Financial Accounting - Amazon S3

Financial Accounting

Financial Accounting

Principles of Accounting I, Lumen Learning

CC BY Developed in conjunction with Debra Porter, Tidewater Community College, tcc.edu, with contributions from Broward College.

CONTENTS

Unit 1: What is Accounting .......................................................................................................... 1

? Introduction: What Is Accounting ....................................................................................................................... 1 ? Accounting Defined............................................................................................................................................ 3 ? Users of Accounting Information........................................................................................................................ 4 ? Types of Businesses and Business Activities.................................................................................................... 6 ? Ethics in Accounting .......................................................................................................................................... 9 ? Exercises: Unit 1.............................................................................................................................................. 11 ? Glossary Unit 1 ................................................................................................................................................ 14

Unit 2: Accounting Principles and Practices .............................................................................. 16

? Introduction: Accounting Principles and Practices........................................................................................... 16 ? GAAP - Generally Accepted Accounting Principles......................................................................................... 16 ? Account Types ................................................................................................................................................. 18 ? The Basic Accounting Equation....................................................................................................................... 21 ? Financial Statements ....................................................................................................................................... 27 ? Accounting in the Headlines ............................................................................................................................ 30 ? Glossary: Lesson 2 .......................................................................................................................................... 31 ? Exercises: Unit 2.............................................................................................................................................. 33

Unit 3: The Accounting Cycle .................................................................................................... 43

? Introduction: The Accounting Cycle ................................................................................................................. 43 ? The Accounting Cycle...................................................................................................................................... 43 ? Accounts, Journals, Ledgers, and Trial Balance ............................................................................................. 44 ? General Rules for Debits and Credits .............................................................................................................. 46 ? Journal Entries................................................................................................................................................. 48 ? Posting to the General Ledger......................................................................................................................... 50 ? Preparing a Trial Balance ................................................................................................................................ 53 ? Glossary: Lesson 3 .......................................................................................................................................... 54 ? Debit and Credit Review .................................................................................................................................. 56 ? Exercises: Unit 3.............................................................................................................................................. 57

Unit 4: Completion of the Accounting Cycle .............................................................................. 72

? The Accrual Basis and Cash Basis of Accounting........................................................................................... 72 ? Classes and Types of Adjusting Entries .......................................................................................................... 74 ? Adjusting for Accrued Items............................................................................................................................. 75 ? Adjusting for Deferred Items ............................................................................................................................ 76 ? Preparing an Adjusted Trial Balance ............................................................................................................... 80 ? Preparing Financial Statements....................................................................................................................... 83 ? Closing Entries................................................................................................................................................. 87 ? Accounting in the Headlines ............................................................................................................................ 91 ? Glossary: Completing the Accounting Cycle.................................................................................................... 92 ? Exercises: Unit 4.............................................................................................................................................. 95

Unit 5: Accounting For a Merchandising Enterprise ................................................................117

? Merchandising Business................................................................................................................................ 117 ? Merchandise Inventory .................................................................................................................................. 119 ? Buyer Entries under Perpetual Method.......................................................................................................... 120 ? Seller Entries under Perpetual Inventory Method .......................................................................................... 123 ? Buyer Entries under Periodic Inventory System ............................................................................................ 128 ? Seller Entries under Periodic Inventory Method ............................................................................................ 132 ? Glossary: Accounting for a Merchandising Enterprise................................................................................... 137 ? Exercises: Unit 5............................................................................................................................................ 139

Unit 6: Financial Reporting for a Merchandising Enterprise ....................................................150

? Adjusting Entries for a Merchandising Company........................................................................................... 150 ? Merchandising Financial Statements............................................................................................................. 153 ? Journalizing Closing Entries for a Merchandising Enterprise ........................................................................ 157 ? Impacts of Inventory Errors on Financial Statements .................................................................................... 161 ? Accounting in the Headlines .......................................................................................................................... 163 ? Exercises: Unit 6............................................................................................................................................ 164

Unit 7: Inventory Valuation Methods ....................................................................................... 172

? Merchandise Inventory .................................................................................................................................. 172 ? Inventory Methods for Ending Inventory and Cost of Goods Sold................................................................. 173 ? Methods Under a Periodic Inventory System ................................................................................................ 178 ? Effects of Choosing Different Inventory Methods .......................................................................................... 181 ? Lower of Cost or Market Rule ........................................................................................................................ 183 ? Internal Control Issues and Procedures for Inventory ................................................................................... 185 ? Exercises: Unit 7............................................................................................................................................ 190

Unit 8: Accounting Information Systems ................................................................................. 207

? Principles of Accounting Systems.................................................................................................................. 207 ? Special Journals ............................................................................................................................................ 208 ? Subsidiary Ledgers and Control Accounts..................................................................................................... 212 ? Internal Control and Accounting System Design ........................................................................................... 215 ? Accounting in the Headlines .......................................................................................................................... 218 ? Exercises: Unit 8............................................................................................................................................ 219

