1 The types of companies: 1. Understanding The Business Service Company: A company that provides intangible services, rather than tangible products Merchandising

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The types of companies:

1. Understanding The Business

Service Company: A company that provides intangible services, rather than tangible products

Merchandising Company: A company that buys ready-made inventory for resale to customers

Manufacturing Company: A company that uses labor, plant, equipment to convert raw material into new finished products

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The main procedures of Mf. Company:


Purchasing: the procedure in which raw material is purchased from suppliers

Producing: the procedure in which raw material is converted into finished product

Selling: the procedure in which finished product is sold to customers

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VAT: Value Added TaxIs a tax imposing on the value added of product


Let:Value added=ΔV; Price=P; Material consumed= CVAT rate = %ΔV=P-CVAT=ΔV× %VAT= （ P-C ） ×%

VAT=P×% - C ×%P ×% called sales item tax(selling tax)

C ×%called purchasing item Tax(purchasing tax)

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2.1 The cost of raw materials includes:2.1 The cost of raw materials includes:（ 1 ） the purchase price (excluding VAT )（ 2 ） shipping cost (transport cost)（ 3 ） other cost

2. Accounting for purchasing

2.2 The accounts may be used in purchase 2.2 The accounts may be used in purchase accountingaccounting

Cash

Account payable

Notes payable

Raw Material inv.

Material Purchase

Tax payable

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Tax PayableCrDr

M. PurchaseCrDr

2.3 Basic transactions in purchase accounting2.3 Basic transactions in purchase accountingCase 1

A company purchases

B material of 17000

Yuan. The amount of

VAT included in is

2890 Yuan. In

addition relevant

transport cost is 1000

Yuan. The material

has not been checked

into the stock, but all

purchase amount has

been paid already.

Cash CrDr

18000Price+Trans.C

2890G. J. entry

M purchase-B 18000Tax payable 2890 Cash 20890

20890


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M. PurchaseCrDr

18000

Tax PayableCrDr

2890

2.3 Basic transactions in purchase accounting2.3 Basic transactions in purchase accounting

Case 2

The company

purchases C material

of 9000 Yuan. The

amount of VAT on

the special invoice is

1530 Yuan. The

relevant transport

cost is 225 Yuan in

all. All relevant

amount has not been

paid yet.

Cash CrDr

208909225

1530G. J. entryM.purchase-C 9225Tax payable 1530 Account payable 10755

A. Payable CrDr

10755


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Cash CrDr

20890

M. PurchaseCrDr

180009225

Tax PayableCrDr

28901530

A. payable CrDr

10755

9225

R. Material ivn.CrDr

2.3 Basic transactions in purchase accounting2.3 Basic transactions in purchase accounting

Case 3 the B material of above Material purchase has been checked into the stock, but the C material hasn’t.

G. J. entry

R. Material inv. 18000 M. Purchase 18000

18000

Material Checking

18000

Material in transit at the period end

18000

Ending Material in stock


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3. Accounting for producing3.1 some important cost concepts3.1 some important cost concepts

Cost object: Anything for which a separate measurement of costs is desired.

Direct cost: A cost that can be specifically traced to a cost object.

Indirect cost: A cost that can not be specifically traced to a cost object.

Product costs: the cost of producing or purchasing tangible products intended for sale.

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3. Accounting for producing

3.1 some important cost concepts3.1 some important cost concepts

Full product costs: The costs of all resources that are

used throughout the value chain for a product.

Inventoriable costs: All costs of a product that are regards

as an asset for external financial reporting.

(Manufacturing cost)

Period costs: Operating costs that are expensed in the

period in which they are incurred.

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Manufacturing cost (M.C.): the inventoriable cost in the manufacturing company is also called Manufacturing cost.

M.C. normally is classified three major categories as follows:

（ 1 ） Direct materials are the materials that become a physical part of a finished product and whose costs are separately and conveniently traceable through the manufacturing process to a finished product.


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（ 2 ） Direct labor is the compensation of employees who physically convert materials into the company’s products and is directly traceable to finished products.

（ 3 ） Manufacturing overhead, also called factory overhead or indirect manufacturing cost, is the manufacturing costs except direct costs.


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M. OverheadCrDr

Indirect costs(In workshop) OH. transfered


3.2 taking material from stocks3.2 taking material from stocks

Production costAccounting for the cost of product

P. Cost

The cost of W.I.P.

CrDr

Direct M.Direct L.

