Accounting 2

What a student will be able to do

• Work out the full cost to record a long-term asset, including delivery, installation, and testing to get it ready for use.
• Decide whether a later cost is added to the asset or treated as an expense straight away, and remember that land is never depreciated.
• Spread the cost of an asset over its useful life three ways: straight-line (the same amount each year), double-declining-balance (more in the early years), and units-of-activity (an amount for each unit the asset produces or each kilometre it travels).
• Work out book value, charge only part of a year when an asset is bought or sold mid-year, and redo the figures from today onward when an estimate changes.
• Record the sale or scrapping of an asset and work out the gain or loss on it.
• Classify intangible assets such as patents, copyrights, trademarks, and goodwill, and spread the cost of the ones with a limited life.
• Explain why goodwill is never written off a little each year, but is instead tested each year to see if its value has fallen.
• Work out fixed asset turnover and say what a higher figure tells you about how well the assets are being used.

The games that teach it — 24 in this chapter

What a student will be able to do

• Spot a current liability (something the company must pay within one year) and tell it apart from a long-term debt.
• Work out the interest on a short-term loan, and record the loan from the day it starts to the day it is paid back.
• Record sales tax correctly - it is money collected for the government, never a cost of the business.
• Record money received before the work is done, such as a customer deposit or a gift card, and show it as earned later.
• Decide when a possible future cost, such as a lawsuit, must be recorded, only mentioned in a note, or ignored.
• Record the cost of a warranty (a promise to repair a product) at the time of the sale, not when the item breaks.
• Work out an employee's take-home pay from their total pay, and record the extra taxes the employer must pay on top.
• Calculate the current ratio (current assets divided by current liabilities) and say what it tells you about paying short-term bills.

The games that teach it — 25 in this chapter

What a student will be able to do

• Explain what a bond is (a loan a company sells to investors in small pieces) and name its main terms.
• Compare borrowing money with selling shares, and say why a company might choose one way over the other.
• Decide whether a bond sells at face value, below it (a discount) or above it (a premium) by comparing the two interest rates.
• Record the sale of a bond, then spread the discount or premium evenly across the years until the bond is repaid.
• Split each payment on a long-term loan into two parts - interest, and repayment of the amount borrowed - and build the payment schedule.
• Work out interest expense using the effective-interest method, where the amount is recalculated every period.
• Record the end of a bond, both on its due date and when the company buys it back early at a gain or a loss.
• Calculate debt-to-assets and times-interest-earned, two simple checks on how safely a company carries its debt.

The games that teach it — 22 in this chapter

What a student will be able to do

• Explain how a corporation works, including limited liability (owners are not personally responsible for the company's debts).
• Record the sale of shares to investors, both at par value (a small legal amount printed on the share) and above it.
• Tell common shares apart from preferred shares, and count shares that are authorized, issued and outstanding.
• Record a cash dividend at each step, from the day it is announced to the day the cash is paid out.
• Work out how much of a dividend goes to preferred owners first, including payments missed in earlier years.
• Explain the difference between a stock dividend and a stock split, and show what each one does to total equity.
• Record treasury stock - shares the company buys back from its own investors - and what happens when it sells them again.
• Build the owners' equity part of the balance sheet in the correct order, and calculate earnings per share and return on equity.

The games that teach it — 22 in this chapter

What a student will be able to do

• Sort each transaction into operating (running the business), investing (buying or selling long-term items) or financing (owners and lenders).
• Handle the tricky cases, such as interest paid counting as operating while dividends paid count as financing.
• Start from net income and adjust it, step by step, to find the cash the business actually made from operating.
• Apply the golden rules: a change in a current asset moves cash the opposite way, and a current liability the same way.
• Work out the real cash received when a long-term asset is sold, using its book value plus a gain or minus a loss.
• Build the full statement of cash flows and prove that it explains the move from opening cash to closing cash.
• Show deals that used no cash, such as buying land by signing a loan note, in a separate note below the statement.
• Calculate free cash flow (operating cash left after paying for equipment) and simple ratios that test cash against debt.

The games that teach it — 20 in this chapter

What a student will be able to do

• Compare a company with itself over several years using horizontal analysis (the percentage change from one year to the next).
• Turn a statement into percentages using vertical analysis, so that companies of very different sizes can be compared fairly.
• Calculate liquidity ratios, including the quick ratio, to judge whether short-term bills can be paid on time.
• Calculate activity ratios that show how quickly inventory sells and how quickly customers pay what they owe.
• Calculate profitability ratios, such as return on assets and return on equity, to see how hard the invested money is working.
• Calculate solvency ratios, such as debt-to-equity, to judge how heavily a company depends on borrowed money.
• Calculate investor ratios - price-earnings, payout, dividend yield and book value per share - and break return on equity into its three drivers.
• Explain why a single ratio means little on its own, and judge earnings quality when accounting choices change the numbers.

The games that teach it — 20 in this chapter

What a student will be able to do

• Name a factory's three inventories (materials, work in process and finished goods) and follow its costs all the way to cost of goods sold.
• Tell a product cost from a period cost, and split product costs into direct materials, direct labor and factory overhead.
• Compute a predetermined overhead rate, apply overhead to a job, build a job cost sheet, and say whether overhead was overapplied or underapplied.
• Prepare a schedule of cost of goods manufactured.
• Classify costs as fixed, variable or mixed, and say what happens to total cost and to cost per unit when the volume changes.
• Prepare an income statement with contribution margin, and find the break-even point and the sales needed for a target profit.
• Prepare a simple monthly cash budget.

The games that teach it — 10 in this chapter