Financial Accounting Final Exam Review

Overview

This study guide summarizes the main topics and learning objectives for a college-level Financial Accounting course, organized by chapter and topic. It is designed to help students prepare for the final exam by outlining essential concepts, definitions, and applications.

Ch. 1 - Conceptual Framework and Financial Statements

Accounting and Its Principles

• Definition of Accounting: The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.

• Generally Accepted Accounting Principles (GAAP): The common set of accounting principles, standards, and procedures that companies must follow when they compile their financial statements.

• Users of Financial Statements: Internal users (management, employees) and external users (investors, creditors, regulators).

The Accounting Equation

• Basic Equation:

• Application: Used to analyze and record business transactions.

• Example: If a company has assets of $100,000 and liabilities of $60,000, owner's equity is $40,000.

Ch. 2 - Recording Business Transactions

Double-Entry System and Journal Entries

• Double-Entry Accounting: Every transaction affects at least two accounts, maintaining the balance of the accounting equation.

• Debits and Credits: Debits increase assets and expenses; credits increase liabilities, equity, and revenues.

• Journal Entry Example: Purchasing supplies for cash: Debit Supplies, Credit Cash.

Posting to the Ledger and Trial Balance

• Ledger: A collection of accounts that shows the changes made to each account as a result of transactions.

• Trial Balance: A list of all accounts and their balances at a particular date, used to verify that debits equal credits.

Ch. 3 - Accrual Accounting

Adjusting Entries

• Purpose: To record revenues and expenses in the period in which they are earned or incurred, regardless of when cash is received or paid.

• Types: Accruals (revenues earned or expenses incurred before cash changes hands) and deferrals (cash received or paid before revenues are earned or expenses incurred).

• Example: Accrued revenue: Services performed but not yet billed.

Ch. 4 - Presentation of Financial Statements

Financial Statement Preparation

• Income Statement: Reports revenues and expenses to show net income or loss for a period.

• Balance Sheet: Shows assets, liabilities, and equity at a specific point in time.

• Statement of Owner's Equity: Summarizes changes in equity during a period.

Ch. 5 - Internal Control, Cash, and Receivables

Internal Controls

• Definition: Procedures and policies implemented to safeguard assets, enhance the reliability of accounting records, and increase efficiency of operations.

• Examples: Separation of duties, authorization of transactions, physical controls.

Cash and Receivables

• Bank Reconciliation: The process of comparing the company’s cash records to the bank statement and explaining any differences.

• Allowance Method for Uncollectible Accounts: Estimating bad debts expense and recording it in the same period as related sales.

Ch. 6 - Inventory and Merchandising Operations

Inventory Systems

• Perpetual System: Inventory records are updated continuously.

• Periodic System: Inventory records are updated at the end of the period.

• Cost Flow Assumptions: FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average.

Ch. 7 - Property, Plant, Equipment (PPE) and Intangibles

Acquisition and Depreciation

• Capitalization: Recording the cost of an asset, including all expenditures necessary to acquire and prepare it for use.

• Depreciation Methods: Straight-line, declining balance, and units-of-production.

• Formula (Straight-Line):

Intangible Assets

• Examples: Patents, copyrights, trademarks, goodwill.

• Amortization: Systematic allocation of the cost of an intangible asset over its useful life.

Ch. 8 - Investments and International Operations

Investments

• Types: Short-term (trading securities) and long-term (available-for-sale, held-to-maturity).

• Equity Method: Used when an investor has significant influence over the investee (typically 20-50% ownership).

Ch. 9 - Liabilities

Current and Long-Term Liabilities

• Current Liabilities: Obligations due within one year (e.g., accounts payable, short-term notes).

• Long-Term Liabilities: Obligations due after one year (e.g., bonds payable, long-term loans).

• Contingent Liabilities: Potential obligations dependent on a future event.

Ch. 10 - Stockholders' Equity

Equity Transactions

• Common Stock: Basic ownership interest in a corporation.

• Preferred Stock: Stock with preferential rights over common stockholders, such as dividends.

• Treasury Stock: Corporation's own stock that has been reacquired.

Ch. 11 - Cash Flows

Statement of Cash Flows

• Purpose: To provide information about cash receipts and cash payments during a period.

• Sections: Operating, investing, and financing activities.

• Indirect Method: Adjusts net income for changes in balance sheet accounts to calculate cash from operating activities.

Ch. 12 - Financial Statement Analysis

Analytical Tools

• Horizontal Analysis: Comparison of financial data over time.

• Vertical Analysis: Expressing each item in a financial statement as a percentage of a base amount.

• Ratio Analysis: Liquidity, solvency, and profitability ratios.

Appendix: Time Value of Money

Present and Future Value Concepts

• Present Value (PV): The current value of a future sum of money, discounted at a specific interest rate.

• Future Value (FV): The value of a current sum of money at a future date, based on a specific interest rate.

• Formula (Future Value):

• Formula (Present Value):