Unit 9: Cash............................................................................................................................. 221

? Internal Control Structure............................................................................................................................... 221 ? Cash and Internal Control.............................................................................................................................. 223 ? Preparing a Bank Reconciliation.................................................................................................................... 225 ? Petty Cash ..................................................................................................................................................... 232 ? Accounting in the Headlines .......................................................................................................................... 235 ? Exercises: Unit 9............................................................................................................................................ 236

Unit 10: Receivables ............................................................................................................... 248

? Receivables ................................................................................................................................................... 248 ? Subsidiary Ledgers and Control Accounts..................................................................................................... 249 ? Direct Write-Off and Allowance Methods....................................................................................................... 252 ? Estimating Bad Debts .................................................................................................................................... 254 ? Accounting for Credit Card Sales .................................................................................................................. 259 ? Accounting for Notes Receivable................................................................................................................... 261 ? Exercises: Unit 10.......................................................................................................................................... 265

Unit 11: Plant Assets and Intangible Assets............................................................................ 274

? Long Term Assets.......................................................................................................................................... 274 ? Entries for Cash and Lump-Sum Purchases of Property, Plant and Equipment ........................................... 275 ? Methods for Computing Depreciation ............................................................................................................ 279 ? Computing Book value................................................................................................................................... 281 ? Asset Disposal ............................................................................................................................................... 282 ? Journalize Entries for Trade-In of Similar Assets........................................................................................... 285 ? Natural Resources and Depletion.................................................................................................................. 286 ? Journalizing Adjusting Entries for Depletion .................................................................................................. 287 ? Intangible Assets ........................................................................................................................................... 289 ? Exercises: Unit 11.......................................................................................................................................... 291

Unit 12: Current Liabilities and Payroll .................................................................................... 302

? Accounting for Current Liabilities ................................................................................................................... 302 ? Entries Related to Notes Payable.................................................................................................................. 303 ? Accounting for Contingent Liabilities.............................................................................................................. 305 ? Recording Transactions Related to Product Warranties................................................................................ 306 ? Payroll Accounting Defined............................................................................................................................ 307 ? Payroll Accounting Entries............................................................................................................................. 308 ? Exercises: Unit 12.......................................................................................................................................... 309

Unit 13: Forms of Business Organizations .............................................................................. 313

? Sole Proprietorships and Partnerships .......................................................................................................... 313 ? Journal Entries for Partnerships .................................................................................................................... 314 ? Changes to the Partners................................................................................................................................ 316 ? Corporations .................................................................................................................................................. 319 ? Common and Preferred Stock ....................................................................................................................... 323 ? Journal Entries to Issue Stock ....................................................................................................................... 324 ? Treasury Stock............................................................................................................................................... 327 ? The Stockholder's Equity Section of the Balance Sheet................................................................................ 328 ? Exercises: Unit 13.......................................................................................................................................... 331

Unit 14: Stockholders' Equity, Earnings and Dividends...........................................................340

? Retained Earnings: Entries and Statements.................................................................................................. 340 ? Entries for Cash Dividends ............................................................................................................................ 343 ? Stock Dividends and Splits ............................................................................................................................ 345 ? Items Reported on a Corporate Income Statement ....................................................................................... 347 ? Exercises: Unit 14.......................................................................................................................................... 350

Unit 15: Long-Term Liabilities and Investment in Bonds .........................................................366

? Long-Term Financing..................................................................................................................................... 366 ? Recording Entries for Bonds.......................................................................................................................... 368 ? Redeeming Bonds Payable ........................................................................................................................... 374 ? Capital Leases and Operating Leases........................................................................................................... 376 ? Accounting for Investment in Bonds .............................................................................................................. 378 ? Exercises: Unit 15.......................................................................................................................................... 379

Unit 16: Investment in Stocks .................................................................................................. 387

? Investment of Stocks in Other Corporations .................................................................................................. 387 ? Cost Method .................................................................................................................................................. 388 ? Equity Method................................................................................................................................................ 392 ? Consolidated Financial Statements ............................................................................................................... 393 ? Exercises: Unit 16.......................................................................................................................................... 394

Unit 17: Statement of Cash Flows ........................................................................................... 406

? The Statement of Cash Flows ....................................................................................................................... 406 ? Direct and Indirect Methods for Preparing a Statement of Cash Flows......................................................... 407 ? Cash Flows From Investing and Financing.................................................................................................... 410 ? Preparing a Statement of Cash Flow............................................................................................................. 412 ? Accounting in the Headlines .......................................................................................................................... 417 ? Exercises: Unit 17.......................................................................................................................................... 419

Unit 18: Financial Statement Analysis ..................................................................................... 445

