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