Assets

Posted on June 3, 2013 by gauravg

There are many different types of financials a person can look at to analyze their business. The most important of all financials is the balance sheet.  The balance sheet provides insight of the businesses  net worth.  One of the most important parts of the balance sheet is called the ”assets”.  There are various kinds of assets an entity can own and use in their daily operations.  Assets are subdivided into different categories to distinguish them from each other.  Current assets, long-term investments, fixed assets, intangible assets, and tangible assets are the categories used in balance sheet to categorize all assets.

Current Assets

Current asset is an asset which can either be converted to cash or used to pay current liabilities within 12 months.   Typical current assets include cash, cash equivalents, short-term investments, account receivable, stock inventory and the portion of prepaid liabilities which will be paid within a year.

  • Cash and cash equivalents – are the most liquid assets found within the asset portion of a company’s balance Sheet.  This  includes currency, bank accounts, and negotiable instruments (money orders, travelers check, and bank drafts).
  • Short Term Investment – this account contains any investments that a company has made that will expire within one year.
  • Receivables – a record of  outstanding balances from the customers for the services rendered.
  • Inventory – is considered an important asset for a business. The value of inventory reported on balance sheet is usually the historical cost or fair market value, whichever is lower. Different types of methods used to calculate the cost of inventory are FIFO (first in first out), LIFO (last in first out) or average of all products purchased within a time period to derive the cost.
  • Prepaid expenses – expenses which are paid in advance and amortize over the period. Some of the examples are insurance, office supplies, rent, and utilities.

Long-term Investments

Investments made by the entity for a long term with no intentions to dispose in the near future. This group usually consists of three types of investments:

  • Securities such as bonds, common stock, long term notes or treasury stock
  • Fixed assets not used in daily operations such as land or buildings
  • Funds such as sinking funds, hedge funds or pension funds

Fixed Assets

Fixed assets are often referred to as property, plant and equipment (PPE), used for daily operations and held for long term to earn profit in the company.  Some of the assets that includes in fixed assets are land, machinery, equipment, tools, furniture, etc.  Fixed assets are recorded on their actual cost or fair market value whichever is lower and depreciate over the life of the asset (with exception of land).  Depreciation methods used in accounting are straight line, double declining or sum-of-years digits method. Entity discloses their depreciation method in notes to financial statements and accumulated depreciation appears on the front of balance sheet as a negative number reducing the value of fixed assets to the estimated value for the given period.

Intangible Assets

Assets that lack of physical substance and are hard to evaluate.  Some of the intangible assets are copyrights, goodwill, patents, trademarks, trade names, etc.  According to the US GAAP, with the exception of goodwill these assets are amortized to expense over the period.

Tangible Assets

Assets that have physical substance and can easily evaluate.  Currencies, buildings, inventories, vehicles, and precious metals are considered to be tangible assets.

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Don’t Get Complacent With the Payroll Process

Posted on March 29, 2013 by susanw

While the majority of our clients must keep their financial records in compliance with DCAA, maintaining accurate and reliable payroll accounting records is a prime responsibility for all business owners.

Time card records presented by the employee should be reviewed and approved by the assigned supervisor before the paychecks are created. Worked hours need to be recorded correctly among appropriate labor categories. Use of fringe benefits such as holiday, PTO, and Inclement Weather/Site Closure should follow the company’s written employment policy.

It is the responsibility of the employer to review all paycheck information presented on any external payroll company report or processed through a QuickBooks based program. Taxes, 401K contributions, medical insurance, flexible spending allocations, and any other voluntary deductions need to be monitored to be sure they agree to the employee’s instructions. If the payroll company does not handle the remittance of 401K, FSA, or H.S.A. deductions to the investment company, the employer should process the remittances timely, accurately funding the amounts deducted.

Payroll tax remittances need to be made timely according to the rules of the federal, state, or county jurisdictions. Confirmation of remittance reports should be readily available from your payroll company. If you suspect taxes are not being timely remitted, you can contact the tax agency directly and receive a report of funds received.
For Federal payroll taxes go to https://www.eftps.gov/eftps/ to register to access your payment history. For state tax remittance inquiries, go to http://www.irs.gov/uac/Contact-a-Local-Taxpayer-Advocate to view contact information for your state’s taxpayer advocacy office.

