Overview
This financial accounting lecture series covers fundamental concepts, key terminology, financial statements, the accounting equation, journal entries, adjusting entries, inventory methods, depreciation, bonds, shareholders' equity, cash flow statements, and financial statement analysis. It includes step-by-step examples, problem walkthroughs, and critical exam-ready definitions and procedures.
Key Accounting Terms & Concepts
- Six essential terms: assets, liabilities, shareholders' equity, revenues, expenses, dividends.
- The accounting equation: Assets = Liabilities + Shareholders' Equity (A = L + SE).
- Assets: resources owned/controlled that have measurable value.
- Liabilities: present obligations to repay in the future.
- Shareholders' Equity: residual interest after liabilities are subtracted from assets.
- Revenues: income earned from regular business activities.
- Expenses: costs incurred to earn revenues.
- Dividends: distribution of earnings to shareholders, reducing retained earnings.
Financial Statements
- Income Statement: summarizes revenues and expenses; shows profit/loss (Net Income = Revenues - Expenses).
- Statement of Changes in Equity: tracks changes in common shares and retained earnings during a period.
- Balance Sheet: lists assets, liabilities, and shareholders' equity at a point in time; must balance.
- Cash Flow Statement: shows cash inflows/outflows from operating, investing, and financing activities.
Journal Entries & Debits/Credits
- Every transaction affects at least two accounts (debit and credit).
- Debits increase assets/expenses/dividends; credits increase liabilities/equity/revenues.
- For revenues: always a credit; for expenses/dividends: always a debit.
- Common journal entry format: Date, Accounts (debited/credited), amounts, description.
Adjusting Journal Entries
- Required at period end for accurate reporting.
- Five common adjusting entries: prepaid expenses, depreciation, accrued expenses, accrued revenues, unearned revenues.
- Depreciation records wear and tear on long-term assets.
Inventory & Cost Flows
- Inventory costing methods: FIFO (first-in, first-out), LIFO (last-in, first-out), Weighted Average, Specific Identification.
- COGS (Cost of Goods Sold) calculation depends on chosen method.
Receivables & Bad Debt
- Not all sales on account are collected; estimate bad debts (percentage of sales or aging method).
- Allowance for doubtful accounts contra-asset offsets accounts receivable.
- Write-offs reduce AR and allowance; recoveries reverse the write-off.
Depreciation Methods
- Straight Line: equal cost allocation each year.
- Units of Production: based on usage (e.g., km driven).
- Double Declining Balance: accelerated, higher early-year expense.
Bonds & Long-term Debt
- Bonds issued at discount (market rate > coupon) or premium (market rate < coupon).
- Use an amortization schedule to allocate interest expense and amortize premium/discount.
Shareholders' Equity & Dividends
- Common shares: basic ownership with voting rights.
- Preferred shares: dividend preference, possible cumulative feature.
- Stock dividends increase shares, transfer from retained earnings to common shares.
Cash Flow Statement
- Three sections: Operating, Investing, Financing.
- Two methods for operating section: direct (actual cash receipts/payments) and indirect (adjust net income for non-cash and working capital changes).
- Ending cash = Beginning cash + net change (from all activities).
Financial Analysis & Ratios
- Horizontal analysis: compares year-over-year changes in line items.
- Vertical analysis: expresses each item as % of a base (e.g., sales or total assets).
- Key ratios: current ratio, quick ratio, inventory/receivables turnover, debt ratio, profit margin, ROE, price/earnings, dividend yield.
Key Terms & Definitions
- Asset — resource owned/controlled with measurable value.
- Liability — obligation to repay an external party in the future.
- Shareholders’ Equity — residual interest after liabilities; owner's claim.
- Revenue — income earned from core business activities.
- Expense — cost incurred in earning revenue.
- Dividend — distribution of earnings to shareholders.
- Depreciation — systematic allocation of asset cost over useful life.
- Allowance for Doubtful Accounts — estimated uncollectible receivables.
- FIFO — earliest purchased inventory sold first.
- LIFO — latest purchased inventory sold first.
- Weighted Average — average cost per unit.
- Straight-line Depreciation — equal expense each year.
- Double Declining Balance — accelerated depreciation method.
- Amortization Schedule — table tracking bond premium/discount over time.
Action Items / Next Steps
- Review and memorize key terms and formulas.
- Complete homework problems assigned (refer to workbook or PDF links).
- Practice preparing each financial statement from trial balance data.
- Calculate and interpret basic financial ratios for sample companies.
- Prepare and post journal entries for varied accounting scenarios.