This is a summary of the main theory in the course, followed by a step by step on hot to solve the most common questions about Long term- assets, COGS, and Revenues. It also has the most common journal entries, and how to make all financial statements. It will help you review for the exam and also ...
Financial Accounting Exam Guide
Theory
● Accounting systems provide financial statements for external decision-makers and
managerial accounting reports for internal decision-makers
● The objective of accounting is to provide financial information about the reporting
company that is useful for decision-making
● IFRS (international financial reporting standards) and IASB (international accounting
standard board):
○ Provide the rules for accounting
○ Provide a common global language for business affairs.
○ Reason: so company accounts are understandable and comparable across
firms and international boundaries
● Elements related to the financial position are:
○ Assets: resources (good or right) controlled by the company and from which
economic benefits are expected to flow to the firm.
○ Liabilities: a present obligation of the company arising from past events
○ Equity: residual interest in the assets of the company after deducting all of its
liabilities.
● Elements related to the performance ie. profit:
○ Revenues/income
○ Expenses
● According to IFRS:
○ Financial statements shall present fairly the financial performance, financial
position, and cash flows of a company.
● Accrual basis of accounting:
○ Economic facts must be recorded as they occur, regardless of related
cashflows.
○ Meaning that revenues and expenses should be recorded when they are
incurred, not when cash is paid or received.
, ● The double-entry system is based on the duality principle
● Types of businesses:
○ Soleproprietorship: a single owner
○ Partnership: two or more co-owners
○ Corporation:
■ Publicly owned: owned by the public through the sale of shares.
■ Privately owned: owned by fsamilies or a small group of shareholders,
shares are not traded in the open market.
● Corporations must use the accrual priprinciples of accounting.
Financial Statements:
● Income statement: evaluates performance/profitability.
○ Revenues - expenses = profit
○ Earnings generated in the operations (value added)
○ Shows the performance of an accounting period
● Balance Sheet: evaluates financial position.
○ Assets = liabilities + equity
○ Assets are economic resources, and liabilities and owners' equity are the
sources of financing for the assets.
○ Shows a snapshot of the assets, liabilities, and equity at a point in time
○ Also known as the statement of financial position.
● Cash-flow statement: evaluates the cash-flow generation and management
○ Shows cash inflows and outflows related to investing, financing, and operating
activities.
○ Measures changes over an accounting period
● Statement of owner’s equity: shows the changes in equity.
○ Changes in the company’s stockholder's equity accounts
○ Measures changes over an accounting period
○ Also known as change equity statement
● It is important to understand that the balance sheet is the only financial statement
that reports on a certain point in time and not over a given accounting period, and to
, see how the statements are linked together. This can be better explained by the
following graphs:
Balance Sheet
● Assets:
○ Current/short-term: Assets expected to be converted into cash or used in the
operating cycle within a year
■ Cash and marketable securities
■ Receivables
■ Inventory
■ Prepaid expenses
○ Non-current/long-term: Not expected to expire or be converted into cash
within a year
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