Comprehensive Study Guide: Financial Accounting Final Exam Learning Objectives

Study Guide - Smart Notes

Tailored notes based on your materials, expanded with key definitions, examples, and context.

Financial Accounting Final Exam Study Guide

Overview

This study guide summarizes the key learning objectives for a college-level Financial Accounting course, as outlined in the final exam question pool. Each topic is expanded with definitions, examples, and relevant academic context to support exam preparation.

Types and Forms of Businesses

Business Structures

Understanding the different types and forms of businesses is foundational in financial accounting.

Sole Proprietorship: Owned and operated by one individual. Simple to set up, owner has unlimited liability.
Partnership: Owned by two or more individuals. Partners share profits, losses, and liability.
Corporation: Separate legal entity owned by shareholders. Limited liability, more complex regulations.
Limited Liability Company (LLC): Combines benefits of partnership and corporation, offering limited liability and flexible management.
Example: A local bakery may operate as a sole proprietorship, while a large tech company is typically a corporation.

Key Accounting Principles and Concepts

Fundamental Principles

Accounting principles guide the preparation and presentation of financial statements.

Entity Concept: Business is separate from its owners.
Going Concern: Assumes the business will continue operating.
Monetary Unit: Transactions are recorded in a stable currency.
Historical Cost: Assets are recorded at their original cost.
Accrual Basis: Revenues and expenses are recognized when earned/incurred, not when cash is exchanged.
Example: Revenue is recorded when a service is performed, not when payment is received.

Accounting Functions in a Business

Role of Accounting

Accounting serves several functions within a business, including recording, classifying, and summarizing financial transactions.

Recording: Documenting financial transactions.
Classifying: Organizing transactions into categories.
Summarizing: Preparing financial statements.
Reporting: Communicating financial information to stakeholders.
Example: Preparing an income statement to show profitability.

Accounts and Their Use in Accounting

Definition and Understanding

Accounts are individual records of increases and decreases in specific asset, liability, equity, revenue, or expense items.

Asset Accounts: Cash, Accounts Receivable, Inventory.
Liability Accounts: Accounts Payable, Notes Payable.
Equity Accounts: Common Stock, Retained Earnings.
Revenue and Expense Accounts: Sales Revenue, Rent Expense.
Example: The Cash account tracks all cash inflows and outflows.

Debits, Credits, and Double-Entry System

Basic Accounting Mechanics

The double-entry system ensures that every transaction affects at least two accounts, maintaining the accounting equation.

Debits: Left side of an account; increases assets and expenses, decreases liabilities and equity.
Credits: Right side of an account; increases liabilities, equity, and revenues, decreases assets and expenses.
Accounting Equation:
Example: Purchasing equipment for cash: Debit Equipment, Credit Cash.

General Journal and General Ledger

Recording Transactions

The general journal is the initial place where transactions are recorded; the general ledger organizes these entries by account.

General Journal: Chronological record of transactions.
General Ledger: Collection of all accounts, showing balances.
Example: Journal entry for a sale: Debit Cash, Credit Sales Revenue.

Revenue Recognition and Matching Principles

Timing of Income and Expenses

These principles determine when revenues and expenses are recognized in the financial statements.

Revenue Recognition: Revenue is recognized when earned, not necessarily when received.
Matching Principle: Expenses are matched to the revenues they help generate.
Example: Recognizing sales revenue when goods are delivered, matching cost of goods sold to those sales.

Adjusting Entries

Types and Preparation

Adjusting entries ensure that revenues and expenses are recorded in the correct accounting period.

Prepaid Expenses: Expenses paid in advance; adjust to recognize expense.
Unearned Revenues: Cash received before revenue is earned; adjust to recognize revenue.
Accrued Expenses: Expenses incurred but not yet paid.
Accrued Revenues: Revenues earned but not yet received.
Example: Adjusting for prepaid insurance at year-end.

Financial Statements from Adjusted Trial Balance

Preparation Process

After adjusting entries, the adjusted trial balance is used to prepare financial statements.

