Financial Accounting Final Exam Comprehensive Study Guide

Financial Statements and the Accounting Equation

Key Concepts

• Accounting Equation: The foundation of financial accounting is the accounting equation: $\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$.

• Financial Statements: The four primary financial statements are the Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows.

• Purpose: Financial statements provide information about a company's financial position, performance, and cash flows.

Example

• If a company has $120,000 in assets and $40,000 in liabilities, its owner's equity is $80,000.

Transaction Analysis and Accrual Accounting

Transaction Analysis

• Each transaction affects at least two accounts and keeps the accounting equation in balance.

• Common transactions include purchasing equipment, paying salaries, and selling goods.

Accrual Accounting

• Accrual Basis: Revenues are recognized when earned, and expenses when incurred, regardless of cash flow.

• Matching Principle: Expenses should be matched to the revenues they help generate in the same period.

Example

• Recording salary expense in the period employees work, not when paid.

Internal Control and Cash

Internal Control Systems

• Designed to safeguard assets, ensure accurate financial reporting, and promote operational efficiency.

• Key elements: separation of duties, assignment of responsibility, monitoring of controls.

Bank Reconciliation

• Compares the company's cash records to the bank statement to identify discrepancies.

• Adjustments may include outstanding checks, deposits in transit, and bank errors.

Example Table: Bank Reconciliation Adjustments

Adjustment Type	Bank Side	Book Side
Outstanding Checks	Subtract	None
Deposits in Transit	Add	None
NSF Checks	None	Subtract
Bank Fees	None	Subtract

Receivables and Revenue Recognition

Accounts Receivable

• Amounts owed to the company by customers for goods or services sold on credit.

• Allowance for doubtful accounts estimates uncollectible receivables.

Revenue Recognition

• Revenue is recognized when earned, not necessarily when cash is received.

• Sales discounts and returns must be accounted for.

Example

• If credit sales are $50,000 and 2% are estimated uncollectible, bad debt expense is $1,000.

Inventory and Cost of Goods Sold

Inventory Costing Methods

• FIFO (First-In, First-Out): Oldest inventory costs are assigned to cost of goods sold first.

• LIFO (Last-In, First-Out): Newest inventory costs are assigned to cost of goods sold first.

• Weighted Average: Average cost per unit is used for all units sold.

• Specific Identification: Used for unique, high-value items.

Inventory Calculation Example Table

Beginning Inventory	Purchases	Goods Available	Ending Inventory	COGS
$2,000	$1,000	$3,000	$1,400	$1,600

Formula

• $\text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory}$

Plant Assets, Depreciation, and Intangibles

Depreciation Methods

• Straight-Line: Allocates equal expense over the asset's useful life.

• Units-of-Production: Expense based on usage or output.

• Double Declining Balance: Accelerated method, higher expense in early years.

Depreciation Table Example

Year	Depreciation Expense	Accumulated Depreciation	Book Value
1	$20,000	$20,000	$80,000
2	$20,000	$40,000	$60,000

Formula

• Straight-Line: $\text{Depreciation Expense} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$

Liabilities: Current, Contingent, and Long-Term

Current Liabilities

• Obligations due within one year, such as accounts payable and short-term notes.

Contingent Liabilities

• Potential obligations dependent on future events (e.g., lawsuits).

Long-Term Liabilities

• Obligations due beyond one year, such as bonds payable and long-term notes.

• Bonds may be issued at par, premium, or discount.

Bond Table Example

Bond Type	Change in Discount/Premium	Carrying Value	Interest Expense
Discount	Amortization increases	Increases	Interest expense increases
Premium	Amortization decreases	Decreases	Interest expense decreases

Stockholders' Equity

Components

• Common Stock: Basic ownership interest in a corporation.

• Preferred Stock: Special class with priority for dividends and liquidation.

• Treasury Stock: Shares repurchased by the company.

• Retained Earnings: Cumulative net income retained in the business.

Issuance of Stock Example

• If a company issues 1,000 shares of $1 par value stock for $10 per share, $1,000 is credited to Common Stock and $9,000 to Paid-In Capital in Excess of Par.

The Statement of Cash Flows

Purpose and Structure

• Reports cash inflows and outflows from operating, investing, and financing activities.

• Helps assess liquidity, solvency, and financial flexibility.

Operating, Investing, and Financing Activities

• Operating: Cash flows from core business operations.

• Investing: Cash flows from buying/selling long-term assets.

• Financing: Cash flows from borrowing, repaying debt, and issuing stock.

Indirect Method Example Table

Item	Adjustment
Net Income	Start with net income
Depreciation	Add back non-cash expense
Increase in Accounts Receivable	Subtract
Decrease in Accounts Payable	Subtract

Financial Statement Analysis

Key Ratios

• Current Ratio: $\frac{\text{Current Assets}}{\text{Current Liabilities}}$

• Quick Ratio: $\frac{\text{Cash} + \text{Marketable Securities} + \text{Receivables}}{\text{Current Liabilities}}$

• Debt to Equity Ratio: $\frac{\text{Total Liabilities}}{\text{Stockholders' Equity}}$

Example

• If a company has $50,000 in current assets and $25,000 in current liabilities, the current ratio is 2.0.

Appendix: Depreciation Practice Tables

Straight-Line Method

Year	Depreciation Expense	Accumulated Depreciation	Book Value
1	$20,000	$20,000	$80,000
2	$20,000	$40,000	$60,000

Units-of-Production Method

Year	Depreciation Expense	Accumulated Depreciation	Book Value
1	Based on units produced	Sum of expenses	Cost minus accumulated depreciation

Double Declining Balance Method

Year	Depreciation Expense	Accumulated Depreciation	Book Value
1	Double straight-line rate × book value	Sum of expenses	Cost minus accumulated depreciation

Additional info:

• These notes cover all major topics from the Financial Accounting curriculum, including the financial statements, transaction analysis, accrual accounting, internal control, receivables, inventory, plant assets, liabilities, stockholders' equity, statement of cash flows, and financial statement analysis.

• Tables and formulas have been inferred and expanded for clarity and completeness.