Financial Accounting Lecture Notes

Module Overview

• Focus on financial statements, terminology, and key accounting concepts.
• Understanding of six key terms is important for success in accounting class:
  • Assets
  • Liabilities
  • Shareholders’ Equity
  • Revenues
  • Expenses
  • Dividends

Understanding Assets

• Definition: Anything of value that a company owns or controls, providing future economic benefit.
• Examples of typical assets for an undergrad:
  • Cell phones
  • Textbooks
  • Cars
• Technical Definition: Anything a company owns or controls as a result of past transactions, giving future economic benefits.
• Common Assets on Financial Statements:**
  • Cash
  • Accounts Receivable (money owed to the company)
  • Inventory
  • Property, Plant, and Equipment (land, buildings, equipment)***

Key Takeaways for Assets

• Assets are valuable things a company can own or control.
• Only those that can be reliably measured are listed on financial statements.

Understanding Liabilities

• Definition: Anything that needs to be repaid in the future.
• Examples of Liabilities:
  • Student loans (for students)
  • Accounts Payable (money owed by the company)
• Common Liabilities on Financial Statements:
  • Notes Payable (bank loans, mortgages)
  • Accounts Payable
  • Wages Payable
  • Other obligations to be paid in the future.

Key Takeaways for Liabilities

• Liabilities represent obligations that a company must fulfill in the future.

Understanding Shareholders’ Equity

• Definition: The owners' claim on the assets of the company after all liabilities have been paid.
• Calculation: Assets - Liabilities = Shareholders’ Equity
• Components of Shareholders’ Equity:
  • Common Shares
  • Preferred Shares
  • Retained Earnings

Key Takeaways for Shareholders’ Equity

• Represents the owners' share in the company post liabilities.
• Changes directly with profits or losses.

Understanding Revenues and Expenses

• Revenues: Income generated from normal business operations (e.g., sales of goods/services).
• Expenses: The costs incurred in the process of earning revenues (e.g., salaries, rent, utilities).
• Dividends: Payments made to shareholders from profits.
• Calculation of Net Income: Revenues - Expenses

Closing Thoughts

• Understanding these key concepts is crucial for analyzing financial statements and doing well in accounting.
• Emphasizes the importance of estimating certain values (e.g., bad debts) to accurately reflect the financial health of a company.
• The significance of cash flows in terms of liquidity and operational capacity is highlighted.