Financial Accounting: Basics

Accounting

The systematic recording, reporting, and analysis of financial transactions of business. Allows a company to analyze financial performance and look at statistics.

Revenue

The total amount of money received by the company for goods sold or services provided during a certain time period. It is calculated before any expenses are subtracted.

Intangible Asset

Trademarks, patents, & copyrights

Stockholders/Shareholders

Owners of the corporation. They buy shares, units of ownership, in the corporation. They do not directly manage the corporation.

Dividend

Payment (usually of cash) to the owners of the business; distribution of income to owners rather than an expense of doing business. They do not appear on the income statement.

Managerial Accounting

Provides information to people inside* the company (Internal investment decisions, Performance evaluation).

Tax Accounting

Provides information to the tax authorities

Balance Sheet

Quantitative summary of a company's financial condition at a specific point in time, including assets, liabilities, and net worth.

Long-Term Asset

Real estate, plants, & equipment

(Net) Income =

Revenue - Expenses

Assets - Total Liabilities =

Shareholders' Equity / Net worth / Book Value

Footnotes

Significant accounting policies, estimates, etc.

Long-term Liabilities

Debts payable over a longer period.

Current Liabilities

Debts payable within one year.

Money Measurement Concept

Economic activity is initially recorded and reported in a common monetary unit of measure. (concept)

Assets =

Equities

Revenue measures

economic benefits generated by the sale of products or providing of services over a period of time.

Expenses measures

economic sacrifices incurred to "earn" the revenues of a given period.

Financial accounting translates...

events into financial statements

Annual Report includes:

-Management Discussion -Auditor's Report -Consolidated Balance Sheet -Consolidated Net Income -Consolidated Statement of Stockholders' Equity -Consolidated Cash Flow Statements -Notes to Accounts

3 Sections of Accounting Data

1. Operating-activities (sales of goods or services 2. Investing-activities (sale or purchase of an asset) 3. Financing-activities (borrowings, or sale of common stock)

Economic Unit

A business entity; Any business organization.

Accounting Method

A process used by a business to report income and expenses. (Cash or Accrual Accounting)

Cash Flow Statement

A summary of the actual or anticipated incomings and outgoings of cash in a firm over an accounting period. -Where the money came (will come) from? -Where it went (will go)? (operating, investing and financial activities)

Going-concern Concept

Accountants assume that the business entity will continue operations into the indefinite future. Allows accountants to value long-term assets. (concept)

Included on a balance sheet as liabilities:

Accounts payable, taxes, wages, accrued expenses, and deferred revenues.

Retained Earnings & Statement of Retained Earnings

Accumulated net income of the corporation - the dividends distributed to stockholders. Cumulative sum of undistributed profits.

Cash Basis Accounting

An accepted form of accounting that records all revenues and expenditures at the time when payments are actually received or sent. Appropriate for small or new businesses that conduct business on a cash basis or don't carry inventories.

Accrual Basis Accounting

An accepted form of accounting that reports income when earned and expenses when incurred. Companies do have some discretion as to when income and expenses are recognized, but there are no rules governing the recognition. Companies are required to make prudent estimates against revenues that are recorded but may not be received, call bad debt expense.

Income Statement

An account of sales, expenses, and net profit for a given period. Revenue - Expenses = Net Income

Periodicity Concept

An entity's life can be meaningfully subdivided into time periods to report the results of its economic activities.

Liability

An obligation that legally binds a company to settle a debt.

Shareholders' Equity

An ownership interest in a corporation in the form of common stock or preferred stock.

Expense

Any cost of doing business resulting from revenue-generating activities.

Asset

Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Example: Cash, securities, inventory, office equipment, real estate, car, property, etc.

Basic Accounting Equation

Assets A = Liabilities L + Stockholders' Equity SE (A = L +SE)

Current Asset

Cash & other liquid items

Business Entity Concept

Data gathered in an accounting system relates to a specific business unit or entity. Assumes each business has an existence separate from its owners, creditors, employees, customers, other parties, and other businesses.

Prepaid & Deferred Asset

Expenditures for future costs such as insurance, rent, & interest

Statement of Retained Earnings

Explains the changes in retained earnings between two balance sheet dates. (addition of net income or deduction of net loss)

T-Accounts

Format account balances by keeping the debits on the left side and the credits on the right. The overall account balance is then calculated at the bottom. There is a title or heading at the top that displays the name and number of the account.

GAAP

Generally Accepted Accounting Principles

Financial Accounting

Information that appears in financial statements that are intended primarily for external use. Stockholders and creditors are two outside parties who need financial accounting information. These parties decide on matters pertaining to the entire company, such as increasing or decreasing their investment or to extend credit to a company.

Why we need financial accounting?

It promotes the exchange of resources. Resources today go into a company, the company provides financial statements to outsiders (investors, suppliers, creditors) and produces resources tomorrow.

Accounts Payable

Money which a company owes to vendors for products and services purchased on credit. This appears on a company's balance sheet as a current liability. Represents a negative cash flow when accounts payable are paid off.

Exchange Price Concept

Most of the amounts in an accounting system are the objective money prices determined in the exchange process. (Concept)

Equity Ratio =

Stockholders' Equity / Total Equities

Profitability

The ability to generate income.

Solvency

The ability to pay debts as they become due.

Capital Stock

The amount of the owners' investment in the corporation.

Operating Cycle

The elapsed time between the start of production and the eventual receipt cash from customers from the sale of the product.

Assets Equal

The sum of liabilities, common stock, preferred stock, and retained earnings.

An Account

Used to classify and summarize the increases, decreases, and balances of each asset, liability, stockholders' equity item, dividend, revenue, and expense.

Income Statement measures

the "performance" of a company over a period of time.