? Analyzing Comparative Financial Statements ............................................................................................... 445 ? Calculating Trend Percentages ..................................................................................................................... 446 ? Common-Size Financial Statements ............................................................................................................. 448 ? Calculate Ratios That Analyze a Company's Short-Term Debt-Paying Ability .............................................. 450 ? Ratios That Analyze a Company's Long-Term Debt Paying Ability ............................................................... 453

? Ratios That Analyze a Company's Earnings Performance ............................................................................ 454 ? Ratio Summary .............................................................................................................................................. 459 ? Exercises: Unit 18.......................................................................................................................................... 462

Appendix: Partnerships ........................................................................................................... 486

? Sole Proprietorships and Partnerships .......................................................................................................... 486 ? Journal Entries for Partnerships .................................................................................................................... 487 ? Changes to the Partners................................................................................................................................ 489 ? Exercises: Appendix B (revise questions) ..................................................................................................... 492

UNIT 1: WHAT IS ACCOUNTING

LEARNING OBJECTIVES

By the end of this lesson, you will be able to: ? Define accounting ? Describe the evolution of accounting ? Identify reasons for the study of accounting. ? List various types of accounting activities ? Identify users of accounting information. ? Explain the importance of Ethics in business and accounting and the reason for the enactment of the SARBANES OXLEY Act.

Why do we need financial information?

Each business needs financial information to be able to answer the following questions: ? How much cash does the business need? ? What is the business' profit or loss? ? How much should the business sell? ? What is the cost of goods sold? ? What are the business' expenses? ? Do customers owe money to the business? ? How much money does the business owe to vendors (suppliers)?

The video below gives a brief overview of many of the topics in this lesson. Before you review the video, consider these questions:

? What is Accounting? ? What is Business? ? Who are the three people that want to know the story of your business? ? What language of Accounting does the government use? ? What language of Accounting do Investors use? ? What language of Accounting do internal users employ?

Watch this video online:

Accounting is the Language of Business

Every business organization that has economic resources, such as money, machinery, and buildings, uses accounting information. For this reason, accounting is called the language of business. Accounting also serves as the language providing financial information about not-for-profit organizations such as governments, churches, charities, fraternities, and hospitals. However, these entities are not businesses because they do not operate in a for-profit manner. In this course we will focus on accounting for business firms.

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The accounting process provides financial data for a broad range of individuals whose objectives in studying the data vary widely. Bank officials, for example, may study a company's financial statements to evaluate the company's ability to repay a loan. Prospective investors may compare accounting data from several companies to decide which company represents the best investment. Accounting also supplies management with significant financial data useful for decision making.

Financial accounting information appears in financial statements that are intended primarily for external use (although management also uses them for certain internal decisions). Stockholders and creditors are two of the outside parties who need financial accounting information. These outside parties decide on matters pertaining to the entire company, such as whether to increase or decrease their investment in a company or to extend credit to a company. Consequently, financial accounting information relates to the company as a whole, while managerial accounting focuses on the parts or segments of the company.

Managerial accounting information is for internal use and provides special information for the managers of a company. The information managers use may range from broad, long-range planning data to detailed explanations of why actual costs varied from cost estimates. Management accountants in a company prepare the financial statements. Thus, management accountants must be knowledgeable concerning financial accounting and reporting. The financial statements are the representations of management, not the CPA firm that performs the audit.

Answer the following questions to quiz your understanding of the video and the readings. Choose how confident you are, Maybe, Probably or Definitely, to check your answer!

Accounting is the Language of Business

Every profit-seeking business organization that has economic resources, such as money, machinery, and buildings, uses accounting information. For this reason, accounting is called the language of business. Accounting also serves as the language providing financial information about not-for-profit organizations such as governments, churches, charities, fraternities, and hospitals. However, these entities are not businesses because they do not operate in a for-profit manner. In this course we will focus on accounting for business firms.

The accounting process provides financial data for a broad range of individuals whose objectives in studying the data vary widely. Bank officials, for example, may study a company's financial statements to evaluate the company's ability to repay a loan. Prospective investors may compare accounting data from several companies to decide which company represents the best investment. Accounting also supplies management with significant financial data useful for decision making.

Financial accounting information appears in financial statements that are intended primarily for external use (although management also uses them for certain internal decisions). Stockholders and creditors are two of the outside parties who need financial accounting information. These outside parties decide on matters pertaining to the entire company, such as whether to increase or decrease their investment in a company or to extend credit to a company. Consequently, financial accounting information relates to the company as a whole, while managerial accounting focuses on the parts or segments of the company.

Managerial accounting information is for internal use and provides special information for the managers of a company. The information managers use may range from broad, long-range planning data to detailed explanations of why actual costs varied from cost estimates. Management accountants in a company prepare the financial statements. Thus, management accountants must be knowledgeable concerning financial accounting and reporting. The financial statements are the representations of management, not the CPA firm that performs the audit.

Answer the following questions to quiz your understanding of the video, remember to choose how confident you are with your answer, Maybe, Probably or Definitely!

NEW TERMS

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

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