Accounting Fundamentals Lesson 1

Financial Statements

• Four main financial statements are commonly prepared by publicly traded companies:
  • Balance Sheet
  • Income Statement
  • Statement of Cash Flows
  • Statement of Retained Earnings (Owner's Equity)

Balance Sheet (Statement of Financial Position)

• Provides insight into a company's ability to pay bills, acquire capital, and distribute cash dividends.
• Includes three key items: the company name, statement title, and the specific date of the report.
• Displays assets, liabilities, and shareholders' equity, adhering to the accounting equation:
  • Assets = Liabilities + Owners Equity (A = L + OE)
• Assets are categorized as current (expected within a year) and non-current (long-term).
• Current assets include cash, short-term investments, accounts receivable, inventory, and prepaid expenses.
• Non-current assets typically encompass long-term investments and intangible assets.
• Liabilities are also divided into current (satisfied within a year) and non-current categories.
• Key indicators derived from the balance sheet include working capital, current ratio, quick ratio, and debt-equity ratio.

Income Statement

• Measures a company's earnings and profitability over a specific period (month, quarter, or year).
• Formula for net income: Net Income = Revenues - Expenses.
• Revenue increases assets and owners' equity, while expenses decrease them.
• Depicts the relationship of debits and credits, which are essential for determining net income or loss.
• Equity computation for sole proprietorships and corporations differs, with corporations including items like retained earnings and premium stock.

Statement of Cash Flows

• Illustrates sources and uses of cash throughout a specified period.
• Categorizes cash flow into operating activities, investing activities, and financing activities.
• Includes sections for net cash flow from various activities, exchange rate impacts, and end-of-period cash balance.
• Constructed using data from beginning and ending balance sheets, as well as income statements.

Key Accounting Terms

• Accounts Payable: Liability
• Accounts Receivable: Asset
• Common Stock: Owners' Equity
• Long-Term Debt: Liability
• Retained Earnings: Owners' Equity
• Accrued Expenses Payable: Liability

Double-Entry Bookkeeping

• Records economic events as transactions affecting at least two accounts, involving at least one debit and one credit.
• Each transaction includes the date, amount, and description.
• Understanding debits and credits is crucial:
  • Debit means left-hand side; Credit means right-hand side.
  • Cash increases with debits and decreases with credits, reflecting the nuanced use of these terms.

Tax Accounting

• Governed by laws and regulations at federal, state, and local levels.
• Tax accountants aid in minimizing tax obligations and ensuring compliance with IRS rules.

Fund Accounting

• Used in nonprofit entities to manage resources towards specific objectives.
• Distinguishes between general funds for daily operations and special purpose funds for specific initiatives, helping maintain resource control.

Forensic Accounting

• Involves accounting practices in legal contexts, such as litigation support and financial investigations.
• Forensic accountants analyze financial evidence and may provide expert testimony in court-related matters.

This quiz covers the foundational concepts of financial statements, specifically focusing on the balance sheet, income statement, statement of cash flows, and statement of retained earnings. Understand how these financial documents reflect a company's operations and financial position. Test your knowledge on the purposes and structures of these essential accounting reports.