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Financial Accounting Key Concepts and Formulas

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  • What is accounting?

    Accounting is an information system that measures business activities, processes data into financial statements, and communicates results to decision makers.

  • Who are the main users of accounting information?

    Individuals, investors, creditors, regulatory bodies, and nonprofit organizations use accounting information for financial decisions and compliance.

  • Difference between Financial Accounting and Managerial Accounting

    Financial Accounting provides information to external users; Managerial Accounting provides information for internal decision making.

  • Types of business organizations and liability

    Proprietorship: single owner, unlimited liability; Partnership: two or more partners, unlimited liability; Corporation: shareholders, limited liability.

  • What is GAAP and who sets it?

    GAAP are accounting standards set by the Financial Accounting Standards Board (FASB) in the US.

  • What is IFRS and who sets it?

    IFRS are international accounting standards set by the International Accounting Standards Board (IASB).

  • List the fundamental qualitative characteristics of useful financial information

    Relevance, Faithful Representation, Comparability, Verifiability, Timeliness, Understandability, and Cost Constraint.

  • Entity Assumption in accounting

    The business is separate from its owners and other entities.

  • Going Concern Assumption

    The business will continue operating in the foreseeable future.

  • Historical Cost Principle

    Assets are recorded at their original purchase price.

  • Stable Monetary Unit Assumption

    Financial statements are prepared using a stable currency, ignoring inflation effects.

  • What is the basic accounting equation?

    \(\text{Assets} = \text{Liabilities} + \text{Equity}\)

  • Define assets

    Economic resources owned by a business expected to provide future benefits, such as cash, inventory, and equipment.

  • Define liabilities

    Obligations payable to outsiders, like loans and accounts payable.

  • Define equity

    Owners' claims on assets after liabilities are paid, including capital and retained earnings.

  • Components of stockholders' equity in a corporation

    Paid-in capital (amount invested by shareholders) and retained earnings (income retained in the business).

  • Purpose of the income statement

    Reports revenues, expenses, and net income for a specific period to measure operating performance.

  • Net income formula

    \(\text{Net Income} = \text{Revenues} - \text{Expenses}\)

  • Purpose of the statement of retained earnings

    Shows changes in retained earnings during a period, including net income and dividends.

  • Statement of retained earnings formula

    \(\text{Ending Retained Earnings} = \text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends}\)

  • Purpose of the balance sheet

    Reports assets, liabilities, and stockholders' equity at a specific date to show financial position.

  • Classification of assets

    Current assets (convertible to cash within one year) and long-term assets (provide benefit beyond one year).

  • Classification of liabilities

    Current liabilities (due within one year) and long-term liabilities (due after one year).

  • Formula for total assets

    \(\text{Total Assets} = \text{Current Assets} + \text{Long-Term Assets}\)

  • Formula for total liabilities

    \(\text{Total Liabilities} = \text{Current Liabilities} + \text{Long-Term Liabilities}\)

  • What is net working capital?

    Measure of short-term liquidity calculated as current assets minus current liabilities.

  • Net working capital formula

    \(\text{Net Working Capital} = \text{Current Assets} - \text{Current Liabilities}\)

  • What is double taxation in corporations?

    Corporations pay taxes on earnings, and shareholders pay taxes on dividends received.