Financial Accounting: Key Concepts, Transactions, and Financial Statements

What are the two main financial statements emphasized in this course?

Balance sheet and income statement

Who are the primary external parties that financial statements are prepared for?

Shareholders and lenders

What is the primary return for shareholders?

Dividends and stock price appreciation

What is the primary return for lenders?

Interest and repayment of principal

What is GAAP?

Generally Accepted Accounting Principles

Which organization has jurisdiction over publicly traded companies in the U.S.?

Securities and Exchange Commission (SEC)

What is the role of the Financial Accounting Standards Board (FASB)?

To set GAAP standards

What is the fundamental accounting equation?

Assets = Liabilities + Equity

What are assets?

Resources controlled by the company with future economic benefit

What are liabilities?

Amounts owed to third parties

What is equity?

Shareholders' stake in the company, calculated as assets minus liabilities

What are the two components of equity?

Contributed capital and retained earnings

What does the income statement show?

Revenues minus expenses equals net income for a specific period

What is the statement of retained earnings?

Beginning retained earnings plus net income minus dividends equals ending retained earnings

What does the balance sheet represent?

A snapshot of a company's assets, liabilities, and equity at a specific date

What is the statement of cash flows?

A financial statement required under GAAP that shows cash inflows and outflows

What is Return on Assets (ROA)?

A ratio evaluating managerial performance, calculated as net income divided by average total assets

How is average total assets calculated?

(Beginning Total Assets + Ending Total Assets) ÷ 2

What are the two levers to improve ROA?

Increase net income or decrease unproductive assets

What is the difference between dividends and expenses?

Dividends are a return of profit to owners, while expenses are costs of doing business

What is double-entry accounting?

A system where every transaction affects at least two accounts

What is the going concern assumption?

The assumption that a corporation will continue its operations indefinitely

What is the relationship between shareholders and management in a corporation?

Shareholders own the corporation, while management is hired to run it

What happens when a company provides consulting services on credit?

Accounts receivable increases and retained earnings increase

What does paying down accounts payable affect?

It decreases cash and decreases accounts payable

What is the significance of the balance sheet equation?

It ensures that total assets equal total liabilities plus equity

What is the purpose of accounting rules?

To ensure comparability of financial statements across companies

What is the primary focus of managerial accounting?

Internal use only, with no standardized rules

What is the difference between public and private companies regarding GAAP?

Public companies must follow GAAP; private companies are not required to

What is the fundamental principle of double-entry accounting?

Every transaction affects at least two accounts, keeping Assets = Liabilities + Equity in balance.

What do the terms 'debit' and 'credit' refer to in accounting?

Debit refers to the left side of an account, and credit refers to the right side.

What is a T-account?

A T-account is a ledger account that records all transactions affecting one account.

How do you determine the balance of a T-account?

Balance is the sum of one side minus the sum of the other, recorded on whichever side has the larger total.

What is the golden rule of accounting regarding debits and credits?

Total debits must always equal total credits for every transaction.

What is a journal entry in accounting?

A journal entry records a transaction, with debits listed first, followed by credits.

What is the purpose of the chart of accounts?

It is a company's official list of accounts, each with a reference number for consistent recording.

What is the difference between temporary and permanent accounts?

Temporary accounts measure flows over a period and are closed at period end; permanent accounts measure levels at a point in time.

What is the revenue recognition principle?

Record revenue in the period goods/services were actually provided, not necessarily when cash changes hands.

What is the matching principle in accounting?

Record expenses in the same period as the revenue they helped generate.

What are deferred expenses?

Cash is paid first, recorded as an asset, and expensed gradually as the asset is used up.

Provide an example of a deferred expense.

Prepaid insurance is paid upfront and expensed monthly.

What are deferred revenues?

Cash is received first, recorded as a liability, and recognized as revenue gradually as goods/services are provided.

Provide an example of deferred revenue.

Client pays in advance for consulting services, recorded as unearned revenue until earned.

What is accrued expense?

An expense that is recognized before payment is made.

What is accrued revenue?

Revenue that is recognized before cash is received.

What is the adjusting entry for a deferred expense?

Debit Expense and Credit Asset.

What is the adjusting entry for deferred revenue?

Debit Liability and Credit Revenue.

What is the significance of the adjusting entries?

They bring balances into line with GAAP before producing financial statements.

What is the formula for calculating monthly depreciation?

