Financial Accounting Review

Real

PERMANENT accounts, or assets/liabilities that carry over into the next period; Balance Sheet; 12/31 = 1/1

Revenue Recognition & Matching

Record revenue when earned (generally on delivery of product or service) & associated expenses in same period (generally when resources are used) = Accrual Basis

Revenue

Revenue; income from delivering product/service (except "Unearned Revenue" which is a Current Liability)

Gain

Revenue; of peripheral transaction; not the main business

Financial Statements presentation

Show + and (-) amounts; not Dr & Cr (which investors need not know)

Economic Entity

Each business must keep its Financial Accounting separate from its owners & others.

Adjusting entry

Entry at period end adjusting certain accounts that constantly change internally or over time

Close entry

Entry at period end, zeroing out Revenues, Expenses & Dividend accounts and updating Balance Sheet - Retained Earnings

Correcting entry

Entry made to adjust prior incorrect entries

Cost-Benefit

FASB weighs user benefit of GAAP rules against the implementation & audit cost.

Going-Concern

Financial Accounting assumes (without contrary evidence) that a company is not liquidating.

Time Period

Financial Statements are issued for specific periods: Quarterly (interim) and the Annual Report

FASB Conceptual Framework

(with SEC authority), the concept & reason upon which GAAP rules & standards are based.

Asset Contra-Accounts:

1. Allowance for Doubtful Accounts - Cr NAB 2. Inventory, Purchase Discounts, Returns & Allowances - Cr NAB 3. Billing on Construction in Process - Cr NAB 4. Accumulated Depreciation - Cr NAB 5. Accumulated Amortization - Cr NAB

6 Account Types

1. Assets 2. Liabilities 3. Shareholder's Equity 4. Revenues 5. Expenses 6. Dividends Note: the 6 account types are in Financial Statement order

FASB Constraints

1. Conservatism 2. Materiality 3. Industry Practices 4. Cost-Benefit

Liability Contra-Accounts:

1. Discount on Bonds Payable - Dr NAB

FASB Principles

1. Historical Cost 2. Full Disclosure 3. Revenue Recognition & Matching

Order of Financial Statements

1. Income Statement [Net Income ->] 2. Statement of Retained Earnings [RE ->] 3. Balance Sheet [Total A = L + SE} 4. Statement of Cash Flows [ = End Cash]

Accounting Cycle steps

1. Journal Entries - analyze/record transactions 2. Posting - transfer from JEs to GL accts 3. Trial Balance - summarizes GL by listing each bal. 4. Adjusting Entries - update accts at period end 5. Adjusted Trial Balance - lists each acct bal. w/ adj 6. Financial Statements 7. Closing Entries - zero out all NOMINAL accts 8. Closing Trial Balance - only REAL balances remain

FASB Assumptions

1. Monetary Unit 2. Economic Entity 3. Time Period 4. Going-Concern

Revenue Contra-Accounts

1. Sales Discount - Dr NAB 2. Sales Returns & Allowances - Dr NAB 3. Unrealized Holding Loss (Income) - Dr NAB

Expenses Contra-Accounts

1. Tax Benefit from Loss Carryback/Carryforward - Cr NAB

Historical Cost Exceptions

1. Trading & Available-for-sale Securities = at FV 2. Accts/Trade Receivable = at NRV (Price - Cost) 3. Inventory/Merchandize = at Lower of Cost or Market 4. Held-to-Maturity Securities = at Amortized Cost 5. PPE = Depreciated cost (net of Accumulated Depr) 6. Intangibles = at Amortized Cost 7. Bonds Payable = at Amortized value

Shareholder's Equity Contra-Accounts

1. Treasury Stock - Dr NAB 2. Accumulated Other Comprehensive Loss - Dr NAB 3. Unrealized Holding Loss (Equity) - Dr NAB 4. Other Comprehensive Loss (Pension) - Dr NAB

Monetary Unit

Only events expressible in dollars ($) are in Financial Accounting records (not inflation adjusted).

Full Disclosure

All info that could influence user decisions should be in Financial Statements (or in Notes)

Receivable

Asset; amount receivable from customers, etc.

Shareholder's Equity

Balance Sheet, Real, Cr NAB, (Dr if contra) Ex: Paid-in Capital, Retained Earnings, Other Comprehensive Income

Liabilities

Balance Sheet, Real, Cr NAB, (Dr if contra) Ex: Payables, Unearned Revenue, Deferred Gross Profit

Assets

Balance Sheet, Real, Dr NAB, (Cr if contra) Ex: Cash, Receivables, Prepaid Expenses

Industry Practices

Certain exceptions to normal GAAP are OK based on longtime industry use.

Expense

Expense; cost of earning (& matched to) revenue (except "Prepaid Expense" which is a Current Asset)

Loss

Expense; of peripheral transaction; not the main business

Materiality

GAAP rules-formats-methods can be violated for items too small to affect decisions.

Conservatism

If in doubt, use amounts that will not overstate Assets or Net Income or understate Liabilities. Also, any asset must be written down to a lower MV if it is < its HC. DO NOT MISLEAD INVESTORS.

Revenues

Income Statement, Nominal, Cr NAB, (Dr if contra) Ex: Sales, Interest/Dividend Revenue, Gains

Expenses

Income Statement, Nominal, Dr NAB, (Cr if contra) Ex: Cost of Goods Sold, SG&A, Wages

Payable

Liability; amount payable to supplier; etc.

Reversing entry

Optional entry made to reverse Adjusting entry to simplify bookkeeping.

Dividends

Statement of Retained Earnings, Nominal, Dr NAB Ex: Dividends on Common Stock vs. Preferred)

Nominal

TEMPORARY accounts that close out each year; Income Statement - Revenues, Expenses, Dividends; 1/1 = $0

"Decision Usefulness"

The primary objective of GAAP Financial Statements; providing use info (relevant, reliable, comparable & consistent) so that external users can make informed decisions.

Historical Cost (HC)

Used for most accounts; objective & verifiable; not current market value

Statement of Cash Flows

Uses cash basis