Retirement plan employee deferrals and employer match remittances need to be made timely. It is the employer’s responsibility to ensure that the deduction and match transactions are being properly processed by the payroll department or external payroll company. Out of cycle payroll calculations, such as a separate payroll run for bonuses, sales commissions, overtime, or adjustments to time worked, all need to have the appropriate 401K deferral and employer match applied to those earnings. In certain situations, missed 401K deductions from employee paychecks may become an expense to the employer.

Recording the time card and payroll information in your accounting software needs to be done timely. QuickBooks, in particular, can provide useful reports that are easy to create and easy to understand. The payroll summary report when set to display by ‘total’ will help you confirm that the information recorded agrees to the payroll company reports. The same report displayed by employee, will allow easy viewing of variances that may relate to a simple miscoding, to an inappropriate selection of labor categories, or even abuse of the fringe benefit policies. Regularly reviewing your payroll information in your accounting software will save you time and money by presenting complete and accurate payroll information when we are asked to prepare your company’s financial statement.

You can refer back to the December 2010 blog on this website for specific details on recording payroll data in the QuickBooks program. If you need assistance, or just a little enlightenment, don’t hesitate to contact our office.

Submitted by: Susan W.

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Understanding the Cash Flow Statement

Posted on February 8, 2013 by janeller

The purpose of the cash flow statement is to show owners/investors the amount of money that is flowing in and out of the business over a period of time, typically a year or one quarter.  It also ties together both the income statement and Balance sheet by factoring in various assumptions with money earned by the business and showing the change in assets and liabilities from previous periods.

The cash flow statement is made up of three sections, net cash from operating activities, net cash from investing activities and net cash from financing activities.   Beginning and ending cash are reconciled based on the net effect of all three activities.

Net cash from Operating Activities

Net cash from operating activities takes the items on the income statement and converts them from accrual basis of accounting to cash basis of accounting.  Because the cash generated from operating activities is compared to the company’s net income, if the cash from operating activities is greater than net income this shows investors that the net income of the company is “high quality”.  If cash generated from operating activities is consistently lower than net income it raises the question as to why net income is not turning into cash.  Here is a general format of the operating section of the cash flow statement:

Net Income

      + Depreciation expense

      + Losses

      – Gains

      – Increases in current assets

      + Decreases in current assets

      + Increases in current liabilities

      – Decreases in current liabilities

        ———————————–

      Net Cash from Operating Activities    

Net cash from Investing Activities

Net cash from investing activities shows the purchase and sale of various long-term investments as well as property, plant and equipment.  This section may also include the lending of money and receiving loan payments.  In looking at this section of the cash flow statement one can evaluate whether or not a surplus in operations is being used to grow a company.  On the flip side, a lack in investing activities demonstrates slow or stagnant growth of the company.  Here is a general format of the investing section of the cash flow statement:

+ Proceeds from sale of assets

- Purchases of property and equipment

————————————————————-

Net Cash from Investing Activities

Net cash from Financing Activities

Net cash from financing activities include the borrowing and repaying money, issuing stock (equity) and paying dividends.  This section allows ownwers/investors to determine the amount of cash generated or used as a result of the fore mentioned transactions.  As a company is growing, this section of the cash flow statement will tell owners/ investors the strategies management has used to grow the company.   Here is a general format of the financing section of the cash flow statement:

+ Net Borrowing under line of credit agreement

+ Proceeds from new borrowings

- Repayment of loans

- Principal payments under capital lease obligations

- Dividends/Distributions/Withdrawals Paid

+ Proceeds from issuance of stock

+ Partner/Owner capital contributions

———————————————————————

Net Cash from Financing Activities

Together, all three sections of the cash flow statement show investors the net changes in cash over a period of time.  While the balance sheet and income statement are used for overall management, the cash flow statement gives a better insight into the financial position of the company.  If the cash flow statement is showing an overall positive cash flow, this makes tasks such as acquiring financing a lot easier.  Also, if there is a positive cash flow, owners are able to consider long-term financing to aid in growing the company.

