Review of Financial Accounting Concepts

Review of Financial Accounting Concepts

• Managerial vs. Financial Accounting: Distinction between accounting used for internal management decisions and external reporting.
• Basic Financial Statements: The four main statements (like balance sheets, income statements, cash flow statements, and statements of owner's equity) are used to report a business's financial performance.
• Assets, Liabilities, Equity, Revenue, and Expense: Key accounting elements for financial statements. This includes, assets are what the company owns, liabilities are what the company owes, equity is the owners' stake in the company, revenues are the income generated, and expenses are the costs incurred.
• Statement Reflecting Balances: Balance sheets reflect assets, liabilities, and equity. Income statements reflect revenues and expenses.
• Debit or Credit to Increase: Debits increase assets and expenses, while credits increase liabilities, equity, and revenues.
• Accounting Equation: Assets = Liabilities + Equity
• Corporate Form of Organization Corporations are entities created by law separate from owners. They can be publicly or privately held. Corporations have rights and privileges.
• Advantages of a Corporation: Separate legal entity, limited liability, transferable ownership, continuous life, easier capital accumulation, and limited commitment to contracts.
• Disadvantages of a Corporation: Governmental regulation and corporate taxation.
• Corporate Organization and Management This is a hierarchical structure: Stockholders > Board of Directors > President/Officers > Employees. Corporate governance directs and controls company management.
• Rights of Stockholders: The rights of shareholders in a corporation, include: Voting at meetings, selling shares, buying new shares, receiving dividends, sharing in liquidation.
• Stock Certificates and Transfer: Certificates are proof of stock ownership, allowing transfer of ownership according to corporation regulations.
• Basics of Capital Stock: Understanding authorized stock, par value stock, no-par value stock, and stated value stock; defining paid-in (contributed) capital, and explaining retained earnings (cumulative net income).
• Par Value vs. Market Price: Par value is an arbitrary amount set for a share, while market price is the current market value of a stock.
• Stockholders' Equity:
• Paid-in (contributed) capital: The cash or assets stockholders provide to the corporation in exchange for stock
• Retained earnings: The cumulative net income (or loss) of a company not distributed as dividends.
• Issuing Par Value Stock: Examples of journal entries for issuing par value stock at par and at a premium.
• Issuing No-Par Value Stock: Examples of journal entries for issuing no-par stock.
• Issuing Stated Value Stock: Examples of journal entries involving the issuance of stated-value stock.
• Issuing Stock for Noncash Assets: Examples of journal entries for issuing stock, receiving land, or services.
• Issuing Stock Example: This section details journal entries for receiving cash in exchange for stock. Various scenarios are presented: $2 par value, no par value, and $5 stated value.
• Cash Dividends: To pay cash dividends, a corporation must have a sufficient balance in retained earnings and the necessary cash.
• Cash Dividend Dates: Declaration date, record date, and payment date.
• Accounting for Cash Dividends: Examples of journal entries, showing the recording of liabilities, and the payment of dividends.
• Stock Dividends: Distribution of a company's own stock to shareholders without cash payment. This explains Small vs. Large Stock Dividends.
• Recording a Small Stock Dividend: Examples demonstrate the capitalization of retained earnings for the market value of distributed shares.
• Recording a Stock Dividend (Payment): The journal entries record the distribution of common stock dividend.
• Recording a Large Stock Dividend: The procedures of recording a 30% stock dividend.
• Stock Splits: A distribution of additional shares of stock to stockholders according to percentage ownership.
• Financial Statement Effects of Dividends and Splits: How different dividend and split types affect the financial statements.
• Example of a Stock Split: Example details demonstrating a stock split and its effects.
• Example of Dividends: Illustrates both cash and stock dividends and their accounting entries.
• Issuance of Preferred Stock: Journal entries and balance sheet presentation of preferred stock issuance. Including reasons for issuing Preferred stock.
• Reasons for Issuing Preferred Stock: Financial leverage, investor appeal (based on perceived risk/return).
• Dividend Preference of Preferred Stock (Cumulative vs. Noncumulative): The difference in how dividends are handled if dividends are not paid.
• Treasury Stock: Shares of a company's own stock that has been repurchased.
• Purchasing Treasury Stock: A journal entry is provided for buying back treasury stock in the open market.
• Selling Treasury Stock at Cost/above cost/below cost: Demonstrates journal entries for treasury stock transactions at various prices.
• Statement of Retained Earnings: Definition and calculation.
• Restricted Retained Earnings Legal and contractual restrictions on retained earnings. Includes restrictions that prohibit further purchases of treasury stock, or restrictions that prohibit the payment of dividends (if the level of restricted earnings is exceeded).
• Prior Period Adjustments Correcting errors in prior years financial reporting.
• Statement of Stockholders' Equity Demonstrates how a stockholder's equity statement is presented, and its relationship and differences from a statement of retained earnings, it shows all the items that impact equity including beginning balances, stock dividends, issuance of common stock, and cash dividends.
• Earnings Per Share (EPS): Calculation and importance of this financial metric.
• Price-Earnings Ratio: Used to evaluate a company's stock price in relation to its earnings per share, showing market expectations for future company performance. Includes example calculations to find the correct ratio.
• Return from Stock: Describes income and growth stocks.
• Dividend Yield: Annual cash dividends per share as a percentage of the stock's market value. Includes example of calculating dividend yield. Includes examples of classifying companies as income or growth stocks.