OverheadFinished P. Cost

Accounts for

production accounting

Manufacturing overheadAccounting for indirect M. cost

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P. cost-A CrDr P. cost-B CrDrR. M.-X CrDr R. M-y CrDr

P. Cost CrDrR. Material inv.CrDr


Case 4

C workshop takes 39000 Yuan of materials for production. Thereinto, 9000 Yuan for Product A, 30000 Yuan for Product B.

Direct M.39000

Material out39000

out9000

out30000

D. M9000

D.M30000

G.J.Entry

Production C.-A 9000Production C.-B 30000 R. Material Inv. 39000

3.2 taking material from stock3.2 taking material from stock

Work in process inventory

or

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S. PayableCrDr

3. Accounting for producing3.3 Employee compensation3.3 Employee compensation

Case 5

In this month the factory shou

ld pay 80000 of wages to prod

uction workers. Thereinto, 50

000 Yuan is for product A, 30

000 Yuan is for product B.

The compensation has not bee

n paid to workers.

P. Cost CrDr39000

P. cost-A CrDr

9000

P. cost-B CrDr

30000

G. J. Entry

Production Cost –A 50000Production Cost –B 30000 Salary payable 80000

Payroll (Employee compensation) takes different forms:

Salary is pay stated at a yearly, monthly, or weekly.

Wages are employee pay amounts that are stated at an hourly figure.

Commission are computed as the percentage of the sales the employee has made.

Bonus is amount over and above regular compensation

payroll80000

D.L.80000

D. L.50000

D. L.30000

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Case 6

Taking 2500 of material for E. repair

Case 6M. Overhead 2500 R. Material 2500

The indirect costs in workshop should be summarized in the account of M. Overhead.

Examples:

Indirect M., Indirect L., Plant utilities, Plant repairs, Plant rent, insurance on plant, Depreciation on plant and equipment

Case 7

Basing computation the salary of administrative management should be paid 18860 Yuan.

M.Overhaed CrDr

R. Material inv. CrDr

39000

S. PayableCrDr

80000

Cash CrDr

2640

2640

3.3 Manufacturing overhead3.3 Manufacturing overhead

Case 7M. Overhead 18860 Salary payable 18860

Case 8

Paying water expenses in cash, the amount is 2640 Yuan

Case 8M. Overhead 2640 Cash 2640

2500

2500

18860 18860

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O.H

24000

CrDr

2500188602640

P. Cost CrDr

3900080000

P. Cost-A CrDr

900050000

P.Cost-B CrDr

3000030000

3. Accounting for producing3.3 Manufacturing overhead3.3 Manufacturing overhead

Case 9

The total overhead in this period is 24000 Yuan. The W.H of A product is 25000H. The W.H of B product is 15000H 。

Case 9

Production Cost —A 15000 —B 9000 Overhead 24000

OH. A. Rate=24000/ （ 25000+15000 ） =0.60 Yuan/h

OH for A =25000*0.6=15000 Yuan

OH for B =15000*0.6=9000 Yuan

On the subsidiary account of Production cost account the product cost can be calculated by summarizing the data of Dr side.

24000 24000

At the end of period overhead should be

allocated to every product the workshop

makes. The standards of allocation may be

standard working hour.

24000

900015000

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P. Cost CrDr

390008000024000

F. Good inv.CrDr

3. Accounting for producing3.4 Product costing3.4 Product costing

Case 10

All product A are finished ， Volume is 1000 ； N

o P. B is finished, they are all Work in process.

Case 10Finish good inv. 74000 Production cost 74000

A total cost :

Direct material 9000

Direct labor 50000

Overhead 15000

P. Cost-A CrDr

90005000015000

74000 74000

P. Cost-B CrDr

30000300009000

69000 0

69000

7400074000

143000 74000

69000

74000 0

74000

74000

Total 74000Unit cost = 74000/1000=74 Yuan/Unit

Work in process

If all products are finished at the end of the period, Then, the total expenses in the subsidiary P.C.A. is the total cost of the product. The unit cost can get by dividing total cost by the volume.

If no product is finished at the end of the period, then, the total expenses in the subsidiary P.C.A. is the expenses of Work in process.

If some products are finished and the others are not, then, the total expenses in the account should be divided between finish product and work in process.

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3. Accounting for producing3.4 Product costing3.4 Product costing

F. Good inv.CrDr

74000

P. Cost-A CrDr

900050000

15000

W.I.P.Inv. CrDr3900080000

2400074000

74000 74000

P. Cost-B CrDr

3000030000

9000

69000 0

69000

143000 74000

69000 74000

74000 0

Cash CrDr

2640

S. PayableCrDr

80000

18860

O.H.

