financial accounting cheat sheet

financial accounting cheat sheet

Comprehensive Guide to Financial Accounting: A Complete Cheat Sheet

1. Introduction to Financial Accounting

1. The management of a company should be focused on accounting data. 2. The workforce of a company should be keen on accounting data for job protection. 3. The investment market should be focused on the work. 4. Some lending banks can rely on others. 5. The customer base of a corporation will rely on the statements of accounts. 6. The tax authority and statistical organization are also the customers of financial accounting.

Because every single business enterprise that organizes and operates a business demands financial accounting, the users of financial accounting information are diversified, including:

1.2 The Users of Accounting Information

Financial accounting is the process of recording, summarizing, and reporting the multitude of transactions resulting from business operations over a period of time.

1.1 Definition of Financial Accounting

Topic 1: Introduction To Financial Accounting

First of all, what is financial accounting? Financial accounting is the process of recording, summarizing, and reporting the multitude of transactions resulting from business operations over a period of time. These transactions are summarized in the preparation of financial statements, including the balance sheet, income statement, equity statement, and statement of cash flows. Financial accounting is only one branch of the larger discipline of accounting. Accounting is a broad field made up of a number of different types. The most common form of accounting is financial accounting, in which property, stocks, bonds, patents, trademarks, and other economic entities are accounted for.

Part 1: Introduction to Financial Accounting

2. Key Principles and Concepts

Key elements of financial reporting are quantitative expressions, such as numbers and percentages. In contrast, the qualitative characteristics ensure that the information in financial reports is presented in a form that will be useful to users. Financial statements are prepared according to sets of principles, often referred to as conceptual frameworks, based on a range of concepts and principles. The key principles that underpin the practice of accounting are accounting concepts and accounting conventions. These topics are explained in the Principles of Accounting section. The key accounting concepts are historical cost, economic entity, realization, going concern, matching, and consistency. The key accounting conventions (also referred to as assumptions) are accrual, consistency, prudence, and periodicity.

Financial accounting is concerned with the production of financial information and its inclusion in the financial statements. For most companies, producing financial statements is governed by the legal requirement to do so at the end of the financial year. The statement that is produced is called the Annual Report. The Annual Report consists of the following four financial statements: the Income Statement, the Statement of Financial Position or Balance Sheet, the Statement of Changes in Equity, and the Cash Flow Statement. The objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.

3. Financial Statements and Analysis

– Balance Sheet. The balance sheet is divided into two parts – the left side lists assets that the company owns, the right side shows the source of those assets. Current assets are resources, earning revenue for the company within a year; these include things like cash, accounts receivable, inventory, and short-term notes. Nonoperating assets are those that will not produce revenue for a year or more; these typically include intangibles, property, plant, and equipment. On the right hand of the balance sheet, we have liabilities and stockholders’ equity. Current liabilities are obligations that must be paid out of current assets; these include accounts payable, notes payable, and wages. Long-term liabilities are obligations not needing to be paid within a year. Stockholders’ equity is those funds provided by the stockholders and includes common stock and retained earnings. – Income Statement. The income statement is used to measure the profitability of the business. It shows revenues the company earned and expenses it incurred in the accounting period. Sales is the total dollar amount of goods or services the company produced. Cost of Goods Sold is generally what the company paid for the things it sold. Gross Margin is Sales – Cost of Goods Sold. Operating expenses include salaries, office supplies, utilities, depreciation, and amortization. Operating income is Gross Margin – Operating Expenses. Other income or expenses usually include miscellaneous sources of revenues or expenses, like interest income or expense. Net income or profit is the bottom line number. It is calculated by taking Operating Income + Other Income (or – Other Expense) – Taxes. Remember, a company may have a loss if it incurred more operating expenses and other expenses than it had in sales, and that is a key indicator that a company may not be as profitable as its competitors.

Laws require businesses to provide financial statements to the public. This information is used to assess the overall performance and financial stability of the company. The following are the most commonly used financial statements:

4. Common Financial Ratios and Formulas

Companies report information in their financial statements to help users of those statements assess their financial performance. Not all businesses are similar, so not all companies report the same items in the same categories, and there are a number of financial ratios and formulas to help users assess not only how a company is doing now but also how it compares to other companies that are in the same line of business or are at a similar stage of development. All of the following ratios use figures that are found in financial statements.

– Quick Ratio or Acid Test Ratio = (2 * Current Assets – Inventory) / Current Liabilities. Quick ratio is a measure of a company’s short-term liquidity. It measures a company’s ability to meet short-term obligations with its most liquid assets. – Inventory turnover ratio = COGS / Average inventory. This indicates how many times a company sells its entire inventory in a certain period. Generally, a higher inventory turnover ratio means that the company is selling its items more quickly. – Return on assets = (Net income + Interest) / Average assets. This kind of ratio shows how well a company is able to generate net income with its total assets. It measures how many dollars in earnings the business derives from each dollar of assets it owns. – Return on equity = Net income / Average equity. ROE is a very popular ratio. It measures how much profit the business generates as a percentage of shareholders’ equity. A rising ROE suggests growth in the overall productivity. – Debt to equity = Total liabilities / Shareholders’ equity. This shows the proportion of equity and debt the company is using to finance its assets. – Interest coverage ratio = EBIT (Earnings Before Interest and Taxes) / Interest expense. The interest coverage ratio is used to determine how easily a company can pay interest on outstanding debt. – Net profit margin = Sales – COGS – Operating Expenses – Other Expenses / Total revenue. Net profit margin is a measurement of the company’s profitability. The net profit margin shows the percentage of each dollar in revenue that resulted in net profit. – Cash flow ratio = Cash flow from operating activities / Sales. Cash flow is often more widely utilized to evaluate a company’s operations. This ratio looks at cash flow in relation to the company’s sales.

Following is a list of some popular ratios:

5. Practical Tips and Examples

1. Prepare for each class session. Be sure to read the assigned material in advance of the class meeting. This will help you comprehend what is being discussed. 2. Take notes, read and interpret the homework promptly after the class. Do not fall behind. Do the reading and homework promptly after the class. 3. Visit your instructor. If you need more explanation, go to your instructor with specific questions. Do not wait until the day before an exam to try to acquire understanding. 4. Use the Study Guide. Do the tutorial and Your Thoughts notebooks. Stay active. Keep your mind involved. 5. Compare competing companies and industries when they are discussed in the book – or another such source – and use the data to make comparisons among the companies you select. Reading financial statements and understanding the data in them is an acquired skill. It requires practice and self-confidence.

Advice to the Student: You will have your best chance of understanding, enjoying, and remembering financial accounting if you take an active approach to the subject. Follow these steps:

The author offers their advice essential to understanding financial accounting and to using the information from financial statements to reach informed decisions. The chapter also provides references to specific financial statement information and shows the data in tables. Many readers will wish to capture this data in a usable format, leading to the publication of the book’s companion, Financial Reporting and Analysis, Fourth Edition (1999).