Works Cited:

The Trade Creditor’s Guide to the Statement of Cash Flows, Retrieved January 31, 2013 from http://www.crfonline.org/orc/cro/cro-10.html

Statement of Cash Flows, Retrieved January 31, 2013 from http://ccba.jsu.edu/accounting/STATEMENTCASHFLOWS.HTML

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Indirect Costs

Posted on December 5, 2012 by jamies

In order to understand the calculation of an indirect cost, it is best to first discuss the difference between a direct cost and an indirect cost. A direct cost is any cost that is directly identifiable. For example, materials for a contract are directly identifiable to that job. The material expense would not have been incurred had the company not contracted with the customer for that particular job. An indirect cost is just the opposite. It is a cost that cannot be directly identifiable. An example would be general and administrative costs. Regardless if the company contracted for a job with a particular customer, the company would have still incurred general and administrative costs. However, a contracted job will have increased the amount of general and administrative costs incurred. This is why indirect costs are allocated.

If indirect costs are not identifiable to a particular job or company division how can they be allocated? Direct costs are used to determine the allocation rate for indirect costs to each job or company division. Then the indirect costs are allocated by percentage to each job or company division.

Before calculating the indirect cost rates, the government and the contractor must agree on the allocation base and the base period. The allocation base is the direct cost both parties agree will result in a fair allocation of indirect costs. Direct cost bases generally are direct labor costs, manufacturing costs, or any other suitable costs (Federal Acquisition Regulation, 2005, p. 51). Once the base has been agreed upon, it cannot be changed (Federal Acquisition Regulation, 2005, p. 771). The base period is the cost accounting period during which the work will be performed (Federal Acquisition Regulation, 2005, p. 771).

EXAMPLE
The company has three divisions. Each division has incurred direct labor costs of $3,000, $2,000, and $5,000. The company has a total of $5,000 in indirect costs.

Step 1: Calculate the total cost of direct labor costs for each division and the company

Division One 3,000
Division Two 2,000
Division Three 5,000
Total Company Direct Labor Costs 10,000

Step 2: Calculate the percentage of direct labor costs for each division

For each division divide the direct costs by the total direct costs.
Division One 3,000/10,000 = 30%
Division Two 2,000/10,000 = 20%
Division Three 5,000/10,000 = 50%

Step 3: Assuming the company has incurred $5,000 worth of indirect costs, allocate the total company indirect costs to each division based on the percentages from above.

Then for each division multiply the total company indirect costs by the percentage to determine each divisions allocated indirect costs.

Division One 3,000/10,000 = 30% * 5,000 = 1,500
Division Two 2,000/10,000 = 20% * 5,000 = 1,000
Division Three 5,000/10,000 = 50% * 5’000 = 2,500

The example is greatly simplified and has not taken into consideration the requirement by FAR (Federal Acquisition Regulation) to group indirect costs (Federal Acquisition Regulation, 2005, p. 771). FAR requires the indirect costs to be grouped by like costs, such as general and administrative costs, fringe benefits, and overhead costs. The calculation demonstrated would need to be done for each category of indirect costs. Remember the government and contractor must agree on how to allocate indirect costs.

Important Note:
When allocating indirect costs, ensure all unallowable costs as deemed by FAR are NOT included in indirect costs.

Works Cited:
Federal Acquisition Regulation. (2005, March). Retrieved from https://www.acquisition.gov/far/current/pdf/FAR.pdf
page numbers are based on this URL address

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Understanding the Income Statement

Posted on October 2, 2012 by ashleyw

The income statement is one of the three major financial statements.  The other statements are the balance sheet and the statement of cash flow.  The purpose of the income statement is to report the company’s earnings over a certain period of time. The statement displays the company’s revenue and expense for the reporting period.   The bottom line of the statement shows the company’s net income or loss, which shows how much the company earned or lost over the period and how management controls the expenses of the company to generate revenue.

When understanding the income statement you must think of it as one equation.

Total Revenues minus Total Expenses = Net Income.

