Essay about acct 303

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I. Course intro
a. Corporationsanalysts give info to financiers (creditors, investors)
b. Financiers give corp money
c. Auditor check mgt
d. Mgt pays auditors
e. Glitches:
i. Aggregation- which is consolidated groups ii. Mangerial discretion- choices and estimates iii. Incentive misalignment- agency theory iv. Unrecorded assets= brand names, human capital, growth
1. Market value and accounting value differ
2. MV= share price x outstanding shares
3. BV= Equity= A-L
a. Take assets plus capitalization and subtract liabilities
b. MV:BV, market value is higher
v. Political pressure vi. Myopic behavior
II. Contingencies
a. Possible Legal obligation
b. Gain contingencies- don’t record, only disclose if estimable and probable
c. Loss contingencies- record if estimable and probable
i. Remote- do nothing ii. Reasonably possible- disclose
d. Types:
i. Litigation ii. ARO iii. Guarantees and warranties
1. Dr Warranty expense
a. Cr warranty liab- companies overshoot this if they have a bad year so next year the expense will be reduced,
2. Earnings mgt- keep expenses high in bad years and revenues low, defer revenues if bad year, accelerate revenues if slightly bad year to meet forecasted earnings
a. Risky accruals like A/R, warranties, discretionary items flag fraud
III. Investments:
a. 1. Minority Passive: less than 20%
i. trading- means report unrealized gains in income ii. AFS- report unrealized gains in equity account- AOCI
1. Move unrealized gain from equity account to income only when sold iii. Journal entries:
1. Record purchase, dr investment, cr cash
2. record any dividend revenues- dr cash, cr dividend revenue
3. record unrealized gain or loss at the end of period if market value changes
4. sell the investment and record a realized gain
b. Minority Active- equity method of accounting- 20-50
i. Retained earnings approach
1. Journal entries:
a. Record investment
b. Record % of Net income as dr. investment, cr income revenue
c. Record dividends as dr cash, cr investment
d. Unrealized gains/losses are ignored
e. Only revenue is from net income not dividends
c. Majority investment- acquisition/ consolidation method
i. Decrease equity accounts of new company
1. Dr capital stock
2. Dr to retained earnings
a. CR to investment

ii. Decrease the liabilities and assets by fv over bv- this is a credit to the investment
1. DR PPE
a. CR NP (if it increased from book value to fair value)
b. CR investment iii. You will zero out the entire investment account iv. Whatever is left over= goodwill, after crediting investments is the goodwill
1. Dr goodwill
a. Cr investment
2. If Notes payable decreased then:
a. Dr PPE
b. Dr NP
i. Cr investment
IV. Revenue Recognition:
a. Revenue is material to financial statements compared to any other area
b. RR principle: when it is realized or realizable (readily converted into cash) and when is it earned
i. At point of sale(delivery)- dr A/R, cr sales revenue, ISSUES:
1. Sales with discount – dr sales discount because contra revenue account
2. Sales with a right of return- dr sales returns and allowances- contra revenue, recognize revenue after the expiration date
3. Bill and holding sales- buyer is not ready to take delivery, but does take title and accept billing
4. Principal agent relationship- amounts collected on behalf of the principal are not revenue of the agent , revenue for the agent is the commission it receives which is a % of the revenue, aka the net approach
a. Consignee= agent, consignor= principal
5. Trade loading and channel stuffing- trade loading means inducing the customers to buy more product than they can resell, channel stuffing means to make deep discounts so distributors overybuy and increase revenue
6. MDAs- multiple deliverable arrangements: multiple products or services in one arrangement ii. Before Delivery- long term construction contract accounting
1. Percentage of completion- as you spend money
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