FSA: Financial Reporting Mechanics Flashcards
Financial Statement Elements =
assets, liabilities, owners’ equity, revenues, expenses
Accounts, chart of accounts, contra accounts =
An account is a ‘specific record’ in an element where various transactions are entered.
Chart of accounts is a detailed list of the accounts (which make up elements/line items in the FS)
Contra accounts - used for entries that offset some part of the value of another account. (ie accumulated depreciation against an equipment account)
Assets (9 examples) =
THE FIRM’S ECONOMIC RESOURCES
Cash and cash equivalents (liquid securities with maturities of 90 days or less)
Accounts receivable (may have a contra account)
Inventory
Financial assets (such as marketable securities)
Prepaid expenses
PPE
Investment in affiliates (accounted for using the equity method)
Deferred tax assets
Intangible Assets
Liabilities (6 examples) =
CREDITOR CLAIMS ON THE COMPANY’S RESOURCES
Accounts Payable & trade payables
Financial Liabilities - such as short term notes payable
Unearned revenue - items that will show up on future income statements as revenues
Income taxes payable - accrued over last year but unpaid
Long-term debt - such as bonds payable
Deferred tax liabilities
Owners’ equity (4 exampes) =
OWNERS’ RESIDUAL CLAIM ON A FIRM’S RESOURCES (amount by which assets exceed liabilities)
Capital (par value of common stock)
Additional paid-in capital - proceeds from common stock in excess of par value (contra account is TREASURY STOCK)
Retained Earnings - cumulative net income not distributed as dividends
Other comprehensive income - changes from currency translation, unrealized G&L on investments
Revenue (3 examples) =
INFLOWS OF ECONOMIC RESOURCES
Sales
Gains - increases in assets from transactions incidental to day to day activities
Investment Income - such as interest, dividend income
Expenses (6 examples) =
OUTFLOWS OF ECONOMICS RESOURCES
COGS
SGNA - selling, general and administrative expenses - incl advertising, mgmt salaries, rent, utilities
Depreciation and Amortization - to reflect the ‘USING UP’ of tangible and intangible assets
Tax expense
Interest expense
Losses - decrease in assets from transactions incidental to day to day activities
EQUATION: ASSETS (x3) =
LIABILITIES + OWNERS’ EQUITY
LIABILITIES + OWNERS’ EQUITY + CONTRIBUTED CAPITAL + ENDING RETAINED EARNINGS
LIABILITIES + OWNERS’ EQUITY + CONTRIBUTED CAPITAL + BEGINNING RETAINED EARNINGS + REVENUE - EXPENSES - DIVIDENDS
Double Entry Accounting =
to keep the accounting equation in balance - a transaction must be recorded in at least 2 accounts.
Accruals: Unearned Revenue =
cash received in advance of providing a good or service. Cash UP (asset), UnEarned Rev UP (liab)
When the service is provided - revenue UP, UnEarned Rev DOWN
Accruals: Accrued Revenue =
Firm provides good or service before cash is received.
Rev UP, Acc Receivable UP
Cash paid: Acc Receivable DOWN
Accruals: Prepaid Expenses =
Firm pays cash ahead of time for an anticipated expense.
Cash DOWN (A), Prepaid Expense UP (A)
Expense incurred: Expense UP, Prepaid Expense DOWN
Accruals: Accrued Expenses =
Firm owes cash for expenses incurred
Expense UP, Accrued Expense UP(L)
Firm pays cash: Cash DOWN (A), Accrued Expense DOWN (L)
wages payable is a good example.
Accruals: Why?
When payment and delivery are not at the same time - with accruals they are recorded at the the correct times.
One entry when the first event occurs
An offsetting entry when the exchange is completed
Valuation Adjustments =
Most assets are recorded on the FS at historical costs.
We have sometimes use valuation adjustments to update values to be current market values.
Adjustments in ASSETS will need a counter adjustment to OWNER’S EQUITY, either gain or loss in the income statement, or sometimes ‘other comprehensive income’.
Flow of Information in an Accounting System (x4) =
Journal Entries - record every transaction, which accounts are changed, by how much (general journal shows all entries chronologically)
General Ledger - sorts journal entries by account
Trial Balance - shows balance in each account, prepared at the end of an accounting period (adjusted trial balance is made if changes are necessary)
Account balances from the adjusted trial balance are presented in the financial statements.