Revenue - The revenue section displays how much money the company received from the sale of a product or service. This section is also called the gross revenue or sales because expenses have not been deducted. 

Expense - The expense section shows how the company spends their money.  The amount of money the company spent to sell the product or service. Such expenses are salaries for employees, materials needed to perform the service or produce the product, rent, utilities, and travel. The subcategories of the expenses are:

              Direct Cost: A portion of the expenses that deals with direct costs, which are the costs that can be directly    traced to the product such as direct labor and travel.

              Indirect cost: The other portion is the indirect costs which are cost that cannot be traced directly to the product. Some examples include advertising, accounting services, and general supplies.

              Other Income (Expense): This section includes the interest expense which is all the cost associated with the company’s borrowing. 

               Provision for Income Tax:  The federal and state taxes are deducted in this section.

Once all the expenses are deducted from the revenue we arrive at the bottom line- Net income or loss. This amount shows the company’s probability during the period and answers the question “Did the company make a profit or did it lose money?”

 

Contributed by:

Ashley Wiggins

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Enhancing Your Knowledge of Quickbooks

Posted on July 31, 2012 by janeller

Want to become more proficient in QuickBooks?  Has your personnel changed and new staff members need to be brought up to speed with the features of QuickBooks?  Does management feel they would benefit from an understanding of the myriad of available QickBooks reports?  There are several resources available to our clients.

Quickbooksusers.com offers both webinars-on-demand and live online training courses.  Webinars-on-demand has the advantage of allowing a firm to plan a session  at a time convenient to the staff members who will participate.  The live web-based sessions allow participants the opportunity to interact with the presenter and receive immediate feedback to specific questions.

Non-Credit programs at the an area community college often offers QuickBooks training sessions.  Howard Community and Anne Arundel Community Colleges both offer the classroom experience including hands-on practice using individual terminals.  Checkout the Continuing Education Programs at your nearest college campus.

Here at Cheryl Jefferson & Associates in Columbia we routinely provide new clients a three hour QuickBooks overview including specific accounting requirements for our Government Contractors. We would be happy to present this curriculum to current clients who have staff members they feel would benefit from the individualized instruction. Our presentation can be limited to areas of particular challenge to your firm, or the full QuickBooks overview can be scheduled at your convenience.

Contributed by:

Susan Webber

 

 

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The Different Types of Financial Statement Reports

Posted on June 1, 2012 by janeller

There are a few different reports that a CPA can issue along with financial statements: Audit, Review, and Compilation. These types of reports will depend on what the client needs. By law, all publicly held companies must have audited financial statements. Privately held companies can use reviewed or compiled financial statements for many purposes. Sometimes, a bank or other credit lenders will require submission of audited or reviewed financial statements for any company that they are considering doing business with. The same goes for certain Federal Government procurement vehicles or specific contract RFPs. The differences between the three levels have to do with the amount of scrutiny that the client’s financials undergo in the preparation of the financial statements and the accompanying report. There are also significant differences in time, effort, and cost to consider. Here is an overview of the different types:

Compilation:

In a compilation, the CPA is providing the most basic level of assurance to the financial statements.  The accountant reviews the trial balance, and makes adjusting journal entries prior to the financial statement preparation.  The financial statements and accompanying report are issued in accordance with AICPA, but contains no assurance from the CPA that they were prepared to conform to GAAP.  This is the most common type of report issued for privately-held companies, who often need so such assurance.  Footnotes to the financial statements are not required with a compilation, so long as there is a paragraph in the compilation report that states that management has elected to omit the disclosures.

Review:

While not at the level of an audit, a review is much more involved than a compilation.  The CPA will perform inquiry and analytical procedures, and must remain independent during the engagement.  The inquiry and analytical procedures aren’t as involved as those performed during an audit.  The accountant states in their reports that they did not become aware of any material modifications that should be made in order for the financial statements to conform to GAAP.  This is known as expressing limited assurance.  Reviewed financial statements are prepared for third parties such as banks, outside investors, or creditors that require more assurance than a compilation provides, but not audited statements.

