Financial Accounting Flashcards
Purpose of financial Accounting
provide meaningfulquantitative financial information regarding a firms activites to decision makers; gives info to external people about the state of a business so they can make decisions
What is financial accounting not?
taxes, managerial accounting
Who are the decision makers in financial accounting?
Shareholders (Owners)
Debt Holders (Creditors)
also..
Managers
Investment analysts and info. intermediaries
Customers and strategic partners
What makes information useful?
Relevance - it’s capable of making a difference to a decision maker
Faithful Representation - Dependable and reliable
nice to have… timely comparable
Where to financial accounting standards come from?
congress -> sec -> fasb -> gaap
Is financial accounting an exact science
no,
-gaap gives companies choices when preparing financial statements
-financial statements depend on estimates
-earning management/manipulation can happen
Oversight of financial accounting
-SEC - publicly traded companies
-External audits American institute of certified public accountants (AICPA) – give reasonable assurance your statements are accurate (not guarantee)
-securities law
3 reasons why accounting is important for good capital allocation
-good capital allocation is required for healthy economy
-better information leads to better capital allocation
-accounting primary source of info for decision makers
capital allocation
the process of determining the most efficient investment strategies for an orgs. financial resources, with the goal of maximizing shareholder equity
Required financial statements
Balance Sheet-important
Income Statement - important
Statement of shareholders equity
Statement of cashflows
statement of comprehensive income
Information beyond financial statements
-financial statement footnotes
-independent auditor report
-management discussion and analysis
-press releases
What does the Balance Sheet describe?
describes the uses and sources of funds
What is the balance sheet useful for?
-Evaluating capital structure
-assessing risk and future cash flows
what is Capital structure
it is the combination of debt and equity a company uses to finance its operations and growth
assets
economic resources that are owned or controlled by a company AND have future economic benefits
examples of assets
cash, accounts receivables, inventory, land, building, equipment, copyrights, investments
To be reported on the balance sheet an asset must….
-be owned or controlled by a company
-posess expected future economic benefits
Historical cost vs market value
assets value can be reported at…
historical cost - objective, faithful representation
market value - useful, relevant
Do assets need to be reliably measured?
Yes, management team, well designed supply chain, better technology can’t be measured and are not documented on balance sheet
Describe Liabilities
Future obligations to pay cash or transfer assets or provide services to another party
Examples of Liabilities
-accounts payable
-notes payable
-wages payable
What is Owners Equity?
ownership interest in net assets of an entity
examples of owners equity
capital stock
preferred stock
retained earnings
Accounting equation
assets = liabilities + OWNERS EQUITY
uses of funds = sources of funds
Balance Sheet format
Assets listed in order of liquidity
Liabilities listed in order of maturity
shareholders equity - no order
Retained earnings formula
beginning retained earnings + Net income - dividend = End retained earnings
Income statement practice problem
question from notes
B.S. practice problem
question from notes
What does Income statement show?
shows how much a company earned (not cash) over a period of time
What is the income statement useful for?
-helps us evaluate past performance
-useful in predicting a firms future performance
-helps asses the risk of achieving future cashflows
Describe Revenues
increase in a companies resources from the sale of goods or services
-revenue is the increase in an asset or decrease in liability
What are expenses?
costs incurred in the normal course of business to generate revenues
-creates liabilities, destroys assets
examples of expenses
cost of good sold (cogs)
utilities expense
wages expense
depreciation expense
Gains/Losses
money made or lost outside the normal firm operations
gains/losses examples
-gain on sale of operating equipmnent
-losee on sale of land
net income/loss
overall measure of the performance of a company
-arguably most important accounting number
-doesn’t nescessarily correspond to good cashflow
a company could have good income but poor cashflow
earnings per share (EPS)
net income/ #shares
What type of account is….? question from notes
question from notes
What is shown on the Statement of shareholders equity?
beginning and ending balances of shareholders equity accounts
statement of shareholders equity categories
capital stock
retained earnings
treasury stock
other comprehensive income
What is the Statement of cashflows?When was it required? How is cash defined?
describes an entities cash inflows and outflos DURING A PERIOD
-required since 1983
-cash is defined as cash and cash equivalents
Purpose of statement of cashflows
shows change in cash balance from first balance sheet to second balance sheet
sections of statement of cashflows
operating activites (indirect or direct)
investing activities
financing activities
direct vs indirect statement of cashflows
-only changes operations section
-indirect start with ni and gets to total operations
-direct - cash based income statement
relationships among financial statements
-financial statement are linked within and across time
-b.s. and i.s. are lined via retained earnings
-b.s. and statement of cashflow are linked by changes in cash
-operating statement of cash flows is a cash basis income statement
relationship between statements picture (draw)
What is the accounting cycle?
procedure for analyzing recording summmarizing and reporting transactions of a business
3 accounting cycle steps
- analyze transactions
- record effects of transactions
- summarize effects of transactions by account
4 prepare reports
transactions
event that causes a change in balance sheet values
Account
an accounting record in which the results of a transaction are recorded
double entry accounting
a method of accounting that includes debits and credits
debit = left
credit = right
account determines whether a debit is increase or decrease
alsway one debit and one credit per transactions
debits = credits
journal entries
a recording of a transaction or other entry
t-accounts
a place to accumulate the effect of journal entries on each account
Accrual Accounting
a system of accounting in which revenues and expenses are recorded as they are earned or incurred, not nescessarily when cash changes hands
what does accrual accounting do?
-splits business into time-periods
-makes net income a better measure of a firms profitability
Revenue recognition
companies recognize revenue when goods or services are transferred to customers for the amount the company expect to be enttled to recieve in exchange for those goods or services
When can revenue be recognized
when a service is provided and you are likely to be paid
Matching principle
all costs and expenses incurred in generating revenues must be recognized in the same period as the revenue. if you cant match with revenue then recognize it immediately
matching principle excercise (in lecture notes)
statement of cashflows operating activites
cash transactions that enter into determination of net income (direct/indirect)
statement of cashflows-investing activities
cash transactions involved in the purchse and sale of ppe (property, plant, and equipment)
statement of cashflows
financing activities
cash transactions where resources are obtained or repaid to owners and creditors
current assets
convert to cash < 1 year
long term assets can’t be converted to cash in 1 year
current vs long term liabilities
current -maturities less than one year
long term liablilities- maturities longer than one year
