Midterm exam study test
Chapters 1,3,6,7,8 (important exam!)
+ 67 test bank questions with answers
+ 7 specific tips for actual test
Financial Accounting: Global Edition
Walter T Harrison
12th edition 2023
English
9781292412900
Pages: 25
Reading time: 90 min.
7 x down to earth advice for final test >>>
,1. Get the basics drilled in:
Know the 4 main financial statements inside out:
o Income Statement → Performance (Revenue - Expenses = Net
Income)
o Balance Sheet → Position (Assets = Liabilities + Equity)
o Cash Flow Statement → Where’s the money coming/going?
o Changes in Equity → Shows what’s up with shareholder
investments
If you remember these, you’ll never get totally lost.
2. The Accounting Equation is LIFE:
Assets = Liabilities + Equity.
Tattoo this in your brain. Every single topic ties back to it, trust me.
3. Accrual vs. Cash Accounting:
o Accrual = When things happen, not when you pay or get paid.
o Cash = Cash moves, end of story.
4. Adjusting Entries Suck, But You’ll Survive:
These are for things like prepaid expenses and accrued revenues. Just
remember:
o Prepaid → Paid first, expense later.
o Accrued → Use first, pay later.
5. FIFO vs. LIFO:
o FIFO → First in, first out (oldest stock goes out first).
o LIFO → Last in, first out (newest stock goes out first).
FIFO is super common, so don’t overthink it.
6. Focus on Key Formulas:
Some critical ones are:
o Gross Profit = Sales Revenue - COGS
o Average Cost = Total Cost of Units / Total Units Available
7. Don’t Cram Definitions:
Instead, focus on understanding why things happen. Like, why do we adjust
entries? Why is accrual better? If you get the logic, you’ll remember the
details.
,
,
,
,Chapter 1 — Conceptual Framework and Financial Statements
Business decisions
Core of financial accounting:
Statement of Comprehensive Income (includes Income Statement)
Statement of Financial Position (Balance Sheet)
Statement of Cash Flows
Statement of Changes in Equity
Financial statements: business documents that companies use to report the
results of their activities to various user groups, who make a variety of decisions
(buy, hold, sell invest).
Net income: excess of revenues over expenses.
Accounting is the language of business
Accounting is an information system. It records and measures business
activities, processes data into information and communicates them to decision
makers who make decisions that will impact on business activities.
Two perspectives of accounting
Financial accounting: provides information for decision makers outside the
reporting entity, external.
Management accounting: internal.
Organizing a business
Accounting is used in every type of business:
Proprietorship: owned by proprietor, liable for business debts.
Partnership: owned by partners (general partners are personally liable,
limited partners are not).
Corporation: owned by shareholders, not personally
liable. Accounting standards
Necessary, vary in different jurisdictions.
Generally Accepted Accounting Principles, used to compare financial results
across entities from different countries.
The International Accounting Standards Board produces the International
Financing Reporting Standards.
Their biggest advantage is that they reduce costs.
The conceptual framework
Conceptual framework
Prescribes the nature, function and boundaries within which financial
accounting and reporting operate.
Focus on general purpose financial statements, prepared and presented
(at least) annually and directed toward the common information needs
of a wide range of financial statement users.
The objective of financial reporting is to provide financial information about
the reporting entity that is useful to existing and potential investors, lenders and
other creditors. Users evaluate financial statements to make decisions.
1
, Users of accounting information: investors, employees, creditors, suppliers and
trade creditors, retail customers, Government and its agencies, the public.
Qualitative characteristics of accounting
Fundamental characteristics:
o Relevance: must be capable of making a difference to the decision
maker. It is influenced by the materiality of the information.
o Faithful representation: financial statements represent
economic phenomena so they should be complete (include all
necessary information), neutral (depicted without bias) and free
from error (no errors or omissions).
Enhancing characteristics:
o Comparability: basis of preparation and presentation remains
comparable over time.
o Verifiability: given the same scenario, two different agents can
come to a consensus that the depiction made is faithful.
o Timeliness: information must be made available to users early
enough to help them make decisions.
o Understandability: accounting information must be classified,
characterized and presented clearly and concisely.
Constrains faced: costs.
Assumptions made:
Accrual basis: transactions are recognized when they occur and not
when payment is made.
Going concern: the business has neither the intention nor the need to
liquidate.
We are accounting for…
Assets: economic resources controlled by the entity which are expected
to produce future economic benefits to it.
Liabilities: present obligations of the entity which are expected to result
in an outflow of economic benefits from the entity.
Equity: the residual interest in the entity’s assets after deducing
liabilities. It represents shareholders’ residual claim to the entity’s assets.
It includes share capital (amount shareholders have invested in equity)
and retained earnings (amount earned by income-‐producing activities
and kept for use in the business).
Income: increases in economic benefits during an accounting period. It
includes revenue (arises from the ordinary course of business) and
gains (outside the ordinary course of business).
Expenses: decreases in economic benefits during an accounting period. If
they are out of the ordinary, they are referred to as losses.
Financial position (assets, liabilities, equity) Balance Sheet
Financial performance (income and expenses) Income Statement
The accounting equations
Basic accounting equation: Assets = Liabilities + Equity
Net: amount after a subtraction.
Income increases equity, expenses decrease equity.
2