Audit:

Audited financial statements provide the highest level of assurance service a CPA can provide.  The CPA performs all of the procedures incorporated in compilation and review engagements, plus also perform additional verification and substantiation procedures.  These can include physical inspections of client sites to verify that certain fixed assets actually exist and are in-use, contacting banks to verify account balances, or customers to verify the consummation of a sales transaction.  An audit also includes an in-depth review of the client’s internal controls and control risk.

Keep in mind that, no matter the level of assurance given by a CPA, the financial statements are the responsibility of management.  Having a quarterly compilation or annual audit done does not replace the importance of proper bookkeeping or client internal controls.  There is no such thing as “absolute assurance”; not every error will be detected, even when an audit is performed. 

 Contributed By: Jeremy Shry

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Using QuickBooks Reports

Posted on December 9, 2011 by susanw

In addition to creating company financial statements, such as the Income Statement and Balance Sheet, QuickBooks provides a library of other useful documents and features to help users review their work and gain further understanding of their data.

Trial Balance

Reports/Accountant and Taxes/Trial Balance

The Trial Balance is a snap shot of the account balances in all active accounts. You can use this as a starting point for quick access to transactions. Set the date range to the quarter in which you are working, and double click on the balance to see all transactions for that date range. Select Modify/Filter to limit the detail view to one transaction type such as checks, bills, or invoices.

Accounts Receivable

Reports/Customers and Receivables/Transaction List by Customer

Some firms send their customers invoices created outside of QuickBooks. Set the date range for a three month period, and use this report to check that all customer invoices have been entered in QuickBooks.

Accounts Payable

Reports/Vendors and Payables/Transaction List by Vendor

Set the date range for a three month period and use this report to check that all recurring vendor invoices are up to date in QuickBooks.

Payroll Summary

Reports/Employees and Payroll/Payroll Summary

Set the date range for the current pay period and change the display option from employees to total. Use this report at the completion of each payroll cycle to confirm that gross wages, taxes and deductions on the QuickBooks paychecks agree to the payroll vendor summary reports.

Customer Statements

Not a report but an option found in the customer center, customer statements can be viewed that display all invoices, payments, credit memos, and refund checks for a particular customer or a specific job. Previewing a statement allows you to easily see all customer activity in date order and the running balance after each transaction. This process is particularly useful to monitor customer balances when partial payments have been received or credit memos have been issued.

Contributed By: Susan Webber

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Balance Sheet

Posted on February 17, 2011 by Cheryl Cooke, CPA

The balance sheet is the core of all the financial statements. Therefore, the basic fundamental in accounting and one of the very first equations taught to an accounting student, is derived from the balance sheet. This would be:

Assets = Liabilities + Equity

The balance sheet is based off of this principal and it is considered as the “snapshot of a company’s financials at a specific moment in time”.  The statement is called a balance sheet because the two sides balance out. It is simply because the company has to pay for its assets by either borrowing money (Liabilities) or borrowing it from the shareholder/s (Equity).

Assets - can be classified as either current assets, fixed assets or other assets. A current asset would be an asset that would be easily converted into cash, a fixed asset would be an asset that decreases in value over time and an other asset would be an asset that does not belong to both the former groups. A few examples for this are brand name, security deposits and goodwill.

Liabilities - are an obligation to the company and it is credit owed by the company to other institutions or persons. It could be divided into two categories which are short term liabilities and long term liabilities. A short term liability is an obligation of less than 12 months and any obligation over 12 months is a long term liability.

Equity - is referred to as owner’s equity in a sole proprietorship, partners’ equity in a partnership and shareholder’s equity in a corporation. The equity is the residual value in the assets when the debt is paid off to the creditors and when the obligations have been met.

Third parties can grasp an understanding of the financial situation of a company by simply looking at the balance sheet and this becomes the hub to make many important financial decisions. For example, corporations have to present their balance sheet to the board of directors in order to keep them informed about the assets, liabilities and the retained earnings of the company. Investors place a very high importance on the balance sheet because this one statement informs them how much money a company has, how much the company owes and how much money is left for the stockholders. This information can be used to decide whether it would be a benefit or a risk to invest in the company. A bank would decide to lend money or not based on ratios such as the debt to equity ratio and the current ratio, which compares current assets to current liabilities. By analysis they can find out whether the company has the ability to pay off the debt in the future. Other parties that would be interested in the balance sheet are customers, suppliers, current investors, government agencies and labor unions.

