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Maire Loughran. Financial Accounting For Dummies
Financial Accounting For Dummies® To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Financial Accounting For Dummies Cheat Sheet” in the Search box. Table of Contents
List of Tables
List of Illustrations
Guide
Pages
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Getting a Financial Accounting Initiation
Seeing the Big Picture of Financial Accounting
Knowing the Purposes of Financial Accounting
Preparing financial statements
Showing historic performance
Providing results for the annual report
Getting to Know Financial Accounting Users
Identifying the most likely users
Recognizing their needs
Providing information for decision-making
Respecting the Key Characteristics of Financial Accounting Information
Relevance
Reliability
Comparability
INDEPENDENT VERIFICATION OF ACCOUNTS RECEIVABLE
Consistency
SEEING HOW DEPRECIATION AFFECTS THE BOTTOM LINE
Accepting Financial Accounting Constraints
COST/BENEFIT LOST IN THE WOODS
Considering Your Ethical Responsibilities
Following the accountant’s code of conduct
Having integrity
Maintaining objectivity
Achieving independence
Introducing the Conceptual Framework of Financial Accounting
Introducing the Big Three Financial Statements
Gauging the Health of a Business through Its Financials
Reporting Assets and Claims: The Balance Sheet
Realizing why the balance sheet is “classified”
Studying the balance sheet components
Assets
Liabilities
Equity
Seeing an example of a classified balance sheet
Posting Profit or Loss: The Income Statement
Keeping a scorecard for business activity
Studying the income statement components
Revenue
Cost of goods sold
Operating expenses
Other income and expense
Seeing an example of an income statement
Showing the Money: The Statement of Cash Flows
Tracking sources and uses of cash
Studying sections of the cash flow statement
Seeing a short statement of cash flows
Running the Numbers for Success
Identifying Accounting Issues and Solutions
Selecting a Business Entity
Advantages of the sole proprietorship
Owners’ capital
Limiting liability with the S Corporation
Learning about recognition options
Reporting for Small Businesses
Preparing reports
Analyzing reporting
Identifying cost issues
Managing Cash
Identifying cost issues
Cash budget
Bank statement reconciliation
Converting cash accounting to accrual
Improving cash flow
Acronym Alert! Setting the Standards for Financial Accounting
Walking through the Origins of Number Crunching
ADVICE FOR THE BEFUDDLED FINANCIAL ACCOUNTING STUDENT
Knowing the Role of the American Institute of Certified Public Accountants (AICPA)
ASB audit and attestation standards
AICPA Code of Professional Conduct
Following Regulatory Issues
The U.S. Securities and Exchange Commission (SEC)
PUTTING THE SEC TO WORK FOR YOU!
The Sarbanes-Oxley Act of 2002 (SOX)
The Public Company Accounting Oversight Board (PCAOB)
Getting to Know the Financial Accounting Standards Board (FASB)
AICPA: SEC AND PCAOB WORKING TOGETHER
Understanding generally accepted accounting principles (GAAP)
Looking online for the FASB’s standards
Reviewing Some Accounting Basics
Booking It: The Process Behind Financial Accounting
Shedding Some Light on Bookkeeping
Analyzing the Effect of Business Transactions
Working the fundamental accounting equation
Getting familiar with accounts
Defining debits and credits
Learning about the transaction methodology
Defining Journals
Using journals to record cash transactions
Cash receipts journal
Cash disbursements journal
Recording accrual transactions
Sales journal
Purchases journal
Learning about other journals
Special journals
General journal
Seeing examples of common journal entries
Bringing It All Together in the Ledger
Realizing what a ledger is
Posting to the ledgers
Viewing an example of a general ledger
WALKING THROUGH THE BASIC ACCOUNTING CYCLE
Recognizing the purpose of the trial balance
Focusing on Accounting Methods and Concepts
Distinguishing between Key Accounting Methods
The cash basis
AN “EARNED AND REALIZABLE” EXAMPLE
The accrual basis
Sorting through Standards for Other Types of Accounting
Managerial accounting
Not-for-profit accounting
Governmental accounting
International accounting
Considering the Conceptual Framework of Financial Accounting
The objective of financial reporting
Characteristics of accounting information
Elements of the financial statements
Financial statement measurements
Spending Quality Time with the Balance Sheet
Assessing the Balance Sheet’s Asset Section
Homing in on Historic Cost
Learning What Makes an Asset Current
Cash
Short-term investments
Trading securities
Held-to-maturity securities
Available-for-sale securities
Accounts receivable
Notes receivable
Inventory
Retail (or merchandise) inventory
Manufacturing inventory
Prepaid expenses
Keeping Track of Noncurrent (Long-Term) Assets
Meeting the tangibles: Property, plant, and equipment (PP&E)
Land
Building
Equipment
Furniture and fixtures
Investigating intangible assets
