Financial Accounting Final Exam Cumulative Chapters 1 11 Chapter 1 The four financial statements The Income Statement This statement shows the results of the given year Measures a company s financial performance over a specific accounting period Dated For Period Ending MM DD YY Has two main categories Revenues Gains Expenses Loses Revenues Expenses Net Income If revenues expenses net income will be positive If revenues expenses net income will be negative Net income will go to either Dividends The Income Statement is prepared first before the other three financial statements Retained Earnings The Statement of Retained Earnings Retained Earnings represent the portion of the Net Income that the firm has kept opposed to paying it out in the form of dividends This amount will accumulate from year to year as the firm continues to retain a portion of net income This statement shows the profits we have made and not paid out to the owners Dated For Period Ending MM DD YY Ending Retained Earnings Beginning Retained Earnings Net Income Dividends basically Ending Beginning What goes IN What goes OUT The Statement of Retained Earnings is prepared second after the Income Statement since we need the Net Income from the Income Statement in order to prepare this statement Dividends are NOT an expense The three components of Retained Earnings are Revenues Expenses Dividends How does each of the following impact Retained Earnings Revenues Increase so Retained Earnings increase Expenses Increase so Retained Earnings decrease Dividends Increase so Retained Earnings decrease The Balance Sheet The Balance Sheet reports the firm s assets liabilities and equity Dated A specific date point in time The Balance Sheet is prepared third after the Income Statement and Statement of Retained Earnings since we need the ending balance from Retained Earnings to prepare this statement Assets Liabilities Stockholder s Equity Assets Economic Resources used to produce future benefits Items the firm owns and uses in its business Basically they are what you the company owns and what you are owed Types of assets Current Assets are expected to be converted to cash sold or consumed in the next year or next business cycle whichever is longer Current Assets are things like Cash Short term Investments Accounts Notes Receivables Receivables Inventory and Supplies Prepaid Expenses Long term Assets will be held longer than one year Long term Assets are things like Property Plant and Equipment PPE Land buildings computers etc Intangibles things with no physical substance Long term Investments Liabilities Outside claims and debts owed to others What you the company owe Types of liabilities Current Liabilities are obligations payable in the next year or within the next business cycle Types of Current Liabilities Accounts Payable Payables Accrued Expenses Unearned Revenue this is not part of Retained Earnings Long term Liabilities are obligations payable more than one year from now Types of Long term Liabilities Long term Notes Payable Bonds Payable Stockholder s Equity Net worth Insider claims ownership by stockholders Types of Stockholder s Equity Common Stock represents the amount shareholders have invested Retained Earnings represents the amounts earned and kept by the business This amount come from the Statement of Retained Earnings The Statement of Cash Flows Records the amount of cash coming in and going out of the business Dated For Period Ending MM DD YYYY Three sections Operating Cash in and out of the business from operations which is the selling of goods and services from interest and receiving dividends Day to day activities anything dealing with revenues or expenses So basically Revenues and Expenses Interest Receiving Dividends Investing Cash in and out of the business from the purchase and sale of long term assets and from investing in other companies Buying and selling land equipment and buildings Financing Cash in and out of the business from borrowing money or paying back money that was borrowed and from paying dividends Prepared last out of the four financial statements after the Income Statement Statement of Retained Earnings and the Balance Sheet since we need the Cash Balance from the Balance Sheet to prepare this statement Chapter One in Review Remember that receivables are assets Remember that payables are liabilities Every transaction affects something on the balance sheet Not every transaction affects the income statement Net Income increases retained earnings expenses lower net income which lowers retained earnings Do 1st Income Statement then 2nd Statement of Retained Earnings then 3rd Balance Sheet then 4th Statement of Cash Flows A number written in is negative 300 and 300 is the same thing Chapter 2 The Classified Balance Sheet Groups together similar assets and similar liabilities Current Assets are assets that a company expects to convert to cash or use up within one year or the operating cycle whichever is longer The operating cycle is the average time that it takes to go from cash to cash in producing revenue Long term investments assets are generally investments in stocks and bonds of other corporations Property Plant and Equipment are assets with relatively long and useful lives Intangible assets do not have physical substance goodwill patents copyrights etc Current Liabilities are obligations that the company is to pay within the coming year or operating cycle Long term Liabilities are expected to be paid after one year GAAP Generally Accepted Accounting Principles The primary GAAP rule is that accrual accounting is used Accrual Accounting basically all of the major companies operating in the U S use accrual accounting Timing Issues Transactions recorded in the period which the event occur Revenue Recognition Principle Expenses are recognized when incurred not when paid Revenues are recognized when earned not when cash is actually received Matching Principle Expenses are matched with revenues Recognize expenses when revenue is recognized Financial Reports Concepts Principles in Financial Reporting Important Every time we buy something we record it at cost and it stays that way forever no matter in the value changes over the years Chapter Two Notes On Account means we ll pay for the item later Something cannot be an expense and an asset an asset becomes an expense after it is sold When someone owes us money it is a receivable We record revenue when it is earned not when cash is received
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