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Questions and Answers
What is the primary objective of financial accounting?
What is the primary objective of financial accounting?
What is the purpose of the Balance Sheet?
What is the purpose of the Balance Sheet?
What is the accounting equation?
What is the accounting equation?
What is the purpose of GAAP?
What is the purpose of GAAP?
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What is classified as a Current Asset?
What is classified as a Current Asset?
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What is the purpose of the Income Statement?
What is the purpose of the Income Statement?
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What is the purpose of the Statement of Stockholders' Equity?
What is the purpose of the Statement of Stockholders' Equity?
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What is the first step in the accounting process?
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.