Identifying the two types of intangibles
Writing intangibles off with amortization
Studying the Asset Section of the Balance Sheet
Digging for Debt in the Liabilities Section
Seeing How Businesses Account for Liabilities
Keeping Current Liabilities under Control
Accounts payable
Payroll and taxes
Unearned revenue
Other short-term liabilities
Planning for Long-Term Obligations
FINANCING ASSET PURCHASES WITH DEBT VERSUS EQUITY
Managing long-term debt
Mortgages
Notes payable
Capitalized leases
Anticipating contingent liabilities
Accounting for Bond Issuances
Understanding bond basics
Accounting for bonds sold at face value
Addressing interest payments
Getting and amortizing a premium
Reporting a bond discount
Retiring and converting bonds
Letting Owners Know Where They Stand: The Equity Section
Distinguishing Different Types of Business Entities
Sole proprietorship
Partnership
Corporate
Defining Paid-in Capital
Recording Retained Earnings
Spotting Reductions to Stockholders’ Equity
Paying dividends
THE THREE IMPORTANT DATES IN THE LIFE OF A DIVIDEND
Buying treasury stock
Learning about Stock Splits
Accounting for Accumulated Other Comprehensive Income
Seeing a Sample Equity Section of the Balance Sheet
Investigating Income and Cash Flow
Searching for Profit or Loss on the Income Statement
Presenting the Income Statement in One of Two Ways
Recognizing the single-step format
Breaking it out with the multiple-step format
Defining Different Types of Businesses
Providing a service
Merchandising to the public
Manufacturing a product
Examining Income Statement Sections
Two types of revenue
Gross sales
Other income
Contra revenue accounts
Sales discounts
Sales returns and allowances
Cost of goods sold
Merchandising COGS
Manufacturing COGS
Gross profit
Operating expenses
Heading toward the bottom line
Operating income
Other income and expenses
Income from continuing operations before taxes
Provision for income taxes
Finally — net income!
Earnings per share
Watching Out for Unusual Income Statement Items
Discontinued operations
Noncontrolling subsidiary interests
Arriving at the Final Product
QUICK AND DIRTY INCOME STATEMENT PREPARATION
Following the Money by Studying Cash Flow
Understanding the Difference between Cash and Profit
Seeing how noncash transactions affect profit
Distinguishing costs from expenses
Realizing the Purpose of the Statement of Cash Flows
Walking through the Cash Flow Sections
Figuring cash operating results
Operating sources of cash
Operating uses of cash
TRADING AT A PERSONAL LEVEL
Showing cash investing transactions
Investing sources of cash
Investing uses of cash
Accounting for financing activities
Recognizing Methods for Preparing the Statement of Cash Flows
Using the direct method
Starting indirectly with net income
Interpreting the Statement of Cash Flows
Looking at Two Sample Statements of Cash Flows
Examining Depreciation Cost Flow Assumptions
Discovering How Depreciation Affects All Financial Statements
Mastering Costs
Defining costs and expenses in the business world
Satisfying the matching principle
Identifying product and period costs
Learning which costs are depreciated
ALLOCATING COSTS BETWEEN LAND AND BUILDING
Handling real property depreciation
Expensing repairs and maintenance
Distinguishing among Depreciation Methods
Walking through the straight-line method
Accelerating by using declining balance
Calculating sum-of-the-years’-digits
Using the units-of-production method
Seeing how the methods compare
Figuring partial year depreciation
Preparing a Depreciation Schedule
GAAP VERSUS TAX DEPRECIATION
Learning about Inventory Cost Flow Assumptions
Discovering How Inventory Valuation Affects the Financial Statements
Do Service Companies Have Inventory?
Classifying Inventory Types
Accounting for merchandising company inventory
Perpetual system
Periodic system
Accounting for manufacturing company inventory
Direct material inventory
Work-in-process inventory
Finished goods inventory
FIGURING OWNERSHIP OF FINISHED GOODS
Getting to Know Inventory Valuation Methods
Specific identification
Weighted average
First-in, first out (FIFO)
Last-in, first-out (LIFO)
Comparing inventory cost-flow assumptions
Figuring ending inventory and cost of goods sold using FIFO
Figuring ending inventory and cost of goods sold using LIFO
LIFO LIQUIDATION LAYERS
Figuring ending inventory and cost of goods sold using weighted average
Preparing an Inventory Worksheet
Analyzing the Financial Statements
Using Ratios and Other Tools
Learning about Liquidity Measurements
Figuring the current ratio
Putting the acid test to work
Working with working capital
Measuring Profitability
Explaining trend analysis
Focusing on return on investment
EXPANDING ON ROI WITH THE DuPont MODEL
Homing in on return on equity
Exploring Activity Measures
Accounts receivable turnover
Inventory turnover
Number of days’ sales in accounts receivable
Analyzing Financial Statements
Using horizontal analysis
Comparing with vertical analysis
Using Common Size Financial Statements
WHO WOULD YOU RATHER LOAN MONEY TO?
