Accounting Formulas

Basic equations
B/S: Assets = Liabilities + Owners’ equity
I/S: Revenue – Cost of Goods Sold – SG&A – Tax = Net Income
C/F: Cash flow during the year = cash flow from operation + cash flow from investing + cash flow from financing
Statement of Owners’ equity: Retained earningst = Retained earningst-1+ NIt - Dividendt
Accounts Receivable

A/REB = A/RBB + Credit Sales – Cash Received – Write-off + Recovery

ADAEB = ADABB + Bad Debt Expense – Write-off + Recovery

Two methods for determining Allowance for Bad Debts

Percentage of (Credit) Sales

− Fixes the Bad Debt Expense recorded for the year

Aging Method

− Fixes the Ending Balance of Allowance for Bad Debts

− Bad Debt Expense is as a “Plug-in”

Relevant entries

Credit sales: Dr. A/R Cr. Revenue

Record bad debt expense: Dr. Bad debt expense Cr. ADA

When bad debt happens: Dr. ADA Cr. A/R

Recovery of bad debt: Dr. A/R Cr. ADA

Inventory

INVEB = INVBB +Purchase/Production – COGS

LIFO Reserve = cumulative difference in FIFO – LIFO inventory **or**

LIFO Reserve = Ending InvFIFO – Ending InvLIFO

Change in LIFO Reserve = COGSLIFO – COGSFIFO

PP&E

PPEEB = PPEBB + Acquisitions – Disposals

Straight-line depreciation = (Purchase price – salvage value) / Useful life

AccDepEB = AccDepBB + Depreciation – AccDepDisposal

MV / Proceeds from sales = (BV-AccDep) + gain/loss

Cash flow statement

• Indirect method differs from direct method only in the CFO session.

• CFO (indirect method) = NI + depreciation – (increase in operating non-cash current assets) + (increase in operating current liabilities) – gain from sale of PPE
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Accounting For Income Taxes

• Permanent Differences: Differences between financial statement (“pretax”) GAAP income and taxable income that will never be recaptured/reversed, e.g. Government Fines, Tax-Exempt Revenue.

• Temporary Timing Differences: Differences between pretax GAAP income and taxable income that will be recaptured/reversed at some point in the future. Temporary differences create Deferred Tax Liabilities or Deferred Tax Assets

• Deferred Tax Liabilities (DTL)

Taxable Income <> Pretax GAAP Income

Taxes Payable > GAAP Tax Expense

Taxpayer pays higher taxes today. An asset must be recorded to account for the value of lower taxes to be paid at some point in the future.

Assume depreciation is the only source of deferred tax expense, then deferred tax expense = change in DTL = (tax depreciation – book depreciation) * tax rate
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Marketable securities: recording of gains and losses (or price increase/decrease):
Sales of securities Price change – not sold yet
Trading securities IS – Realized gains/losses IS – Unrealized gains/losses
Available-for-sales IS - Realized gains/losses SE – Unrealized gains/losses