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Financial Accounting Basics and Statement Preparation

Learn about the financial accounting model, primary financial statements, key components of financial statements, and the accounting equation. Understand the differences between historical cost and relevant information, and the impact of materiality and conservatism. Explore the recording and measuring of transactions, and the process of preparing financial statements. Gain knowledge on adjusting journal entries and their impact on financial statements.

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Financial Accounting Basics and Statement Preparation

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  1. Session 2The Recording Process and Mechanics FINANCIAL ACTG. - BUS 020 - Spring 2015

  2. Competencies by Session 3 • What are the primary financial statements in the F/S Package? • What are their uses? • What are the other key components of the F/S Package? • What are their uses? • Describe the Financial Accounting Model. • What is the accounting equation? • Relate it to the Balance Sheet. • Relate it to the Income Statement. • What is Statement of Financial Accounting Concepts #1 (SFAC #1)? • What are the financial accounting assumptions? • What are the financial accounting principles? FINANCIAL ACTG. - BUS 020 - Spring 2015

  3. Historical Cost versus Relevant Information • What is NOT on the balance sheet. • Land at current value. • Intellectual property. • Off-balance sheet liabilities • Measurement bias • Management bias FINANCIAL ACTG. - BUS 020 - Spring 2015

  4. Two Other Factors • Materiality • Conservatism FINANCIAL ACTG. - BUS 020 - Spring 2015

  5. Transactions • External events • Internal events • “...a measurable exchange or change in value, generally recorded AFTER the fact.” FINANCIAL ACTG. - BUS 020 - Spring 2015

  6. Key Accounts • Assets • Liabilities • Equity • Revenues • Expenses FINANCIAL ACTG. - BUS 020 - Spring 2015

  7. Measuring Transactions-The Basics • At least two account • The integrity of the accounting equation • Debits (left-side entries) = Credits (right-side entries FINANCIAL ACTG. - BUS 020 - Spring 2015

  8. Measuring Transactions-Methodology • Determine the accounts • Determine the direction of the exchange • Determine the amounts • Note pages 54- 71 very carefully FINANCIAL ACTG. - BUS 020 - Spring 2015

  9. The “T-Account” ASSETS & EXPENSES LIABILITIES, EQUITY & REVENUES Debit Credit Debit Credit FINANCIAL ACTG. - BUS 020 - Spring 2015

  10. Accounting (Bookkeeping) Cycle-modified • Analyze Transaction • Record and Post • Summarize Accounts • Unadjusted Trial Balance • Adjusting Journal Entries (AJE’s) • Adjusted Trial Balance • Prepare Income Statement • Closing Entries • Final Trial Balance • Prepare Balance Sheet, SCF and SSE FINANCIAL ACTG. - BUS 020 - Spring 2015

  11. Close Worksheet FINANCIAL ACTG. - BUS 020 - Spring 2015

  12. Financial Statement Preparation • Headings are IMPORTANT • Company, Title and Date • Note how the T-Account balances track to the actual financial statements FINANCIAL ACTG. - BUS 020 - Spring 2015

  13. Financial Statement Relationships Stmt of Sharehldrs Eq. Balance Sheet Income Statement Statement of Cash Flows Current Assets Non- current Assets Current Liabilities Long- term Debt Equity Revenue Cost of Goods Sold (COGS) Gross Margin Operating Exps. Net Income Operating Cash Investing Cash Financing Cash Change in Cash Beginning Cash Ending Cash Beginning S/E Net Income Less: Dividends Ending S/E FINANCIAL ACTG. - BUS 020 - Spring 2015

  14. Adjusting Journal Entries • Accruals • Prepayments • Deferrrals • Cost Expirations FINANCIAL ACTG. - BUS 020 - Spring 2015

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