Financial accounting Flashcards
Perception vs reality of accountant:
Common perception: right and wrong comes from rule based model
Pathway vision model: Emphasises Technical skills, professional skills, ethical values. Pathway vision model changes over time as the business landscape changes
Who is responsible for financial information:
management, external auditors, shareholders & investors, government agencies (sec), professional organisations ( international accounting standard board who update accounting standards
External users of financial information:
External users of financial information:
Investors and shareholders are interested in the stability, growth potential
Creditors and financial banks to evaluate credit worthiness
Financial advisors to provide recommendations to clients
Regulatory authorities such as, sec to ensure companies comply with regulations
Suppliers to asses timely payments
Customers could be interested to see if they can continue to provide services
Competitors to see competitive position
Labour union to see labour union strength in negotiations
Business partners examine to assess the feasibility and risks
General public to see effect on economy
Internal users of financial information:
Management team: to make goals and effectiveness of decisions
Board of directors: to oversee management, asses risk and give guidance
Employees: to understand job stability, bonuses and raises
Budgeting teams: to create budgets
Cost and inventory management: identify cost reduction opportunities
Internal auditors: identify potential risks and stick to regulations
Marketing and sales team: profitability and make pricing strategies decisions
HR: to evaluate if they can give bonuses and benefits
R&D: to evaluate the ROI on product development projects
Financial reporting requirements:
Annual report of ( balance sheet, cash flow, income) , Semi or quarterly, Ad-hoc informs about important events
When service or good is delivered it it written in books and not when cash is received
Tensions: When a company buys equipment and uses it for 23 months so its cost is spread across use by depreciation , Once a good is sold buy money is not received it is counted
International accounting standards:
-IFRS is established by IASB and required in 150 countries
- IFRS is needed for public companies
- Local GAAP for private companies
- US GAAP is required for us companies
Accounting systematic: **
is a system for measuring and evaluating business information to be able to create summary statements of the businesses overall financial position, follows gaap and IFRS
When to use IFRS & GAAP
Ifrs is need for public companies
GAAP for private companies in countries
Key features of IFRS:
Principle based approach: Principles that guide preparation of financial statements allows for flexibility and judgement to apply standards to several industries
Fair presentation
Use of professional judgement
Comprehensive coverage: various aspects of financial measurement
Disclosure requirements: disclosure of relevant information
Countries sometimes make adjustments to this
Balance sheet:
snapshot of the financial position on a specific date. Assets is economic resources owned by a company to provide future economic benefits, liabilities are deliver economic benefits to external parties, equity is shareholders claim over company assets: balance sheets are a good insight into a company’s solvency, liquidity and financial stability
Income statement:
financial results of operations over a specific time window: key characteristics; revenue ( sale of goods when earned or should be expected ), expenses ( costs occurred in process of generating revenue; cogs, wages, rent, utilities, rent, administrative expenses ) , gross profit ( Revenue-COGS ) reflects profitability of core operations, operating expenses ( expenses that occur in business operations excluding cogs ) salaries, wages, marketing, depreciation, administrative costs, operating income ( gross profit operating expenses )profit from core operations before considering non operating items, non operating income or expenses ( not directly related to core operations of business ), net income////// looks are revenues and expenses as when occurred and not when cash is received or let out
Cash flow statement:
sources and uses of a company’s cash over a period of timeB: includes cash outflows and inflows in operating ( cash flows from core operations sales of goods) , investing( cash flows to acquisition of long term assets and investments sale or purchase of equipment ), financing activities ( cash flows from raising capital or repaying obligations ), net cash flow ( cash inflow + cash outflow = net ), starts with the opening balance of cash or cash equivalents ( cash on hand, and highly liquid investments ). The statements helps companies ability to generate cash flows, liquidity and financing activities and looks at relationship between net income and cash flows as differences good indicate the impact of non cash items
Statement of stockholders equity:
changes of stockholders equity in the company over time; retained earning, share capital account, often combined with statement of comprehensive income
Notes:
additional information to a companies financials and operations and accounting policies. Clarification and explanation, specific disclosures, disclose financial statements impact ( changes in accounting principles or events that happened after ), supporting information ( calculations ), compliance reporting standards,
5 financial statements
Balance sheet
Income statement
Cashflow statement
Stockholders equity
Notes
Primary objectives of accounting:
Recording, classifying/categorise, summarise, interpreting by internal and external stakeholders
3 sets of accounting books:
Financial accounting: only recording & summarising financial data it provides information to external stakeholders. Focuses on having accurate income, balance, cash flow
Tax accounting: applying and understanding tax laws to be able to pay their taxes, this minimises taxes and ensure compliance
Managerial accounting (cost accounting) : internal decision making information for the management team focus on financial and non financial data
Balance sheet equations and key components:
Assets = liabilities + equity
Double entry accounting: both sides have to be equal
Changes over a period between two balance sheet are summarised in incomes, cash flow and stockholders equity statements
If a business is liquidated liabilities must be paid before owners equity
Asset:
something of value that a company owns and expects to earn future benefits, assets are recognized when: future benefits can be measured, it was acquired in a past transaction or exchange. Examples; cash, supplies, equipment
Liabilities:
obligation to make future payments of a company to external parties in terms of cash, goods, services. Liabilities are recognised when obligations are based on benefits received in past or currently, the amount and timing of payment are almost certain. Examples; accounts payable, notes payable, salaries, wages, etc.
