Financial Accounting Flashcards
Standards for presenting financial information in financial statements
Guidelines that accountants and managers must follow when preparing an auditing
information for external reporting purposes
– US GAAP (Generally Accepted Accounting Principles)
• Set by the Financial Accounting Standards Board (FASB)
• Followed by publicly listed companies in the US
• US GAAP is based on certain key principles
– IFRS (International Financial Reporting Standards)
• Much of the rest of the world
• Set by the International Accounting Standard Board
– HGB (German Commercial Code)
Who needs to prepare which financial statements according to which
guidelines?
- In principle, all merchants must prepare annual financial statements (§ 242 HGB)
- This does not apply to sole proprietorships who do not exceed €600,000 in sales revenue and €60,000 in net income on the first or last two consecutive financial statement reporting dates (§241a HGB)
Balance sheet
• reports an entity‘s financial situation at a particular point
in time („snapshot“ of financial position)
• states what the firm owns and how it is financed
• has two sides: On the left are the assets and on the right
are the liabilities and stockholders‘/owners‘ equity.
• has three main sections:
– Assets („ressources controlled by the entity“)
– Liabilities („the claims against those resources“)
– Owner‘s equity
• MUST always balance.
• The three main sections are related by the accounting
equation:
Assets = liabilities + owner‘s equity
Assets
“What the company owns“
• The assets section of a firm‘s balance sheet reports probably future economic benefits
obtained or controlled by the company as a result of past transactions or events.
• An asset has four key characteristics:
– It has been acquired at a measurable cost
– It is likely to generate a future benefit by contributing to the firm‘s cash flow either
directly or indirectly
– The entity on whose balance sheed the asset is recorded controls the asset
– The transaction that has given the entity control over the asset has already occured
• Assets
– are typically listed in order of liquidity, which refers to the ease with which the
assets can be converted into cash.
– are initially recorded at historical cost (what they cost at the time of purchase)
– are grouped into two broad categories:
– Short-term (current) assets: consumed or disposed of within one year (cash,
marketable securities, inventory, accounts receivable)
– Long-term (noncurrent) assets: consumed or used for periods longer than one year
(property and equipment)
Current Assets
• Accounts typically included in the current assets section:
– Cash (may include cash equivalents): bank deposits, deposits in transit,
undeposited checks, cash on hand, marketable securities
– Accounts Receivable: Amounts legally owed to a company as a result of past
credit sales of goods and services
– Prepaid Expenses: Amounts paid to suppliers for goods or services to be
delivered in future periods (e.g. insurance policy payments at the beginning of
the policy period, pre-paid rent)
– Inventory: Tangible goods purchased for resale in the ordinary course of
business
Long-Term Assets
• Typical accounts in the Long-Term Assets section:
– Loans/Notes Receivable: Amounts legally owed to the company as a result of
loans granted to others
– Investments: Money invested in other companies‘ equity or dept securities,
partnerships, certain property investments, etc.
– Property, Plant, and Equipment (PP&E): Tangible assets that were acquired by
the company for use in operations and that have an expected useful life greater
than one accounting period.
• All tangible assets, except for land, have limited lives.
• PP&E is listed at ist net book value, which means that ist carrying value is
cost less accumulated depreciation.
– Intangible Assets: Resources without physical substance that provide future
benefit. This category includes both intangible assets with finite lives (patents or
copyrights), and intangibles without finite lives (goodwill).