Income Statement: Reports revenues and expenses.
Balance Sheet: Reports assets, liabilities, and equity.
Statement of Cash Flows: Reports cash inflows and outflows.
Example: Using the adjusted trial balance to prepare the balance sheet.

Inventory Systems and Costing Methods

Periodic vs. Perpetual Systems

Inventory systems track the flow of goods and determine cost of goods sold.

Periodic System: Inventory updated at period end.
Perpetual System: Inventory updated continuously.
Example: Supermarkets often use perpetual systems with barcode scanners.

Inventory Costing Methods

Methods for assigning costs to inventory and cost of goods sold.

FIFO (First-In, First-Out): Oldest inventory costs assigned to cost of goods sold first.
LIFO (Last-In, First-Out): Newest inventory costs assigned to cost of goods sold first.
Weighted Average: Average cost per unit assigned to cost of goods sold.
Specific Identification: Actual cost of specific items assigned.
Example: Using FIFO during inflation results in lower cost of goods sold and higher net income.

Lower-of-Cost-or-Market (LCM) Rule

Inventory is reported at the lower of its historical cost or market value.

Formula:
Example: If inventory cost is $1000 and market value is $900, report at $900.

Reporting Inventory in Financial Statements

Presentation and Errors

Inventory is a key asset on the balance sheet; errors can affect reported income and assets.

Inventory Errors: Overstated inventory increases assets and net income; understated inventory decreases them.
Example: Miscounting inventory at year-end affects both the balance sheet and income statement.

Internal Control and Fraud

Importance and Types

Internal controls protect assets, ensure reliable financial reporting, and prevent fraud.

Control Activities: Authorization, documentation, reconciliation, segregation of duties.
Types of Fraud: Asset misappropriation, financial statement fraud, corruption.
Example: Requiring two signatures on checks to prevent unauthorized payments.

US GAAP vs. IFRS

Accounting Standards

US GAAP and IFRS are two major sets of accounting standards with key differences.

US GAAP: Rules-based, used in the United States.
IFRS: Principles-based, used internationally.
Example: Inventory valuation methods differ between GAAP and IFRS.

Bank Reconciliation and Cash Controls

Managing Cash

Bank reconciliation ensures that the company's cash records match the bank statement.

Steps: Compare deposits, checks, and bank charges; adjust for errors and timing differences.
Example: Identifying outstanding checks and deposits in transit.

Uncollectible Accounts

Direct Write-Off and Allowance Methods

Businesses must account for receivables that may not be collected.

Direct Write-Off Method: Bad debts are written off when identified.
Allowance Method: Estimate uncollectible accounts and record an allowance.
Formula (Allowance Method):
Example: Estimating 2% of credit sales as uncollectible.

Legal and Ethical Responsibilities of Accountants

Sarbanes-Oxley Act (SOX)

SOX establishes requirements for ethical conduct and internal controls in accounting.

Key Provisions: Enhanced financial disclosures, auditor independence, internal control assessment.
Example: Public companies must have their internal controls audited annually.

Certified Public Accountant (CPA)

Professional Certification

A CPA is a licensed accounting professional who meets education, experience, and examination requirements.

Role: Auditing, tax preparation, consulting, and financial reporting.
Example: A CPA may audit a company's financial statements for compliance with GAAP.

Summary Table: Key Accounting Topics

Main Topic	Key Concepts	Example/Application
Business Types	Sole Proprietorship, Partnership, Corporation, LLC	Local bakery (sole proprietorship), tech company (corporation)
Accounting Principles	Entity, Going Concern, Accrual Basis	Revenue recognized when earned
Inventory Methods	FIFO, LIFO, Weighted Average	FIFO yields higher net income in inflation
Internal Control	Authorization, Segregation of Duties	Two signatures on checks
Uncollectible Accounts	Direct Write-Off, Allowance Method	Estimate 2% of credit sales as bad debts
Ethics & SOX	Internal Controls, Auditor Independence	Annual audit of internal controls

Additional info: The above guide expands on the brief learning objectives listed in the exam question pool, providing academic context, definitions, and examples for each topic.