Current Vs Non-Current
Current = less than a year, non current = more than a year
Assets = equity + liabilities where the beginning cash balance + increases - decreases = closing balance ( always have to be balanced ) ( balance between debit and credits )
Rules of debits & credits
Every transaction must have one debit and one credit
Debits must equal credits
No negative numbers are allowed
Double entry accounting
Sum of debits = sum of credits ( double entry Accounting )
Debit left side entry ( increase assets )
Credit right side entry ( increase liabilities and equity accounts )
Asset accounts: debit increase and credits decrease accounts balance
Liability and equity accounts: debit decrease and credits increase accounts balance
Each transaction has two or more accounts
Assets = liabilities + contributed capital + prior retained earnings + revenues - expenses - dividends
T accounts:
is a visual representation that represents the letter T debit left, credit right
If the sum of debit entries is greater than the sum of credit then the account will have a debit balance ( bottom left hand side box ) and vice versa
Assets debits should exceed credits
Liabilities credits should exceed debits
Normal balance is on the increase side ( bottom left hand side )
See graph on notes
T account double entry summary:
Normal balance; type of balance that the account carriers under normal circumstances
T account records all changes in an accounting quantity
Account balance the difference between debits and credits
Start + increase - decrease = end balance
Start debit + debits - credits = ending debit ( assets and expenses ) accounts receivable and vice versa ( liabilities, stockholders, revenue ) accounts payable
Effects of business transactions:
External and internal transactions
Has to be measurable financially
Not all activities are considered transactions
Dual effect of every transaction
5 Steps to record and understand a business transaction
What accounts are affected by the business transaction and why
Do the accounts involved increase or decrease and by how much
What is the journal entry that is needed to increase or decrease the accounts
what is the effect on the t accounts
what financial statements are affected
General ledger and General Journal
The financial statements are constituted by financial general ledger (book which includes all accounts which are titled under a certain item, accounts payable ) and general journal ( book contains transactions in alphabetical order called books. The have to be entered chronologically
Preliminary steps before entering transactions in financial statements
See if its relevant
Effects on the equation/ transaction analysis
Journalizing transaction/ and write it down
Report the posting the journal article into the ledger, reported into the proper accounts
Note to self
Debit means left side of the account and credit means right side of accounts
Summary
Elements of financial statements: assets, liabilities, equity,
Asset accounts: debit side when revenue increases and decreases on credit side
Liability & equity accounts: debit revenue decrease, credit revenue increase
Each transaction should affect at least 2 accounts, at the end they have to balance
Reminder: assets are things a company has an exclusive control over with potential future financial gains ( cash inflows usually )
Financial performance: value created by firm
Financial position: net cash has increased or decreased over time
Accrual principle: states that transactions should be recorded once the goods are exchanged
Revenue and expenses are two opposite animals from cash inflows and cash outflows ( cash basis of accounting) on a cash flow statement a the revenues are recorded once payment occurs
unearned revenues falls under liabilities, a scenario where this would occur is when a customer pays and does not receive the product or service till later on
Assets ( Stock/equipment ) that has been used up then falls under the expense category, called implicit transaction because there are no other factors
Buying something on account is buying something where the cash connection is made later on
