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Summary part 1 accountinting notes from the book iba
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Everything you need to know about accounting.
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FINANCIAL ACCOUNTING (PART.1)Book notes from Wong et Al.
Chapter 1 : Introducing Financial Accounting 2
A. Demand for accounting information 2
B. Business activities 4
C. Financial statements 5
D. Financial reporting environment 7
E. Analyzing financial statements 8
Chapter 2 : Constructing Financial Statements 10
A. Reporting financial condition 10
B. Reporting financial performance 13
C. Retained earnings 15
D. Reporting on equity 15
E. Journalizing and posting transactions 16
F. Analyzing financial statements 17
Chapter 3 : Adjusting Accounts to Financial Statements 19
A. Accounting cycle 19
B. Analyzing and recording transactions 19
C. Adjusting the accounts 20
D. Adjusting the accounts 22
E. Closing temporary accounts 23
Chapter 4 : Reporting and Analyzing Cash Flows 24
A. Purpose of the statement of cash flows 24
B. Framework for the statement of cash flows 25
C. Preparing the statement of cash flows - Operating activities 27
D. Preparing the statement of cash flows - Investing and financing activities 30
E. Additional details in the statement of cash flows 31
F. Analyzing financial statements 32
Chapter 5 : Analyzing and interpreting financial statements 34
A. Introduction 34
B. Vertical and Horizontal Analysis 34
C. Return on investment 35
D. Liquidity and solvency 38
Chapter 6 : Reporting and Analyzing Revenues and Receivables 42
A. Reporting operating income 42
B. Reporting accounts receivable 44
C. Analyzing financial statements 46
D. Earnings management 47
,CHAPTER 1 : INTRODUCING FINANCIAL ACCOUNTING
A. Demand for accounting information
❖ Accounting = the process of recording, summarizing, and analyzing financial transactions.
- Accounting information produced by a company can be :
• Financial accounting : designed primarily for decision makers outside of the company.
• Managerial accounting : designed primarily for decision makers within the company.
❖ Who uses financial accounting information ? Demand derives from: numerous users including :
- Shareholders and potential shareholders.
• Shareholders of a corporation are its owners. A corporation exists as a legal entity that
issues shares to its owners in exchange for cash. Corporations with public traded shares =
public corporations.
• Also called stockholders.
• Other common forms of ownership :
‣ Sole proprietorship = a single owner who typically manages the daily operations
(for example, small family run businesses).
‣ Partnership = tow or more owners who are usually involved in managing the
business.
• Financial statements = information on the risk and return associated with owning shares in
the corporation + reveal how well management has performed.
- Creditors and suppliers.
• Most companies borrow from banks + other lenders known as creditors.
‣ They are interested in the potential borrower’s ability to repay.
‣ They sue financial accounting info to help determine loan terms, amounts…
• Suppliers use financial information to establish credit sales terms + to determine long-term
commitment to supply-chain relationships.
• Creditors + suppliers rely on information in the financial statements to monitor + adjust
their contracts and commitments with a company.
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, - Managers and directors.
• Managers often receive cash bonuses, shares of the company, or other incentives that is
directly linked to the information in the financial statement.
• Publicly traded companies are required to have a board of directors.
‣ Directors = elected by the shareholders to represent shareholder. Interests +
oversee management.
‣ They use financial accounting information to review the results results of
operations + evaluate future strategies + assess management performance.
• Managers + directors use financial statements of other companies to perform comparative
analysis + establish performance benchmark.
- Financial analysts.
• Because decision-makers lack the time to analyze financial statements ➔ hire financial
analysts such as credit rating agencies, portfolio managers, and security analysts.
• Their analysis helps to identify + asses risk, forecast performance, establish price for new
issues of shares…
- Other users of financial accounting information.
• Prospective employees, to learn about the company before interview.
• Labor unions examine financial statements in toner to assess the financial health of firms
prior to negotiating labor contracts on behalf of the firm’s employees.
• Customers use the information to assess the ability of a company to deliver products or
services + long-term reliability.
• Tax agencies, ton help establish + implement tax politics.
• Government agencies use it to develop and enforce regulations.
❖ Costs and benefits of disclosure. Disclosure = the act of providing financial information to external users.
- Benefits :
• It often lowers financing + operating costs. For loans, without financial information, a bank is
likely to ask for a bigger interest rate… So it reduces a company’s cost of borrowing.
- Costs :
• Obvious cost of hiring accountants.
• Can also result in costs imposed by competitors. Disclosing too much information that will
eta available to competitors can reduce in a loss of competitive advantage.
• It can also raise investors’ expectations about a company’s future profitability.
• Political cost : highly visible companies (defense, oil…) are often target of scrutiny.
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, B. Business activities
❖ What do businesses do ?
❖ Planning activities
- Company’s strategic (or business) plan = how it plans to achieve its goals. The plan’s success
depends on an effective review of market conditions.
• Must also include competitive analyses + opportunity assessments.
- Most information in a business plan is closely guarded by management.
❖ Investing activities = acquiring and disposing of the resources needed to produce + sell a company’s
products and services.
- These resources = assets, they provide future benefits to the company. Companies differ in
amounts and variety of these resources.
- Some assets are used quickly (retail clothing store). Others are for long-term use (buildings).
❖ Financing activities = refer to the methods companies use to fund investments in resources.
- Financial management = planning of resource needs.
- Two sources of funding :
• Equity funding = funds contributed to the company by its owners + any income retained
by the company.
‣ Does not impose a legal obligation to repay.
• Creditor financing = funds contributed by non-owners which create liabilities.
‣ Liabilities = obligations the company must repay in the future (ex : bank loan).
‣ Imposes a legal obligation to repay usually with interest. Failure —> legal trouble.
- The accounting equation :
Investing = Creditor financing + Owner financing
Assets = Liabilities + Equity
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