Financial Accounting Lecture Notes

Module Overview

• Focus on financial accounting, specifically financial statements and terminology.
• Accounting is described as the "language of business".

Key Terminology

• Assets: Things of value owned by a company.
• Liabilities: Obligations or debts owed by a company.
• Shareholders' Equity: The owner's share in the company, calculated as assets minus liabilities.
• Revenues: Income generated from normal business operations.
• Expenses: Costs incurred in the operation of the business.
• Dividends: Distribution of earnings to shareholders.

Assets

• Examples of student-generated assets:
  • Cell phones, textbooks, cars, beauty, youth, high school diplomas.
• Definition of Assets: Anything owned by the company that can provide future economic benefits, and has a measurable value.

Typical Assets on Financial Statements

• Cash, accounts receivable, inventory, property, plant and equipment.

Liabilities

• Definition: Future obligations that must be paid.
• Examples: Student loans, accounts payable, notes payable.

Shareholders' Equity

• Defined by the accounting equation:
  • Assets = Liabilities + Equity.
• Components of Equity: Common shares, preferred shares, retained earnings.

Important Accounts

• Common Shares: Equity stake in the company.
• Retained Earnings: Profits retained in the business after dividends.

Revenues, Expenses, and Dividends

• Revenues: Amount earned from sales of goods/services.
• Expenses: Costs incurred to generate revenue.
• Dividends: Payments made to shareholders from earnings.

Financial Statements

1. Income Statement: Summarizes revenues and expenses, calculates net income.
2. Statement of Changes in Equity: Tracks changes in equity accounts over time.
3. Balance Sheet: Lists company’s assets, liabilities, and equity at a specific point in time.
4. Statement of Cash Flows: Details cash inflows and outflows, categorized as operating, investing, and financing activities.

Ratios

• Importance of understanding financial ratios for evaluating company performance.
• Types of ratios discussed:
  • Liquidity Ratios: Current ratio, acid-test ratio.
  • Profitability Ratios: Gross profit margin, return on equity.
  • Efficiency Ratios: Inventory turnover, receivables turnover.
  • Market Ratios: Price-to-earnings ratio, dividend yield.

Key Concepts for Cash Management

• Cash is critical for business operations; companies must manage cash flow effectively.
• Understanding the relationship between cash inflows and outflows guides financial decisions.

Conclusion

• Comprehensive understanding of financial statements, key accounting terms, and ratios is essential for evaluating business performance and for making informed financial decisions.