Financial Accounting


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Accounting - It is the process of identifying, recording and summarizing economic data about the organization and reporting it to decision makers.

Financial Accounting - It serves external decision makers such as Stockholders, suppliers, banks, and government agencies

Management Accounting – It serves internal decision makers, such as top executives, department heads, college deans, and other people at management levels within the organization.

Questions on Financial situation about the company:
A) What is the financial picture of the organization on a given day?
B) How well did the company do during a given time period.

Three statements that are very important for decision makers that are prepared by accountant are:
a) Balance Sheet
b) Income Statement
c) Statement of Cash Flows.

Annual Report – A report prepared by corporate management to be distributed among current investors and future prospects. It contains overview of company along with future goals. It also contains all the information about financial situation of the company.

Form 10K – A document submitted with SEC that contains the financial statements of the corporation.

Balance Sheet = Statement of Financial Position = Financial Situation of a company at a particular instant in time. Balance sheet MUST balance both sides (Assets and Liabilities + Owner Equity). If the balance sheet doesn’t match on both sides, there is a mistake.

Balance Sheet Equation
Assets = Liabilities + Owner’s Equity
Owner’s Equity (OE) = Assets – Liabilities

Another Version-
Assets = Liabilities + Owner’s Equity
Assets = Liabilities + Paid in Capital + Retained Earnings
Assets = Liabilities + Paid in Capital + Revenues (Total Sales) – Expenses (Total Sacrifices)

Assets - Economic Resources that either help future Cash Inflow (Adding) or help reduce outflow of CASH
Liabilities - Economic Obligations to outsiders or claims against its assets by outsiders.

Paying Dividends is not an Expense since paying dividends it the distribution of wealth to its owners.

Owner’s Equity - Owner’s CLAIM on organization’s assets or total assets less total liabilities. Remember ( OE is the owner’s claim that can be made after deducting all the liabilities from the Company’s Assets.

Notes Payable - Promissory note(s) that are evidence of a debt and state the terms of repayment.

Entity - an organization or part of the organization that stands apart from other organizations and individuals as a separate unit.

Transaction - an economic event that that affects the financial situation of the entity an can be recorded reliably by the accountant.

Long-lived Asset – an asset that the company expects to provide service for more than 1 year.

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Inventory – Goods held by the company for the purpose of Sale to Customers.
Open Account – Buying or Selling on Credit, usually by “authorized signature” of the buyer.

Account Payable – A liability that results from the purchase of goods or services on OPEN ACCOUNT. This means that A/P is used only when the goods or services are bought on Credit and not against CASH.

Compound Entry – An entry that impacts more than one account on Balance Sheet. e.g. a transaction impacting CASH Bal, Asset, and A/P in one transaction on balance sheet.
Creditor – A person or entity to whom a company owes money.

Types of Corporation
A) Sole Proprietor – A business with a single owner. In this case the person who is running the business is also liable personally for all the business liabilities.
B) Partnership – A business operated by >= 2 individuals who act as co-owners.
C) Corporation – An entity created under State Laws that has one or more owners who have very limited liability.
Types of Ownership
A) Privately Owned – A corporation owed by an individual, a group of partners or a small family, in which shares are not publicly sold.
B) Publicly Owned – A corporation that sells its shares of ownership to general public.

Revenue – Money Earned by Selling Goods or Services to Customers.
COGS – Cost of Good Sales or COS = Cost to the corporation for the item it has sold.

REVENUE – COGS = GROSS MARGIN

GROSS MARGIN – OPERATING EXPENSES = OPERATING INCOME
OPERATING INCOME – INTEREST EXPENSE – TAXES = NET INCOME

Par Value – The nominal value amount printed on Stock Certificates
Paid-in Capital (PIC) in excess of par-value (Additional paid-in capital) – When issuing stock, the difference between the total amount that company receives for the stock and the Par Value
Paid-in Capital – The total cash investment in a corporation by its owners both at and subsequent to the inception of its business.
Common Stock – par value of the stock purchased by common shareholders of a corporation.

Board of Directors – A body of individuals selected by common shareholders to monitor manager’s performance on shareholders’ behalf.

(Elect) (Appoint)
Stock Holders --------------( Board of Directors -------------------( Managers
CEO – Top manager in an Organization

Auditor – A person who examines the information used by managers to prepare the financial statements and attests to the credibility of those statements.
Audit – An examination of the company’s transactions and the resulting financial statements.
Auditor’s opinion is always considered as independent opinion.
Public Accountants – Accountants who work for the general public and charge a nominal fee for their services.
Private Accountants – Individuals who work for government such as IRS, businesses, or other Not for Profit organizations.

Accounting Standards and Auditing Regulations

1) GAAP – Generally Accepted Accounting Principles – This term applies to all broad concepts and detailed practices to be followed in preparing and distributing financial statements. It includes all the conventions, rules, and procedures that together comprise accepted accounting practice.
2) FASB – Financial Accounting Standards Board – The private sector body that is responsible for establishing GAAP in the United States.
3) SEC – The ultimate government agency charged by the US Congress to implement GAAP on all companies whose shares are traded in general public.
4) IASB - International Accounting Standards Board – An international body established to develop in the public interest, a single set of high-quality, understandable, and enforceable global accounting standards
5) AICPA - American Institute of Certified Public Accountants – A Professional association in the private sector that regulates the quality of the public accounting profession.
6) Sarbanes-Oxley Act – A US Law passed by Congress in 2002 that gave the Govt a larger role in regulating the auditing profession.


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