Financial Accounting
accounting equation
Assists = liabilities + stockholders equity
-referred to as fundamental model of business valuation
-referred to as fundamental model of business valuation
revenues
sales of goods or services to customers
net income
revenue-expenses
financial statements
a companies primary way of communicating to external users
income statement
a company’s timely report of expenses and revenues
the two sources of stockholders equity amounts are
paid in from shareholders
earned by corporations
earned by corporations
retained earnings
earned by corporations and not yet paid to shareholders
statement of stockholders equity contains
net income
beginning balance of retained earnings
dividends
beginning balance of retained earnings
dividends
income increases what?
company’s retained earnings
balance sheets contain what
assets, liabilities, stockholders equity
statement of cash flows
-provides information about cash receipts and cash disbursements for the time period
-classifies items as OPERATING, INVESTING, FINANCING
-classifies items as OPERATING, INVESTING, FINANCING
annual reports
include management discussion analysis and note disclosure for financial reports
accounting helps to
communicate information to decision makers
maintain records of a company’s operations
maintain records of a company’s operations
borrowing from a bank is a
financing activity
investing activity
involve buying and selling of land, buildings, and equipment used in business
ex: paying cash to buy equipment
ex: paying cash to buy equipment
operating activity
purchase goods from suppliers, designing, and manufacturing products
interest receivable (balance sheet)
notes payable (balance sheet)
represent amounts owed to creditors (usually the bank)
do all companies use the same accounting rules
yes, it allows for meaningful comparisons
FASB
establishes accounting rules (includes almost everyone except consumers)
IASB
established the IFRS (International Financial Reporting Standards)
Norwalk agreement
FASB and IASB formalized their commitment to the convergence of the U.S. GAAP and IFRS
SEC (securities and exchange commission)
set accounting and reporting standards for companies who’s securities are publicly traded
management
apply accounting standards when communicating to investors
auditors
-provide credibility to financial statements
-express professional opinion to financial statements
-express professional opinion to financial statements
FASB Conceptual Framework
foundation upon which financial accounting is built
cash
considered an asset
what two fundamental qualitative characteristics are fundamental for accounting
relevance and faithful representation
relevance
posses predictive value and confirmatory value
comparability
the overriding goal of financial information
cost constraint
suggests that financial accounting information is provided only when benefits of doing so exceed costs
managers
decide production and expansion
income statement
summarizes proft generating services of a company at a particular time
financial statement that is most useful in explaining a company’s stock price performance
income statement
if someone wanted to know a compare’s debt and see the financial accounting equation they would look at
balance sheet
salaries
are an expense on the income statement
payment of salaries is an
operating activity
collection of accounts receivable is what kind of activity
operating
account
provides the summary of effects of all transactions related to a particular item over a period of time
assests
cash, supplies, equipment, buildings
trial balance
a way to check and make sure that you have checked and correctly reported the balance of accounts
liabilities
accounts payable, salaries payable
stockholders equity
common stock
retained earnings
retained earnings
common stock
represents investments by stockholders
retained earnings
have not been distributed to stockholders by dividends
deferred revenue
when a liability is
a revenue account is increased with a
credit
common stock and retained earnings usually have a
credit balance
accounting cycle
the full set of procedures used to measure and communicate business transactions
a payment of cash dividends will decrease the following…
stockholders equity
retained earnings
assets
retained earnings
assets
companies record revenue at the time…
goods or services are provided
journal
provides a chronological record of all transactions affecting a firm
cost of equipment is an
asset
equipment repairs are an
expense
debits are used to increase
expenses and dividends (because expenses and dividends decrease retained earnings and these are a part of revenue which is a credit account)
revenues increase what
retained earnings
purchasing supplies on an account
debit supplies; credit accounts payable
internal transactions
are recorded at the end of a period
a payment of cash dividends will decrease
retained earnings
stockholders equity
assets
stockholders equity
assets
general ledger
all transactions of a company
on a trial balance the following would have a credit balance
in DEALOR the LOR stand for what accounts on a trial balance that need a credit to increase
stockholders equity (owners equity)
revenues
liabilities
revenues
liabilities
an increase in revenue increases ? which increases retained earnings
net income
the following accounts normally have a credit balance
notes payable
common stock
unearned revenue
common stock
unearned revenue
when a payment for a service is due later how do you record it on the date that the service is provided (prior to pay date)
debit accounts receivable
credit service revenue
credit service revenue
DEALOR (DEA)
Dividends
Expenses
assets
ALL NEED A DEBIT
Expenses
assets
ALL NEED A DEBIT
common stock and revenue require what to increase
CREDIT
deferred revenue
revenue received in advance from customers
notes payable
borrowing cash from a bank
when looking at a problem to determine assists remember
if you pay cash for supplies you are losing and gaining assets so the account remains unchanged
deferred revenue or unearned revenue
is always a liability
a closing entry for expense accounts involves
debit – retained earnings
credit – expenses
credit – expenses
adjusting entries never affect
cash
dividends in adjusting entries
debit – retained earnings
credit – dividends
credit – dividends
deferred revenue adjusting entry
credit – revenue
debit – liability
debit – liability
interest
expense
deferred revenue
liiability
closing account affects
revenues and liabilities
prepaid rent for two months
show prepaid rent – ASSET
prepaid rent – EXPENSE
prepaid rent – EXPENSE
a prepayment for salaries expense will cause a
debit to liabilities
credit to stockholders equity
credit to stockholders equity
accurral liabilities can
increase expenses
increase liabilities
increase liabilities
think about what is in the income statement and adjusted trial balance
expenses
revenues, expenses and dividends are..
temporary accounts
purpose of closing
to establish zero balances in the income statement and dividends accounts
debit accounts receivable and credit service revenue
equity increases
assets increase
assets increase
when revenues are earned but not collected
assets increase and equity increases
retained earnings is a temporary or permanent account
NOT temporary
accused salaries expense adjusting entry will result in
liabilities increase
equity decrease
equity decrease