Financial Accounting

Financial Accounting (Definition)

Keeping the financial score for the entity

Financial Accounting (follows)

GAAP

Financial Accounting (Users)

External: stockholders, bankers, lenders, creditors, and vendors

Managerial Accounting (Definition)

Using accounting and non-accounting information to make decisions

Managerial Accounting (follows)

Conventions (No GAAP)

Managerial Accounting (Users)

Internal: people making decisions about costs

FASB

Financial Accounting Standards Board

GAAP

Generally Accepted Accounting Principles

Entity Principle

Organizational element about which accounting information is collected

Cost Principle

All costs are historical

Objectivity Principle

Arm's length negotiation

Going Concern Principle

Company will be around long enough to use up assets and pay all liabilities

Earned Revenue Recognition Principle

Rendered goods and services

Recognized Revenue Recognition Principle

Expectation of payment

Matching Principle

Match expenses with revenue in the period they occur

Consistency Principle

Follow the same procedures each accounting period so can compare financial statements

Conservatism Principle

If multiple options exist, pick the least favorable

Materiality Principle

If you knew the fact, it could change your mind; 5% of something

Full Disclosure Principle ("Full Monty")

Must disclose all relevant information

Assets

Something of future economic value

Are all assets shown on the balance sheet? If not, why not?

No; assets must be objectively quantifiable to be recorded on the balance sheet

Liability

Something owed

Are all liabilities shown on the balance sheet? If not, why not?

No; liabilities must be objectively quantifiable to be recorded on the balance sheet

Contingent Liability

Liability that cannot be objectively quantifiable

Stockholder's Equity

Capital + Retained Earnings

Capital

Investment by the stockholders

Retained Earnings (Definition)

Earnings retained in the business

Retained Earnings (Equation)

RE_end = RE_beg + NIAT - Dividends

Dividend

Distribution of retained earnings to stockholders (S/H Equity on B/S)

Expense

Expired asset (SG&A on I/S)

Revenue

Rendered goods and/or services with the expectation of payment

SEC

Securities and Exchange Commission

IRS

Internal Revenue Service

GAAS

Generally Accepted Auditing Standards

CPA

Certified Public Accountant

AICPA

American Institute of Certified Public Accountants

Authorized Organization (US)

FASB

Authorized Organization (International)

IASB

Rules (US)

GAAP

Rules (International)

IFRS

IFRS

International Financial Reporting Standards

Philosophy (US)

Objective (Rules) Based

Philosophy (International)

Principles Based

Accounting Process

Recording, classifying, reporting, interpreting

Chart of Accounts (Nicknames)

"Accountant's Bible" or "Index"

Chart of Accounts (Definition)

List of the names and account numbers for all accounts

General Journal (Nickname)

Book of Original Entry

General Journal (Definition)

Shows the debits and credits for each accounting transaction

General Ledger

List of all transactions for the accounting period sorted by account number

Debit

Entry on the left side of a general ledger account

Credit

Entry on the right side of a general ledger account

Trial Balance

List of all accounts showing that the total debits equal the total credits

Adjusting Entry

Reconciling a general ledger account to a backup schedule

Closing Entries

At end of period, all revenue and expense accounts closed to Retained Earnings

Reversing Entries

Reversing an accrual entry from a previous period

Contra Account

Account used to keep the balance in another account visible

"Close" or "Close the Books"

At the end of the period, close (move) all the revenue and expense account balances on the income statement to retained earnings; resets the income statement to zero to begin the next period

Accrual Basis

Accounting based on transactions

Cash Basis

Accounting based on cash in / cash out

Controller

Typically, the top accounting person in a company

Income Statement (Definition)

Matches revenue with expense over a period of time

Income Statement (Nickname)

Profit and Loss Statement

Cost of Goods Sold (Definition)

Cost of what is not there

Cost of Goods Sold (Formula)

Beginning inventory + net purchases - ending inventory

Non-Cash Charges (Definition)

Deduction on income statement but no cash paid out

Non-Cash Charges (Examples)

Depreciation, amortization, depletion, gain, or loss on asset sale

Gross Profit (Formula)

Net Revenue - COGS

SG&A

Selling, general, and administrative expenses (aka operating expenses)

Operating Income (Definition)

Income from the core business

Operating Income (Formula)

Gross Profit - SG&A

Non-Operating Income

Interest income and expense, capital gain or loss (aka "other")

Balance Sheet

shows Assets = Liabilities + Stockholders' Equity at a point in time (financial snapshot)

Current

Within 12 months or one operating cycle

Current Assets

Assets that will be used up or converted to cash within one year

Current Liabilities

Liabilities which are due within one year

Statement of Changes in Cash Position

Difference between two balance sheets expressed in cash

"Capitalize It" (Meaning)

Put the amount on the balance sheet; generally, as an asset to be depreciated or amortized

"Capitalize It" (Net Income Impact)

Increases net income

"Expense It" or "Write It Off" (Meaning)

Deduct the amount on the income statement

"Expense It" or "Write It Off" (Net Income Impact)

Decreases net income

Why is knowing the difference between "Capitalize It", "Expense It", and "Write It Off" important?

We want the net income to be correct

Common Stock (Definition)

Basic (common) stock of the company sold to stockholders

Common Stock (Rights)

Rights by state law

Preferred Stock (Definition)

Hybrid stock (may possess bond like characteristics) sold to specific investors

Preferred Stock (Rights)

Rights by contract

Authorized Stock

Stock authorized for sale by stockholders in the Article of Incorporation

Issued Stock

Stock sold or exchanged for value

Treasury Stock

Stock bought back by the company (i.e. in the treasury of the company)

Outstanding Stock

Issued minus Treasury; Stock held by investors; Most important: vote and receive dividends (if declared)

Fixed Assets (Synonym)

Plant Assets

Fixed Assets (Definition)

Assets with an estimated useful life of more than one year

Fixed Assets (examples)

PPE (property, plant, and equipment)

Impairment

Irreversible reduction in the value of asset below its book value

Goodwill

Amount paid above the identifiable assets in a transaction

Long-Term Liabilities

Liabilities due beyond more than one year

Book Value of an Asset (Formula)

Original cost - accumulated depreciation

Book Value of an Asset (Location)

Found on the balance sheet in assets

Maret Value of an Asset (Definition)

Value paid by a willing buyer and a willing seller

Market Value of an Asset (Location)

Not found on the financial statements

Book Value of a Company (Definition)

Common stockholders' equity