks, the stock will be traded at lower price and it will attract more investors to the company, so it has a positive effect.

      The stock split is the way to split the stocks and decrease the value, and increase the number of shares. The one stock was $100, but after splitting, the value is $50. The shareholders are easily able to have voting right because they will invest less money to buy the stock.

     So, by understanding these financial definitions, the company is able to choose the right choice for the company and the financial analyzer can advise the administration of company. 

Unit7 Q1 : What are the different sources of cash flow? What does it indicate if the cash flows are from each of these sources? Give examples to support your conclusions.

A1 : The cash flows are cash inflows and cash outflows. As operating activities, cash receipts and revenues are the cash inflow and cash payments are the cash outflows. As investing activities, collecting of long-term notes receivable are the cash inflow. As financing activities, it include cash inflows and outflows involved in long-term liabilities and equity.

     The sources of operating, it affect the current assets and current liabilities. The sources of investing activities, it affect long-term assets. The sources of financing activities, it affect long-term liabilities and equity.

     Even though, the company has lots of cash, it is important to know how this company acquire the cash. So, if the company has $1,000,000 cash. It is possible that many ways to acquire these cash.

     For example, $100,000 collected cash, $200,000 cash from contribution, $300,000 cash from revenues, $400,000 cash from bonds. As like this, the accountant should know how the cash acquired. Then, the accountant is able to make a plan for future cash flows. 

A2 :  In investing activities, even though cash outflow, the company invests cash to buy property, then later they can make a profit out of selling off the property. Or in financing activities, by issuing of stock, the cash inflows to the company, and then, the company uses the cash to operation or investments. So, by understanding the sections of the statement of cash flows, we know and understand a whole process of the cash flows. This is very important to know the whole picture of it.

A3 : For the company uses the cash basis accounting, the direct method of reporting cash flows from operating activities is better than the indirect method. Because when the company uses the direct method, they take each line item of the income statement an convert it from accrual to cash basis.

   In addition, the direct method provides clearer information about the sources and uses of cash than does the indirect method(953).

   Also, the direct method requires cash receipts for reporting of interest, dividends, sales revenue, and all of operating activities.

A4  : I agree that investors only pursuit the positive cash flows. But, the cash flows are so important to get an analysis because the cash is current assets, so it affects Working capital, Current ratio, Cash ratio, Acid-test ratio. These ratios are main keys to analyze the financial situation. In addition, cash is very liquid assets. So, we should keep checking where does it comes and go.

A5 :  Of course, we should monitor every cash flows related operating activities, investing activities, financing activities, and non-cash investing and financing activities.

   Last semester, I took a bookkeeper course at other college but by taking this accounting principle class, I learned a lot. Also, I learned that wider knowledge related accounting field and more than only bookkeeping.

   In addition, accounting requires so many financial reports, analysis, and ratios, so, there are also many job positions too. By learning this course, everyone and I can think about what position is good for me or which part of accounting that I am interested. Especially, this chapter 16 and 17 require our knowledge about the big picture of accounting.

 Thank you for everyone sharing ideas! 

Unit7 Q2 : Financial statement analysis: Just what do we do with this information? What is the difference between horizontal and vertical analysis? Give an example of how you would use this information with details to support your answer.

A1 :  Horizontal Analysis compare one year to the next year(1013) and we can use this method on the income statement and the balance sheet. If one company’s net sale is $800,000 in 2014, net sale in 2013 was $750,000. So, this company’s net sale increased 6.7%. ($800,000-$750,000)/750,000x100=6.7% By comparing net sale yearly, the administration of company can decide a sales department’s bonus based on this percentage and they report this good result to investors.

     Vertical Analysis of a financial statement that reveals the relationship of each statement item to its base amount(1017). For example, when the company computes the percentage of notes payable of total liabilities, we can use vertical analysis. Notes payable is $42,000, total liabilities is $431,000 (1018). Notes payable is 5.3% of total liabilities and then, we can manage these notes payable and can make a decision for the next year or try to pay back.

A2 :  I think that is why there is a trend analysis. The trend analysis is a form of horizontal analysis and comparing percentages by selecting a base period.

   When the company especially compare net sales :

·         2012, $80,000, 100% - Base period

·         2013, $64,000, 80%

·         2014, $89,000, 111%

·         2015, $90,000, 112%

   By comparing yearly percentages, the company can see the percentage change from year to the following years.

* Trend percentage = (Any period amount/Base period amount) x 100

A3 : One of the vertical analysis is commons-size statement. It only reports percentages and removes dollar value on the income statement. So, it is good method to compare companies on a relative, not absolute.

       For example :

·         Company A, Gross profit :56%, $80,000

·         Company B, Gross profit :69%, $40,000

     In this case, even though the A company has a more gross profit dollar value, but the B company made 13% more gross profit out of revenue.

A4 : I also think that these analyses are used for comparing with other companies at the same industry and internal users are using it to make company's next year goal. In addition, if the company provides these reports to external users, the external users are able to use it to find a place to invest or merge. Also, the newspaper or media, for example, CNN money, Fortune, or TIMES can use these information to make an interesting articles to share an idea.

by. Jieun Kim.