Financial Accounting

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Revenues normally are reported for goods or services that have been sold to a customer...

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...whether or not they have been paid for.

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Income statement

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(statement of income, statement of earnings, or statement of operations)
Reports the accountant's primary measure of performance of a business, revenues less expenses during the accounting period resulting in net income.

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Example Assets

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Cash, accounts receivable, inventories, plant and equipment, land, short-term investments, other assets

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Example Liabilities

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Accounts payable, notes payable, other liabilities

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Example Stockholders' Equity

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Contributed capital, retained earnings

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Example Revenues

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Sales revenues

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Example Expenses

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Operating expenses, general and administrative expenses, cost of goods sold expense, research and development expense, interest expense, income taxes

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owner-managers

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founders also function as managers of the business

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creditor

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Party that loans money or other ASSETS to another party

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balance sheet, income statement, statement of retained earnings, statement of cash flows heading

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1.name of entity
2.title of the statement: Balance sheet
3.specific date of the statement
4.unit of measure

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Basic accounting equation

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Assets=Liabilities+Stockholders' Equity

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Balance sheet

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reports the financial position of an accounting entity at a particular point in time.

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Net income generally does...

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...not equal net cash generated by operations.

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Net income equations

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Net income=Revenues-Expenses

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Statement of retained earnings equation

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Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

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Statement of cash flows definition

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divides cash inflows and outflows into three primary categories of cash flows in a typical business: cash flows from operating, investing and financing

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Cash flows from operating activities...

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are cash flows that are directly related to earning income

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Cash flows from investing activities...

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include cash flow related to the acquisition or sale of the company's productive assets

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Cash flows from financing activities...

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are directly related to the financing of the enterprise itself

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Price or Earnings Ratio equation

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Price or Earnings Ratio=Market Price/Net income

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Securities and Exchange Commission

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the U.S. government agency that determines the financial statements that public companies must provide to stockholders and the measurement rules that they must use in producing those statements

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Generally Accepted Accounting Principles

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the measurement rules used to develop the information in financial statements

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Financial Accounting Standards Board

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the private sector body given the primary responsibility to work out the detailed rules that become generally accepted accounting principles

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audit

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an examination of the rinancial reports to ensure that they represent what they claim and conform with GAAP

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assurance services

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independent professional services that improve the quality of information for decision makers

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primary objective of external financial reporting

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is to provide useful economic information about a business to help external parties make sound financial decisions

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separate-entity assumption

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states that business transactions are separate from the transactions of the owners

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unit-of-measure assumption

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states that accounting information should be measured and reported in the national monetary unit

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continuity (going-concern) assumption

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states that businesses are assumed to continue to operate into the foreseeable future

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current assets

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assets that will be used or turned into cash within one year; inventory is always considered a current asset regardless of the time needed to produce and sell it

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current liabilites

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obligations that will be paid in cash (or other current assets) or satisfied by providing service within the coming year

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examples of current assets

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cash, short-term investments, accounts receivable, inventories, prepaid expenses, and other current assets

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examples of current liabilities

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accounts payable accrued expenses payable, other current liabilities, unearned franchise fees, long-term notes payable, other long-term liabilities

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stockholders' equity

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the financing provided by the owners and the operations of business

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contributed capital

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results from owners providing cash (and sometimes other assets) to the business

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retained earnings

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refers to the cumulative earnings of a company that are not distributed to the owners and are reinvested in the business

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current ratio equation

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current ratio=current assets/current liabilities

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financial leverage ratio equation

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financial leverage ratio=average total assets/average stockholders' equity

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historical cost principle

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requires assets to be recorded at the historical cash-equivalent cost, which on the date of the transaction is cash paid plus the current dollar value of all noncash considerations also given in the exchange

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transaction

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1. an exchange between a business and one or more external parties to a business
OR
2. a measurable internal event such as the use of assets in operations

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account

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a standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item

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assets

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cash, accounts receivable, notes receivable, inventory, supplies, prepaid expenses, investments, equipment, buildings, land, intangibles

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liablities

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accounts payable, accrued expenses payable, notes payable, taxes payable, unearned revenue, bonds payable

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Revenues

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sales revenue, fee revenue, interest revenue, rent revenue

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expenses

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cost of goods sold, wages expense, rent expense, interest expense, depreciation expense, advertising expense, income tax expense

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transaction analysis

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is the process of studying a transaction to determine its economic effect on the business in terms of the accounting equation

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Every transaction...

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has at least two effects on the basic accounting equation (duality of effects).

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Systematic transaction analysis includes these steps:

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1.Accounts and effects
-identify the accounts (by title) affected and classify them by type of account, making sure that at least two accounts change (A,L, SE)
-determine the direction of the effect (an increase + or decrease - on each account)
2.balancing
-verify that the accounting equation remains in balance (A=L+SE)

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debits

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on the left side

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credits

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on the right side

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operating cycle

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the time it takes for company to pay cash to suppliers, sell goods and services to customers and collect cash from customers

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time period assumption

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indicates that the long life of a company can be reported in shorter time periods

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revenues

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increases in assets or settlements of liabilities from ongoing operations

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expenditure

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any outlflow of money for any purpose, whether to buy equipment or pay off a bank loan

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expense

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