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Summary Financial Accounting IBA Tilburg University
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LECTURE 1 - CHAPTER 1Financial Accounting System
Provides information for external decision makers (investors, creditors, suppliers,
customers, government). Information must be relevant, reliable, comparable and
consistent.
→ GAAP: Generally Accepted Accounting Principles
Management Accounting System
Generates information for internal decision makers (managers throughout the organization);
detailed plans and continuous performance reports; no standards of reliability; less constrained.
Annual report
Basic overview of the operational, financial and extraordinary performance of a company
- over a specific period (year)
- compared to previous periods
- basically numbers and notes
- listed firms: complemented with a lot of brand naming, marketing
Four basic financial statements:
1. Income Statement
Statement of operations that reports revenues, expenses, and net income for a stated
period of time.
2. Statement of stockholders’ equity
Explains changes in stockholders’ equity accounts (common stock and retained
earnings) that occurred during the reporting period.
3. Balance sheet
Statement of financial position that reports dollar amounts for the assets, liabilities, and
stockholders’ equity at a specific point in time.
4. Statement of cash flows
Reports inflows and outflows of cash for a stated period of time.
GAAP are the measurement rules used to develop the information in financial
statements. Knowledge of GAAP is necessary for accurate interpretation of the
numbers in financial statements.
→ Management: accuracy of a company’s financial information
→ Auditors: responsible for expressing an opinion on the fairness of financial
statements
presentations based on their examination of the reports and records of the
company.
,LECTURE 2 - CHAPTER 2
Balance sheet: reports the financial position of an entity at a specific date
When is an item treated as an asset?
- a probable future benefit exists
- the business has an exclusive right to control the benefit
- the benefit must arise from some past transaction or event
- the asset must be capable of measurement in monetary terms
Asset classification
1. Current assets
Cash and other assets expected to convert into cash <1 year
E.g. cash, inventory, accounts receivable
2. Fixed assets
Intention of being used during multiple production cycles rather than held for sale >1 year
E.g PPE, patents, copyright
3. Tangible
E.g. machines, furniture, buildings
4. Intangible
E.g. copyrights, patents, goodwill purchased, licenses
A transaction is any activity that impacts the financial position of a business that can be
measured reliably; note: A=L+SE.
, Elements of balance sheet:
Assets: Probable future economic benefits owner of controlled by the entity as a
result of past transactions.
Liabilities: Probable future sacrifices of economic benefits arising from present
obligations of a business as a result of past transactions.
Stockholders’ equity: Residual interest of owners in the assets of the entity after settling
liabilities; the financing provided by the owners (contributed capital) and
by business operations (earned capital).
Journal entries
Express the effects of a transaction on accounts in a debits-equal-credits format. The
accounts and amounts to be debited are listed first. Then the accounts and amounts to
be credited are listed below the debits and indented, resulting in debit accounts on the
left and credit amounts on the right. Each entry needs a reference.
T-accounts
Summarize the transaction effects for each account. These tools can be used to
determine balances and draw inferences about a company’s activities.
Preparing a simple classified balance sheet:
1. Assets are categorized as current assets and noncurrent assets.
2. Liabilities are categorized as current liabilities and long-term liabilities.
3. Stockholders’ equity accounts are listed as Common Stock (number of shares x par value per
share) and Additional Paid-in Capital (amount received - par value), followed by Retained
Earnings (earnings reinvested in the business).
Current ratio = current assets / current liabilities
→ measures liquidity, ability to pay short-term debts with current assets
Investing activities: Purchasing and selling long-term assets; making loan; receiving principal
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