Objective of Financial accounting

 To provide useful information about a company to whom it may concern (External

Users)
o External users
 Investors (primary)
 Creditors (primary)
 Government agencies
 Labor unions customers
 Suppliers
 Financial intermediaries

Cash basis accounting

 Measures cash receipts and cash payments

Accrual basis accounting

 Measures revenues and expenses when the associated business activities occurred,
regardless of when cash is received or paid

FASB Codification
 ASC (Accounting standards codification)
 Ex: xxx – xx – xx – x
 Topic – subtopic – section – paragraph

Qualitative characteristics
 Relevance
o Does the information make a difference?
 Predictive value
 Many decision require the ability to predict what will happen in
the future
 Confirmatory value
 Helps users confirm or correct prior expectations
 Materiality
 The nature of the item
 Faithful representation
o Can the information be relied on to represent the true underlying situation?
 Completeness
 All the information that is necessary for faithful representation is
provided
 Neutral
 A company cannot select information to favor one set of
interested parties over another
 Free from error
 More accurate presentation of a financial item
Enhancing qualitative characteristics
 Comparability
o Information that is measured and reported in a similar manner for different
companies or time period
 Verifiability
o Independent measurers, using the same methods, arrive at the same results
(historical cost vs. fair value)
 Timeliness
o Information needs to be available before it loses its capacity to influence
decisions
 Understandability
o Users can comprehend the information within the context of the decision being
made

Key constraints
 Cost effectiveness
o The costs of providing the information must be weighed against the benefits that
can be derived from using it
 Cost of providing information
o The costs of information gathering, processing and communicating

assets
 Probable future economic benefits obtained or controlled by an entity
 Confers future economic benefits
 Owned by company
 Arise from past transaction

Liability
 Probable future sacrifices arising from present obligations
 Future economic sacrifice
 Unavoidable obligation
 Arise from past transaction

Equity
 Residual interest in the assets of an entity after deducting its liabilities
 Contributed capital
 Earned capital

Comprehensive Income
 Change in equity of an entity during a period from transactions and other events and
circumstances from nonowner sources
Revenue
 Inflow or other enhancements of assets of an entity or settlements of its liabilities from
delivering or producing goods, rendering services or other activities that constitute the
entity’s ongoing major or central operations

Expenses
 Outflow or other using up of assets of an entity or incurrence of its liabilities from
delivering or producing goods, rendering services or other activities that constitute the
entity’s ongoing major or central operations

Gains
 Increases in equity from peripheral or incidental transactions of an entity and from all
other transactions and other events and circumstances affecting the entity except those
that result from revenues or investment by owners

Loss
 Decreses in equity from peripheral or incident transactions of an entity and from all
other transcribed

Four assumptions of accounting

 Economic entity
o Events can be identified with a specific entity
 Going concern
o A business entity will continue to operate indefinitely
 Monetary unit
o Money is the appropriate measure for accounting information
 Periodicity
o The life of a business is divided into artificial time periods for financial reporting

CS 5
Recognition
 Process of admitting information into the financial statements

Measurement
 Process of associating numerical accounts with the elements

Disclosure
 Process of including additional pertinent information to the financial statements and
accompanying notes

Expense recognition
 Expenses are outflows or other using up of assets or incurrences of liabilities from
providing goods or services
Journal entries
 Provide a chronological record of all economic events affecting the firm
o Must have:
 Date
 Debit & credit

Trial balance
 Created to assure debits and credits are equal

Adjusting entries
 Recorded at the end of any period when financial statements are prepared to better
match revenues and expenses
o Exp paid in cash record as asset – prepaid exp
o Cash received in advance of good or service, record as liability – deferred
revenue
o Revenue earned but not received – accrued receivable
o Exp incurred but not paid – accrued liabilities

The Closing Process

 All temporary account balances are reduced to zero and are closed to Retained Earnings
 Dividends are also closed out to retained earnings

How to caculate gains/losses for disposal of assets

1. Annual depreciation = (acquisition cost – salvage value) / useful life
2. Accumulated depreciation = Annual depreciation

Cash equivalent
 Short, 3 month investment, so companies can earn on cash they have while keeping it
liquid

A/R net
 Accounts receivable – bad debt expense

PPE net
 Property, plant and equipment – accumulated depreciation

Earned capital
 ℜ(retained earnings , initial∧final)→ ℜf =ℜi +¿−¿
 Additional Paid in capital

Solvency:
 Total liabilities / total assets = leverage ratio
Income Statement
 Operating income
o Sales revenue, COGS, Gross profit, Operating expenses
 Non-operating income
o Interest revenue, interest expense, gain on sale of investments
 Income from continuing operations
o Op & non-op income minus income tax expense

Investing activities
 Inflows and outflows of cash related to the acquisition and disposition of:
 Long-lived assets used in the operations of the business
 Investment assets

Financing activities
 Inflows and outflows of cash related to external financing of the company with:
 Owners
 Inflow when shares are sold to them
 Outflow through dividends and requisitioned shares
 Creditors
 Inflow when cash is borrowed
 Outflow when borrowed cash is paid back

Methods of reporting
 Direct
o
 Indirect
o Accrual basis
o Noncash adjustments
o Cash basis

IC - 3

6) d
7)
1. Item is not material
2. Comparability
3. Faithful representation
4. Predictive and confirmative value, and materiality
8) 4
9) b
10) b
IC – 4

What will a debit do to the account

1. Inventory – increase
2. Depreciation expense – increase
3. Accounts payable – decrease
4. Prepaid rent – increase
5. Sales revenue - decrease
6. Common stock – decrease
7. Salaries payable – decrease
8. Cost of goods sold – increase
9. Utilities expense – increase
10. Equipment – increase
11. Accounts receivable – increase
12. Utilities payable – decrease
13. Interest revenue – decrease
14. Dividend – increase
15. Unearned revenue – decrease
16. Notes payable – decrease

Journal entry

Debit credit
Dividend 5000 cash 5000
Prepaid rent 3000 cash 3000
Accounts receivable 12000 sales revenue 12000
Inventory 10000 accounts payable 10000
Supplies 5000 cash 5000
Cash 8000 common stock 1000
Additional PIC 7000
Cash 3000 accounts receivable 3000
Cash 35000 notes payable 35000
Supplies expense 500 supplies 500
Cash 6000 unearned revenue 6000

General ledger false statement

(1) General ledger provides a chronological list of the transactions within the firm
IC 5

1) D advertising expense debit normally exceeds credit

2) D making insurance payment in advance is a prepaid expense
3) A when a company sell a
4) B accruals occur after revenue or expenses