Financial Accounting Fundamentals
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Questions and Answers

What is the primary objective of financial accounting?

  • To provide financial information to stakeholders for informed decisions (correct)
  • To ensure profitability of a business
  • To manage the day-to-day operations of a business
  • To minimize taxes owed by a business

    • What is the purpose of the Balance Sheet?

  • To provide a snapshot of a company's financial position at a specific point in time (correct)
  • To report changes in equity over a specific period
  • To show the inflows and outflows of cash over a specific period
  • To report revenue and expenses over a specific period

    • What is the accounting equation?

  • Assets + Liabilities = Equity
  • Assets = Liabilities - Equity
  • Assets = Liabilities + Equity (correct)
  • Assets - Liabilities = Equity

    • What is the purpose of GAAP?

    <p>To provide a framework for financial reporting and accounting</p> Signup and view all the answers

    What is classified as a Current Asset?

    <p>Cash and cash equivalents</p> Signup and view all the answers

    What is the purpose of the Income Statement?

    <p>To report revenue and expenses over a specific period</p> Signup and view all the answers

    What is the purpose of the Statement of Stockholders' Equity?

    <p>To report changes in equity over a specific period</p> Signup and view all the answers

    What is the first step in the accounting process?

    <p>Recording transactions</p> Signup and view all the answers

    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:
      1. Balance Sheet: snapshot of company's financial position at a specific point in time.
        • Assets = Liabilities + Equity
      2. Income Statement: revenue and expenses over a specific period (e.g., month, year).
        • Revenue - Expenses = Net Income
      3. Cash Flow Statement: inflows and outflows of cash over a specific period.
        • Operating, Investing, and Financing activities
      4. 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

    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.

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