Financial Accounting

The primary purpose of accounting is to

provide financial information for decision-making

Name 2 internal and 2 external users

internal: managers and employees.
external: investors and creditors

1. What is GAAP?

2. What organization sets USGAAP?

1. Generally Accepted Accounting Principles. The principle that ensures financial statements are prepared consistently across businesses

2. FASB. Financial Accounting Standards Board

1. Accounting Equation (Basic)

2. Expanded equation

3. DR and CR equation

1. Assets= Liability + Equity

2. Assets= Liabilities + Owner's Capital - Withdrawals + Revenues - Expenses

3. A=Dr L=CR E=CR Rev=CR Exp=DR Divs=DR

What accounts normally carry a CR balance?

Liabilities, Equity, and Revenues

Purpose of AJEs

To update accounts for revenues earned and expenses incurred

Which accounts are closed at period-end?

Revenues, Expenses, and Withdrawals ( temporary accounts)

What are the cost flow assumptions/ inventory methods

FIFO, LIFO, Weighted Average, and Specific Identification

Which inventory method results in the lowest taxes in inflation?

LIFO

Formula for Gross Margin

Net Sales - COGS

What are 2 cash controls?

Petty cash and Reconciliations

2 purposes of internal control

1. Safeguard assets
2. Ensure accuracy

2 methods for bad debt accounting

1. direct write off
2. allowance method

What are the 3 main depreciation methods?

1. straight-line
2. units of production
3. double-declining balance

What's an intangible asset?

a non-physical asset with future benefits.
Patents, copyrights, and trademarks (amortized)

What are bonds?

• Par

• Discount
  -Premium

Borrows money from investors; LT debt
par: bond sold at face value
discount: less than face value
premium: more than face value

What is amortization?
-Straight-line
-Effective interest

allocating the cost of an asset or long-term liability over useful life, reflecting value; intangible assets

• straight-line: cost evenly
• effective interest: amortize bond premiums and discounts; actual interest exp based on bond's carrying value

What is a common-sized statement?

financial statements with each item expressed a % of base amount

What's the indirect method of statement of cash flows?

Start with net income and adjust non-cash items

Recording transactions first occurs in the

Journal

Closing process transfers temporary accounts into:

Owner's Capital

Acid-Test ratio excludes:

Inventory

Dividends reduce:

Both assets and equity

Which ratio measures how efficiently a company uses assets to generate sales?

Total Asset Turnover Ratio

What types of stock has a par value?

1. Common
2. Preferred

Debt Ratio Formula

Liabilities divided by assets

What entry records estimated warranty liability?

DR Warranty Exp
CR Warranty liability

What measure shows how quickly receivables are collected?

Receivable Turnover Ratio

5 types of AJEs

1. Pre-paid expenses or assets
2. depreciation
3. accrued revenue
4. accrued expense
5. unearned revenue

Treasury stock is reported as:

A reduction of equity (DR)

What are 3 sections of the Statement of Cash Flows

1. Operating (day to day)
2. Investing (LT Assets)
3. Financing (LT liability)

Common Financial Ratio (Current Ratio)

Current Assets divided by Current Liabilities
Liquidability: short-term obligations

Acid-Test Ratio

liquidability. .9-1.0=ideal

Inventory Turnover Ratio

COGS ÷ Avg. Inventory

How efficiently company manage inventory

Days of Sales in Inventory Ratio

365 ÷ Inventory Turnover

A/R Turnover Ratio

Net Credit Sales ÷ Average Net A/R

Collection Period Ratio

365 days ÷ A/R Turnover

Debt Ratio

Total Liability ÷ Total Assets
Debt paying ability. %

Times- Interest- Earned Ratio

income from operations ÷ Interest Expense

Gross Profit % Ratio

Gross Profit ÷ Net Sales

Return in Sales Ratio

Net income ÷ Net Sales
Profitability

Return in Assets Ratio

Net income + Interest Expense ÷ Average assets

Return in common equity ratio

Net income - Preferred Dividends ÷ Average common equity

Equity per Share Ratio

Net income - Preferred dividends ÷ Average of common shares outstanding

Price/ Earnings Ratio

Market price per common share ÷ earnings per share

Dividend Yield Ratio

dividends per share ÷ market price per share

Income statement

Rev - Exp = Net income

Balance Sheet

A=L+E

Statement of changes in equity

Begin Amount + Net income - Dividends-
Common shares and retained earnings

Statement Title

Company Name
Statement Type
Date
(for the year ended…)

Rule of thumb for indirect statements of cash flows

(all up) A=Cash down
L = cash up
E=cash up