Got Your Dictionary Ready? Reading Explanatory Notes and Disclosures
Realizing How Corporations Should Govern Themselves
Identifying Corporate Characteristics
ENRON: A CAUTIONARY TALE OF CORPORATE GOVERNANCE AT ITS WORST
Reviewing Common Explanatory Notes
Leveling the playing field among financial statements
Explaining significant accounting policies
Reviewing depreciation and inventory valuation methods
Consolidating financial statements
Accounting for income taxes
Spelling out employee benefits
Walking through intangibles
Looking for important event disclosures
Accounting changes
Business combinations
Contingencies
Events happening after the balance sheet date
Segment reports
Putting the Onus on the Preparer
Studying the Report to the Shareholders
Why Private and Public Companies Treat Annual Reports Differently
FINDING ANNUAL REPORTS ONLINE
Fulfilling Three Purposes
Serving a marketing and PR function
Stating financial performance and goals
Meeting regulatory requirements
Reading the Annual Report to Shareholders
Meeting the chair of the board of directors
Highlighting key financial data
Touting company achievements
Looking into the future
CALCULATING WEIGHTED AVERAGE
Getting to know key management and board members
Walking through the Form 10-K
Facing page: Identifying the affected company
Part I: Learning more about the registrant
Part II: Revealing the company’s financial performance
Market information and financial highlights
Management discussion and analysis
Audited financial statements
Part III: Identifying management and corporate governance
Part IV: Exhibits, financial statement schedules, and signature
Feeling Brave? Tackling More Advanced Financial Accounting Topics
Accounting for Emerging Issues
Reviewing Different Technological Effects on Financial Accounting
Working in a digital world
Cloud storage for backup and recovery
File-sharing tools
Virtual meetings
Cryptocurrency
Robotic process automation (RPA)
Discussing transitional recording
Introducing the Pharmaceutical Industry
Booking pharmaceutical transactions
Expensing versus capitalization
Writing off impairment
Manufacturing costs
Sales and marketing
Crediting Research and Development Costs
Walking through the background of research and development (R&D)
Explaining the effect on relevant industries
Realizing constraints for costs and expenses
Reporting in the books
Recognizing Losses
Different types of business interruptions
Properly expensing or accruing costs
Accounting for Income Taxes
Identifying Financial Income versus Taxable Income
Figuring out financial income
Taking a look at taxable income
Explaining why the two incomes differ
Tackling temporary differences
Reviewing permanent differences
Explaining tax deferrals
Taking Advantage of Net Operating Losses
Identifying loss carrybacks
Understanding loss carryforwards
Presenting a Side-by-Side Comparison of Book and Tax Calculations
Taking Deferred Tax Liabilities or Assets to the Balance Sheet
Accounting for Leases
Reviewing Lease Basics
Identifying leasing advantages
Introducing the lessor and lessee
Accounting for the Lessee
Looking at operating leases
BOOKING IT UNDER ASC 2016-02
Walking through finance leases
Spotting characteristics of finance leases
Figuring present value
Presenting a finance lease on the financial statements
Accounting for the Lessor
Operating leases
Direct financing leases
Sales-type leases
Reporting Changes in Methods and the Correction of Errors
Coping with Accounting Changes
Reporting changes in accounting principles
Making retrospective accounting changes
Deciding the impracticability exception applies
Using reclassification for accounting changes
FIGURING OUT WHAT’S IMMATERIAL
Switching to the LIFO inventory valuation method
Changing a company’s estimates
Reviewing types of business estimates
Handling changes currently and prospectively
Understanding changes in reporting entities
Dealing with Errors
Reviewing common types of errors
Letting counterbalancing errors lie
Restating the financial statements
The Part of Tens
Ten Financial Accounting Shenanigans
Reporting Revenue in the Wrong Period
Reporting Fictitious Income
Increasing Income with Misleading Events
Shifting Expenses Between Periods
Misclassifying Cash
Failing to Record Liabilities
Reporting Liabilities in the Wrong Period
Not Disclosing Related-Party Transactions
Capitalizing Normal Operating Expenses
Deleting Transactions
Ten Accounting Career Opportunities
Certified Public Accountant
Consultant
Corporate Accountant
Forensic Accountant
Government Accountant
Information Technology Auditor
Income Tax Accountant
International Accountant
Non-Accounting Accountant
Not-for-Profit Accountant
Index. A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
Z
About the Author
Dedication
Author’s Acknowledgments
WILEY END USER LICENSE AGREEMENT
