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Questions and Answers
What is the primary objective of financial accounting?
What is the purpose of the Balance Sheet?
What is the accounting equation?
What is the purpose of GAAP?
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What is classified as a Current Asset?
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What is the purpose of the Income Statement?
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What is the purpose of the Statement of Stockholders' Equity?
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What is the first step in the accounting process?
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Study Notes
Definition and Objectives
- Financial accounting is the process of recording, classifying, and reporting financial information of a business to stakeholders.
- Objectives:
- Provide financial information to stakeholders (investors, creditors, management) to make informed decisions.
- Ensure accountability and transparency in financial reporting.
Financial Statements
- Four main financial statements:
-
Balance Sheet: snapshot of company's financial position at a specific point in time.
- Assets = Liabilities + Equity
-
Income Statement: revenue and expenses over a specific period (e.g., month, year).
- Revenue - Expenses = Net Income
-
Cash Flow Statement: inflows and outflows of cash over a specific period.
- Operating, Investing, and Financing activities
- Statement of Stockholders' Equity: changes in equity over a specific period.
-
Balance Sheet: snapshot of company's financial position at a specific point in time.
Accounting Principles
-
GAAP (Generally Accepted Accounting Principles):
- Assumptions: accounting entity, going concern, monetary unit, historical cost
- Principles: matching, materiality, consistency, cost principle, full disclosure
- Accounting Equation: Assets = Liabilities + Equity
Asset Classification
-
Current Assets:
- Cash and cash equivalents
- Accounts receivable
- Inventory
- Prepaid expenses
-
Non-Current Assets:
- Property, Plant, and Equipment (PPE)
- Investments
- Intangible assets
Liabilities and Equity
-
Current Liabilities:
- Accounts payable
- Short-term loans
- Taxes owed
-
Non-Current Liabilities:
- Long-term loans
- Bonds payable
-
Equity:
- Common stock
- Retained earnings
- Dividends
Accounting Process
- Recording transactions: journal entries, ledgers, and trial balance
- Financial statement preparation: adjusting entries, closing entries, and financial statement preparation
Financial Accounting
- Financial accounting is the process of recording, classifying, and reporting financial information of a business to stakeholders.
- Objectives of financial accounting: provide financial information to stakeholders and ensure accountability and transparency in financial reporting.
Financial Statements
Balance Sheet
- Snapshot of company's financial position at a specific point in time.
- Formula: Assets = Liabilities + Equity.
Income Statement
- Revenue and expenses over a specific period (e.g., month, year).
- Formula: Revenue - Expenses = Net Income.
Cash Flow Statement
- Inflows and outflows of cash over a specific period.
- Classified into: Operating, Investing, and Financing activities.
Statement of Stockholders' Equity
- Changes in equity over a specific period.
Accounting Principles
-
GAAP (Generally Accepted Accounting Principles):
- Assumptions: accounting entity, going concern, monetary unit, historical cost.
- Principles: matching, materiality, consistency, cost principle, full disclosure.
- Accounting Equation: Assets = Liabilities + Equity.
Asset Classification
Current Assets
- Cash and cash equivalents.
- Accounts receivable.
- Inventory.
- Prepaid expenses.
Non-Current Assets
- Property, Plant, and Equipment (PPE).
- Investments.
- Intangible assets.
Liabilities and Equity
Current Liabilities
- Accounts payable.
- Short-term loans.
- Taxes owed.
Non-Current Liabilities
- Long-term loans.
- Bonds payable.
Equity
- Common stock.
- Retained earnings.
- Dividends.
Accounting Process
- Recording transactions: journal entries, ledgers, and trial balance.
- Financial statement preparation: adjusting entries, closing entries, and financial statement preparation.
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Description
Learn the basics of financial accounting, including the objectives and main financial statements such as the balance sheet.
