Let’s say a firm records accrued wages of $1,000 and pays them off next year. What would the balance sheet, cash flow and income statement treatments be for this for both years? What would be the effect on Net Income? Similarly, lets say a company records unearned revenue of $1000, half of which is “earned” next year. What would be the B/S, CF and I/S statement entries made for both this year and next year? On a somewhat different note, I’ve also noticed that questions on flotation costs in the official CFA material require the “incorrect” method of adding flotation costs in order to get the right answer. If your memory is fuzzy as to what I’m talking about, the correct method is to add flotation costs to CF0 when doing NPV, etc. The incorrect method is to add it directly to the cost of component…for instance, if preferred stock has a 5% flotation cost, a dividend of 5, and a price of 100, then the cost of capital is 5/((100 - (100 x .05)). This, again, is labelled the “incorrect” way of doing it in the book, but is used in some questions. What gives?
Can someone answer the first question at least…I would imagine its a piece of cake for the accounting heads on here…
My understanding on the accrual accounting is that it will be reflected as a current liability on the balance sheet, a realized expense on the income statement, but will not be reflected on the cash flows.
I would be answer it this way… Answer to question 1… 20X6 ------------------------------------------------------------------------------ B/S-> Account payable increses by 1000$ I/S-> 1000$ wage expense CF-> No change since no cash changes hand Net Income declines by 1000$ (will be less compared to year 20X7) 20X7 -------------------- CF -->1000$ wages to emplyees (cash flow from Operating acticvities) B/S -> Account payable decreses by 1000$ (liability) Income will be grreater compared to 20X6 Answer to Question 2 20X6 --------- B/S -> 500$ – Unearned revenues (liability) I/S --> Revenue earned 1000$ CF -> Cash recieved 500$(operating activities) 20X7 ----------------------- B/S-> 0$ Unearned revenues (liability) I/S -> No change CF-> Cash recieved 500$(operating activities Not clear about the 3 question onn floatation cost… Please correct me if I am wrong (I m not from accounting background)
Agree on Q1 My Q2: (Assuming half earned in '06, half in '07. You only specified when one half was earned) 20X6 -------- B/S -> 1,000 increase to cash (Dr., asset) B/S -> 500 increase to unearned revenues (Cr., liab) I/S -> 500 increase to revenue (Cr., rev) C/F -> 1,000 increase to cash from operations (you received 1,000 in cash) 20X7 --------- B/S -> 500 decrease to unearned revenues (Dr., liab) I/S -> 500 increase to revenues (Cr., rev) C/F -> no effect (no cash changed hands)
varundarji Wrote: ------------------------------------------------------- > I would be answer it this way… > > Answer to question 1… > > 20X6 > > -------------------------------------------------- > ---------------------------- > B/S-> Account payable increases by 1000$ > I/S-> 1000$ wage expense > CF-> No change since no cash changes hand > Net Income declines by 1000$ (will be less > compared to year 20X7) > > 20X7 > -------------------- > CF -->1000$ wages to emplyees (cash flow from > Operating acticvities) > B/S -> Account payable decreses by 1000$ > (liability) > Income will be grreater compared to 20X6 For 2006, why is there a $1000 wage expense recorded on the I/S? Is it because under accrual rules it is being expensed when it is “earned” by the employees? I’m getting confused because I was figuring it would be expensed when paid out, in 2007. Also, why is it Accounts Payable that increases/decreases- shouldn’t it be Wages Payable? CanadianAccountant Wrote: ------------------------------------------------------- > Agree on Q1 > > My Q2: > > (Assuming half earned in '06, half in '07. You > only specified when one half was earned) > > 20X6 > -------- > > B/S -> 1,000 increase to cash (Dr., asset) > B/S -> 500 increase to unearned revenues (Cr., > liab) > I/S -> 500 increase to revenue (Cr., rev) > C/F -> 1,000 increase to cash from operations (you > received 1,000 in cash) > > 20X7 > --------- > > B/S -> 500 decrease to unearned revenues (Dr., > liab) > I/S -> 500 increase to revenues (Cr., rev) > C/F -> no effect (no cash changed hands) For 2006, there is a +1000 to assets, +500 to liabilities, and +500 to revenues. The A = L + E question doesn’t balance right now as you have +1000 = 500 + 0. But then if you say that the revenue is flowing through to OE, then wouldn’t what flows to OE be less then $500 due to taxes…in which case you have +1000 = 500 + [500(1-t)] So how does the equation balance?
brafique Wrote: ------------------------------------------------------- > For 2006, why is there a $1000 wage expense > recorded on the I/S? Is it because under accrual > rules it is being expensed when it is “earned” by > the employees? I’m getting confused because I was > figuring it would be expensed when paid out, in > 2007. Yes, it is expensed in 2006 because that is when the tasks are performed to earn the income. > Also, why is it Accounts Payable that > increases/decreases- shouldn’t it be Wages > Payable? > > Could be either really, wages payable would be more accurate. brafique Wrote: ------------------------------------------------------- > > For 2006, there is a +1000 to assets, +500 to > liabilities, and +500 to revenues. The A = L + E > question doesn’t balance right now as you have > +1000 = 500 + 0. But then if you say that the > revenue is flowing through to OE, then wouldn’t > what flows to OE be less then $500 due to > taxes…in which case you have +1000 = 500 + > [500(1-t)] So how does the equation balance? For the sake of A = L + E when looking at journal entries just assume revenue and expenses are E. Yes the revenue will be taxed, but any lowering of revenue (and therefore equity when it’s closed out) will just increase liabilities as it would be taxes payable. Technically you could say it is 1,000 = [500 + 500t] + [500(1-t)], but there is no point in bringing taxes into the situation if it is not mentioned in the question.
For Q1 I would say that the Accrued wages are expensed in the period that the revenue they are offsetting is recognized. If they are paid in the next period, then there would be a Cash expense but not an IS expense. I would defer to anyone with a stronger accounting background though.
Guys, 20X6 -------- B/S -> 1,000 increase to cash (Dr., asset) B/S -> 500 increase to unearned revenues (Cr., liab) I/S -> 1000increase to revenue (Cr., rev) …(not 500 cos accounting accural) C/F -> 1,000 increase to cash from operations (you received 1,000 in cash) 20X7 --------- B/S -> 500 decrease to unearned revenues (Dr., liab) I/S -> 0 increase to revenues (Cr., rev) (not 500 cos accounting accural) C/F -> no effect (no cash changed hands) is this fine…???
any updates?
No, that is wrong. My answer is right. Why do you have 1,000 revenue being recognized in '06 and 0 in '07? The journal entries would be: '06: Dr. Cash…1,000 Cr. Revenue…500 Cr. Unearned revenue…500 '07 Dr. Unearned revenue…500 Cr. Revenue…500