24000

CrDr

2500188602640 24000

R.M inv.CrDr390002500

SubsidiaryAccounts

74000

24000

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F.G. inv.CrDr

Balance 74000

Cost of G.S.CrDr

4. Accounting for sales and cost of good sold

Case 11

The company sells A product of 800 units at the price of 174 Yuan/unit to customers in cash. In addition the relevant VAT is 23664 Yuan.

Case 11Cash 162864 Sales revenue 139200 Tax payable (VAT) 23664

Case 12

The manufacturing cost of above product A is 59200 Yuan (74*800).

Case 12Cost of good sold 59200 Finished good inv. 592000

0 59200

14800

5920059200

Cash CrDrSales R.CrDr

T.P.(VAT) CrDr

162864139200

23664Loss & Profit Account CrDr

80000 Profit

Expenses 59200

59200

139200 Revenue

139200

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Loss & Profit Account CrDr

5. Accounting for profit and its distribution

Sales R.CrDr

139200

Cost of G.S. CrDr

58200

Selling Exp. CrDr

4000

Administrative Exp.CrDr

13000

Financial Exp.CrDr

1000

139200 139200

Income tax Exp. CrDr

3000

Net income60000

4000

13000

1000

3000

4000

13000

1000

3000

Dividends payableCrDr

40000

Retained EarningsCrDr

20000

Liability Equity

5820058200

60000

600004000040000

Case-1Case-1

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6. Financial statements

Financial statements

Balance sheet

Income statement

Retained earning

statement

Cash flow statement

An example of listing company in China

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6. Financial statementsAssetsCurrent assets Cash and cash equivalents 5,000$ Short-term investments 7,000 Accounts receivable 23,000 Inventories 18,000 Prepaid expenses 7,000 Other current assets 6,000 Total current assets 66,000 Net property and equipment 256,000 Notes receivable 20,000 Intangibles 49,000 Other assets 18,000 Total assets 409,000$

Liabilities and Stockholders' EquityCurrent liabilities Accounts payable 24,000$ Accrued expenses payable 45,000 Other current liabilities 1,000 Total current liabilities 70,000 Unearned franchise fees 6,000 Long-term notes payable 160,000 Other long-term liabilities 8,000 Stockholders' equityContributed capital 3,000 Retained earnings 162,000 Total stockholders' equity 165,000 Total liabilities and stockholders' equity 409,000$

PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIESConsolidated Balance Sheets

January 31, 2001(dollars in thousands)

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Operating Activities

Cash from: Customers 69,000$

Franchises 3,900

Interest on investments 1,000

Cash to: Suppliers (35,000)

Employees (14,000)

Net cash provided by operating activities 24,900

Investing Activities

Sold land 4,000

Purchased property and equipment (2,000)

Purchased investments (1,000)

Lent funds to franchisees (3,000)

Net cash used in investing activities (2,000)

Financing Activities

Issued common stock 2,000

Borrowed from banks 6,000

Paid dividends (3,000)

Net cash provided by financing activities 5,000

Net increase in cash 27,900

Cash at beginning of month 6,000

Cash at end of month 33,900$

PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES

Unadjusted Consolidated Statement of Cash Flows

For the Month Ended Janaury 31, 2001

(Dollars in thousands)

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Beginning balance, December 30, 2000 165,000$ Unadjusted net income 21,800 Dividends (3,000) Ending balance, January 31, 2001 183,800$

PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIESUnadjusted Consolidated Statement of Retained Earnings

For the Month Ended Janaury 31, 2001(Dollars in thousands)

Beginning balance, December 30, 2000 165,000$ Unadjusted net income 21,800 Dividends (3,000) Ending balance, January 31, 2001 183,800$

PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIESUnadjusted Consolidated Statement of Retained Earnings

For the Month Ended Janaury 31, 2001(Dollars in thousands)

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6. Financial statementsPlease prepare financial statements basing following data. EIC-1Hosey Company has the following adjusted trial balance at December 31, 2003.No dividends were declared. However,400 additional shares were issued during the year for $2,000:

Cash Accounts receivable Interest receivable Prepaid insurance Notes receivable EquipmentAccumulated depreciationAccounts payableAccrued expenses payable Income taxes payable Unearned rent revenue Contributed capital (500 shares) Retained earnings Sales revenue Interest revenue Rent revenueWages expense Depreciation expenseUtilities expense Insurance expense Rent expense Income tax expenseTotal

1,5002,0001201,8003,00012,000

216002,000200 6009,0002,900$56,740

$2,0001,6003,8202,9006002,4001,00042,000120300

$56,740

Documents

1 The types of companies: 1. Understanding The Business Service Company: A company that provides intangible services, rather than tangible products Merchandising