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Overview of Financial Accounting
1) Key Things To Know 5) Medium Practice Test
2) Practice As You Learn  
3) Self Test  
4) Easy Practice Test  

Key Things to Know

Financial information:   tells investors (owners) and creditors (lenders) how the business has performed and helps them determine potential future performance.  Financial information is used to make decisions on what to do with excess money.

Financial accountants provide information used to determine the use of excess money. 

 

Accounting is the language of business

      1)  “Accounting” is the words and formats used to present information to others
              outside the business. 

      2)  Business people need to understand  the financial position and profitability
              of a company.  

      3)   Business people need to understand the factors that change the financial
              position and profitability of a company. 

      4)  Financial accounting is used by all business people (not just accountants).  

 

A financial accounting system is used to record, summarize and report the 3 different types of activities of a business.  

   1)  Financing Activities:    The activities associated with raising money to establish the
                                                     operations of the business (sell ownership and borrow).

   2)  Investing Activities:     The activities associated with buying and selling items
                                                     used to operate the business (long-term assets)

   3)  Operating Activities:    The activities associated with the day to day operations
                                                     of the business (provide goods or services to customers
                                                     and associated costs)

 

Generally Accepted Accounting Principles (“GAAP”):
A set of guidelines established by various accounting standard setting authorities in  
consultation with accounting professionals that give guidance on:

            1) What type of financial information must be provided
            2) What format to use to provide information
            3) How to measure and quantify items reported on the financial statements

 

Financial Accounting Standards Board (“FASB”)
FASB is currently the primary accounting standard setting authority in the U.S. 
FASB guidance is part of U.S. Generally Accepted Accounting Principles (GAAP)

 

International Accounting Standards Board (“IASB”)
The primary current accounting standard setting authority for many countries
outside of the U.S.  The International Accounting Standards Board issues accounting guidance called International Financial Reporting Standards (“IFRS”)

 

Securities & Exchange Commission (“SEC”)
The government agency that oversees U.S. financial markets and accounting
standards for public companies.  The SEC requires public companies to follow U.S. GAAP and comply with SEC reporting requirements.

Private companies do not have to follow U.S. GAAP; however, it is difficult to raise funds from others if financial statements that follow U.S. GAAP are not provided to potential investors and creditors.

The 4 reports used to provide information are the:

            1)  Balance Sheet (also called Statement of Financial Position)

            2)  Income Statement (also called Statement of Operations)

            3)  Statement of Owner’s Equity   (also called Statement of Stockholder’s Equity)

            4)  Statement of Cash Flows

 

Footnotes:  provide information not stated on the financial statements; including 
            1)  a description of the accounting rules followed
            2)  details for significant items listed on the financial statements
            3)  information on relevant things not listed on the financial statements

 

Auditor’s Report:  A professional accounting firm examines a company’s financial statements and gives an opinion on whether or not the financial statements are fairly stated in accordance with GAAP.

 

The 4 Financial Statements:  (Required by GAAP)

Balance Sheet:      

    1)  what the company has (assets), what they owe (liabilities), and ownership;
            as of a specific date

    2)  shows cumulative amounts from the first day the business started operations
            to the current date.

    3)  shows how the company finances operations (from owners or from borrowing),
           and how the funds are invested in business (inventory, property, etc.)

 

Income Statement:            

    1)  company earnings during a specific period of time  (month, quarter, year). 
                                               
                        The value of goods and services provided to customers (price)
            less     The cost of providing to customers *                  
            =          Earnings (the same thing as net income or loss)         
                               
            *  The cost of providing to customers includes the cost of services that are
                 provided to the company and the cost of using things in the  business
                 in order to provide to the customer.

 

Statement of Owner’s Equity:         
 
    1)  Details all transactions with the owners of the company
             during a specific period of time (month, quarter, year).  This includes:        
                       
            A.  money owners added to the company in exchange for ownership
            B.  money repaid to owners (dividends)
            C.  profits and losses of the company.

 

Statement of Cash Flows: (reports the cash, which is not the same thing as profits)
                       
    1)  Operating Section:  cash generated from day to day operations

    2)  Investing Section:  cash related to buying and selling items used in the business

    3)  Financing Section: cash related to borrowing and repaying debt, and payments
                                             to or from owners

 



 
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