When taking into consideration all the above facts it is quite evident that any organization should pay a great deal of attention to the balance sheet. It is important that the organization communicates effectively with its accountant to ensure that all transactions have been recorded properly to reflect the true financial state of the company.

Contributed by Shalini B.

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Demystifying the Payroll Process

Posted on December 2, 2010 by susanw

 
Here at CJA we specialize in clients who work on federal government contracts. Below is our discussion of procedures necessary to keep the payroll records reconciled and in compliance with DCAA requirements, and to avoid delays when financial statements are being prepared. Errors in paychecks or a mismatch between the time and paycheck data needs to be fixed in the client’s accounting system before the file is presented to us for periodic review. The process below relates to clients using QuickBooks software, but could apply to other accounting software.

 
ENTERING TIME
Your time card system should be set up to display all possible labor categories that are used to bill and record time.  Managers should be able to guide the employee’s understanding of their selections and when to use certain labor categories. Distinctions between direct labor, overhead labor, bid and proposal labor, and general and administrative time should be made available, as well. Use of holiday, sick leave, PTO, training, bereavement, jury duty and other fringe labor categories should be outlined in the company’s employee manual. All time card categories should be captured at the same level of detail in the QuickBooks accounting system time entry module.

 
ENTERING PAYCHECKS
From the QuickBooks time entry data you will create the individual QuickBooks employee paychecks.  This is where the employee’s wages are split into the various labor expense accounts.  Time pulled from the time module into the paycheck must stay in agreement. Voluntary benefit deductions, taxes, and company paid 401K and other fringe benefits may also be recorded in the paycheck.  Since net pay actually received and net pay calculated by QuickBooks must match exactly, any variance between the two should be recorded in a comp time or payroll variance account.  For example, if the time card displays 85 hours of time worked and the payroll service company was instructed to pay for 80 hours, the five hours underpaid becomes a company liability to be paid later. If a mistake is noticed in the payroll company’s report, the “incorrect” paycheck must still be recorded in QuickBooks for the same net pay as was issued.  A rerun of that payroll cycle requires careful re-posting of the affected paycheck in order to keep the QuickBooks paycheck in agreement with the payroll company records. You may contact our office for assistance if this occurs.

 
ENTER PAYROLL CASH REQUIREMENTS
Creation of paychecks in QuickBooks will post net pay to the payroll clearing account and the taxes and voluntary deductions into their respective liability accounts. Clients should use care when recording the movement of money electronically passed to the payroll service company.  Payroll clearing, tax liabilities, and company tax expenses should be tagged according to each company’s payroll items set up. Each payroll cycle is complete when there is a zero balance in all the tax liability and payroll clearing accounts. Careful recording of the remittance of retirement and other fringe benefits to the third-party companies should also yield a zero balance in those liability accounts.

 
LABOR DISTRIBUTION REPORT
As part of our procedures for the compilation of financial statements, we include a review of the Time Sheet History and Labor Distribution reports. We look for the accurate matching of time worked by labor category and by job against the paychecks issued for the same period. These custom reports are found in the Memorized Reports section of the client’s QuickBooks file if we set up your accounting system to be compliant with DCAA requirements. Clients may access these reports at any time and test for accurate matching.

 
HANDLING CORRECTIONS
If the company makes subsequent changes to the time worked, jobs charged or labor categories selected, the change must be recorded in the original employee timesheet, the QuickBooks time entry and the QuickBooks paycheck.  Changing one but not the others causes the Time and Labor Distribution reports to become out of sync and puts the company at risk for non-compliance with DCAA requirements. Taking the time during each payroll cycle to follow all the above steps makes for a smoother payroll reconciliation and compilation process and removes one possible area of delay at a time when our clients are eager for their completed financial statements.

 
Contributed by Susan W.

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