Monthly depreciation = (Cost - Salvage Value) ÷ Useful Life in months.

What is the net book value of an asset?

Net book value = Historical Cost - Accumulated Depreciation.

What is the impact of salaries earned but not yet paid on financial statements?

They must be recorded as an expense in the period earned, not when paid.

What is the role of the SEC in financial reporting?

The SEC oversees public companies to ensure compliance with financial reporting standards.

What is the purpose of adjusting journal entries?

To ensure that financial statements reflect accurate and compliant financial positions.

What happens to temporary accounts at the end of a reporting period?

They are closed out to prepare for the next period.

What is the importance of understanding the mechanics of accounting for exams?

It allows for quick calculations and accurate responses under time constraints.

What is the typical structure of a journal entry?

Each entry includes the transaction date and a brief explanation.

How are expenses recorded when cash has not yet been paid?

They are recorded as accrued expenses in the period they are incurred.

What is the core principle of accrual accounting?

Expenses are recorded when incurred, not when cash changes hands.

What are the two types of accounts in accounting?

Temporary accounts and Permanent accounts.

What do permanent accounts measure?

Levels (a point-in-time balance) including Assets, Liabilities, and Equity.

What do temporary accounts measure?

Flows (activity over a period) including Revenues, Expenses, and Dividends.

What happens to temporary accounts at the end of each period?

They reset to $0.

Where do permanent accounts appear?

On the Balance Sheet.

Where do temporary accounts appear?

On the Income Statement or Statement of Retained Earnings.

What is the purpose of closing entries?

To zero out temporary accounts and roll their net effect into Retained Earnings.

How do revenues affect Retained Earnings?

Revenues increase Retained Earnings.

How do expenses affect Retained Earnings?

Expenses decrease Retained Earnings.

What effect do dividends have on Retained Earnings?

Dividends decrease Retained Earnings.

What is the Accounting Equation?

Assets = Liabilities + Equity.

What is the formula for Profit Margin?

Profit Margin = Net Income ÷ Net Sales.

What is the formula for Current Ratio?

Current Ratio = Current Assets ÷ Current Liabilities.

What is a classified balance sheet?

It breaks Assets and Liabilities into current vs. non-current categories.

What is a current asset?

An asset expected to convert to cash or be used up within 12 months.

What is a non-current asset?

An asset used for longer than 12 months.

What is a current liability?

A liability expected to be settled within 12 months.

What is a non-current liability?

A liability settled over multiple years.

What is the role of the Securities and Exchange Commission (SEC)?

It enforces GAAP rules for publicly traded companies.

What is the difference between Financial Accounting and Managerial Accounting?

Financial accounting is for external reporting, while managerial accounting is for internal use.

What is the definition of Net Income?

Net Income = Revenues - Expenses.

What does the term 'Retained Earnings' refer to?

Earnings not distributed to shareholders but retained in the company.

What is the impact of a debit on assets?

A debit increases assets.

What is the impact of a credit on liabilities?

A credit increases liabilities.

What is the impact of a debit on expenses?

A debit increases expenses.

What is the impact of a credit on equity?

A credit increases equity.

What is the ledger in accounting?

A collection of all accounts and their balances for an accounting system.

What are deferral expenses?

Expenses that are paid in advance, such as prepaid insurance.

How is depreciation defined in accounting?

The allocation of the cost of a plant asset over its expected useful life.

What is the formula for straight-line depreciation?

Asset cost minus salvage value divided by useful life.

What is unearned revenue?

Revenue received in advance for services to be provided later.

What does the accounting equation state?

Assets = Liabilities + Equity.

What is the profit margin formula?

Net income divided by net sales (sales revenue).

What is the current ratio formula?

Current assets divided by current liabilities.

What is the full disclosure principle?

Report details that would impact user decisions, usually in notes.

What does the going-concern principle imply?

A business is presumed to continue operating indefinitely.

What is the monetary unit assumption?

Transactions are expressed in monetary units.

What is the time period assumption in accounting?

Company life is divided into periods (months/years) for reporting purposes.

What is a sole proprietorship?

A business owned by one individual, not legally separate from the owner.

What is a partnership in business?

A business owned by two or more individuals who are jointly liable.

What defines a corporation?

A business that is legally separate from its owners; owners are shareholders and not personally liable.

What is an LLC?

A Limited Liability Company where members are not personally liable for debts.