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Austin Community College

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Examples Financial accounting math concepts

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Actual Accounting Examples Some of the concepts may be new you. Dont worry – you will cover these in detail. For now – lets focus on the math concepts.

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Tools Use your calculator Print the narrative

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Depreciation Applies to assets: used in business expected to benefit the business for more than one year Represents the allocation of cost over the life of the asset $$$$$

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Units of Output Method Allocate cost based on output machine hours copies made miles driven

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Units of Output Method Facts: Cost of Photocopier: $60,000 Estimated total copies: 2,000,000 Facts: Cost of Photocopier: $60,000 Estimated total copies: 2,000,000

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Computation Cost Estimated Copies Cost Estimated Copies $60,000 2,000,000 Depreciation per copy Depreciation per copy 3 cents or $0.03 per copy

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$0.03 per copy -- Uses Allocate the cost of the photocopier – Based on actual copies made Determine the cost of making one copy – External – setting the selling price – Internal – developing a budget and recording depreciation

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Current Ratio Measure of liquidity – How quickly can a company pay its current debt Amounts due within one year

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Current Classified Balance Sheet provides data Current Assets Cash Accounts Receivable Merchandise Inventory Current Assets Cash Accounts Receivable Merchandise Inventory Current Liabilities Accounts Payable Salaries Payable Rent Payable Current Liabilities Accounts Payable Salaries Payable Rent Payable

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Current Ratio Current Assets $500,000 Current Assets $500,000 Current Liabilities $250,000 Current Liabilities $250,000 = 2 Interpretation: For every $1 of current liabilities, the company has $2 of current assets. Interpretation: For every $1 of current liabilities, the company has $2 of current assets.

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Gross Profit Net Sales (Cost of Goods Sold) Gross Profit Amount of each net sales dollar – Available to cover operating costs – Provide for net income

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Gross Profit Margin Net Sales (Cost of Goods Sold) Gross Profit The relationship of Gross Profit to Net Sales – Decimal – Percentage

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Gross Profit Margin Net Sales Less: Cost of Goods Sold Gross Profit 100% $200,000 125,000 $ 75,000 37.5% 75,000/200,000 =.375.375 X 100 = 37.5 %

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Sales Tax Sales Tax Rate: 8.25% Gross Taxable Sales: $96,000 What is the total amount due from customers? Sales Tax Rate: 8.25% Gross Taxable Sales: $96,000 What is the total amount due from customers?

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Sales Tax 8.25 % =.0825 96,000 X 8.25 % = 7,920 96,000 X.0825 = 7,920 OR $96,000 + $7,920 = $103,920

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One Step Computation 96,000 X 108.25 % = 103,920 96,000 X 1.0825 = 103,920 OR

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What If Sales Tax Rate: 8.25% Amount Collected: $103,920 What is the total amount of taxable sales? Sales Tax Rate: 8.25% Amount Collected: $103,920 What is the total amount of taxable sales?

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What If Taxable Sales Amount Collected 1 +Sales Tax Rate ? X 1.0825 = 103,920 1.0825 1.0825 Taxable Sales = 96,000

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Employer Payroll Tax Taxes are withheld from employees wages Employers also have to pay taxes One common employer payroll tax FUTA –.8% of the first $7,000 You will cover additional taxes later.

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Federal Unemployment Tax (FUTA) Jones Inc - First Quarter 2008 Total payroll: $15,400 FUTA:.8% of the first $7,000 of wages Jones Inc - First Quarter 2008 Total payroll: $15,400 FUTA:.8% of the first $7,000 of wages Compute the FUTA liability

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Federal Unemployment Tax (FUTA).8% is less than 1 % To convert.8% to a decimal: Move the decimal two places to the left.8%.008

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Federal Unemployment Tax (FUTA) 7,000 X.008 = 56 1% is.01 7,000 X.01 = 70 Thus we know the answer must be less than 70. 70 X 80% = 56

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Purchase Price Allocation A corporation purchases land and building for $850,000. Tax Appraisal – Land $ 270,000 Building $ 650,000 A corporation purchases land and building for $850,000. Tax Appraisal – Land $ 270,000 Building $ 650,000 Determine the amounts to be allocated to the land and building

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Purchase Price Allocation ItemAppraised Value % (rounded to 1 decimal place) Land Building Total $ 270,000 $ 650,000 100 % 70.7 % 29.3 % $920,000 270/920 X 100 = 29.3478260869565 650/920 X 100 = 70.6521739130435

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Allocation of Purchase Price ItemAllocated Amount Land Building Total 850,000 X.293 850,000 X.707 249,050 + 600,950 $ 249,050 600,950 $ 850,000

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Summary Proper Tools – Calculator, Excel, Pencil and Paper Reasonable answer Practice Help – Instructor/Tutor – Classmates, friends, family

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