Financial Accounting

Units

1. 1

   The accounting equation and statements

   4 lessons

   1. Users of accounting and GAAPName the internal and external users of accounting information and what each needs, explain who writes GAAP and how it differs from IFRS, and apply four basic rules: economic entity, monetary unit, historical cost and full disclosure.
   2. The accounting equationUse the accounting equation to find a missing asset, liability, or stockholders’ equity amount; explain how common stock, earnings, and dividends affect equity.
   3. Analyzing business transactionsAnalyze each of a company's first transactions by naming the accounts it changes and the direction of each change, record it in a running accounting equation table, and check that the equation stays in balance after every one.
   4. The four financial statementsPrepare four linked statements from one month of transactions and explain why net income differs from ending cash.
2. 2

   The recording process

   4 lessons

   1. Debits and creditsDraw a T account, find an account's balance, state each account type's normal balance and use the debit and credit rules to show which side of an account every kind of change goes on.
   2. Journalizing transactionsRecord transactions as general journal entries with a date, accounts titled from a chart of accounts, debit and credit amounts and an explanation, including compound entries.
   3. Posting to the ledgerPost journal entries to ledger T accounts and running balance accounts, and compute each account's balance as the difference of its debits and credits.
   4. The trial balancePrepare a trial balance from ledger balances, explain what equal totals do and do not prove, and locate common errors such as a transposition or a balance on the wrong side.
3. 3

   Accrual accounting and the accounting cycle

   4 lessons

   1. Accrual basis and revenue recognitionContrast cash and accrual accounting, state the time period assumption, apply the five step revenue recognition principle to a contract with two promises, and explain the expense recognition (matching) principle with numbers.
   2. Adjusting entries for deferralsPrepare adjusting entries at the end of a period for prepaid expenses, supplies, depreciation with accumulated depreciation as a contra asset, and unearned revenues, with the amounts computed.
   3. Adjusting entries for accrualsPrepare adjusting entries for accrued revenues, accrued salaries and accrued interest, and show the effect on net income, assets, liabilities and equity of leaving each one out.
   4. Adjusted trial balance and closing entriesBuilds statements from an adjusted trial balance, journalizes closing entries for revenues, expenses and dividends to retained earnings, and prepares a post-closing trial balance.
4. 4

   Merchandising and inventory

   4 lessons

   1. Merchandising operationsExplains the merchandising operating cycle, perpetual and periodic systems, recording purchases and sales with returns, discounts and freight, and the multiple-step income statement.
   2. FIFO, LIFO and average costComputes cost of goods sold and ending inventory under specific identification, FIFO, LIFO and weighted average from one purchase table, and compares income and taxes.
   3. Lower of cost and inventory errorsApplies lower of cost or net realizable value (and lower of cost or market for LIFO) and traces how an inventory error flows through two years of income.
   4. Inventory turnover and days in inventoryComputes inventory turnover as cost of goods sold over average inventory and days in inventory, and explains the LIFO reserve.
5. 5

   Cash and receivables

   4 lessons

   1. Internal control and cashExplains the COSO components and control activities (segregation of duties, documentation, physical controls), cash controls and the petty cash fund.
   2. Bank reconciliationPrepares a bank reconciliation adjusting for deposits in transit, outstanding checks, bank charges, NSF checks and errors, and journalizes the resulting entries.
   3. Accounts receivable and the allowance methodContrasts the direct write-off and allowance methods, estimating bad debts with percentage of receivables and an aging schedule, and recording write-offs and recoveries.
   4. Notes receivable and receivables ratiosComputes interest on notes receivable as principal times rate times time, records honoring and dishonoring, and computes receivables turnover and average collection period.
6. 6

   Property, plant and equipment and intangibles

   4 lessons

   1. Determining the cost of plant assetsExplains which costs are capitalized for land, land improvements, buildings and equipment, and the difference between capital and revenue expenditures.
   2. Depreciation methodsComputes depreciation schedules under straight-line, units of activity and double-declining-balance for the same asset, and explains revisions of estimates.
   3. Disposals of plant assetsRecords retirement and sale of plant assets with gains and losses from comparing proceeds to book value, and explains asset turnover and return on assets.
   4. Intangible assets and natural resourcesExplains patents, copyrights, trademarks and goodwill, amortization and impairment, and depletion of natural resources by units of activity.
7. 7

   Liabilities

   4 lessons

   1. Current liabilitiesRecords notes payable, sales taxes, unearned revenues, current maturities of long-term debt and payroll with withholdings and employer taxes, and computes the current ratio.
   2. Contingent liabilities and warrantiesExplains when contingencies are accrued, disclosed or ignored (probable, reasonably possible, remote) and records warranty liability estimates.
   3. Bonds payablePrices a bond as the present value of interest and principal, and records issuance at par, discount and premium with effective interest amortization.
   4. Long-term notes and leasesPrepares an installment note amortization schedule and explains lease accounting under ASC 842, with right of use assets and lease liabilities.
8. 8

   Stockholders' equity

   4 lessons

   1. Issuing common and preferred stockExplains authorized, issued and outstanding shares, par value, paid-in capital in excess of par, and preferred stock features such as cumulative dividends.
   2. Treasury stockRecords purchases and reissues of treasury stock under the cost method and shows its presentation as a reduction of stockholders' equity.
   3. Cash dividends, stock dividends and splitsRecords declaration and payment of cash dividends, small and large stock dividends and stock splits, and allocates dividends between preferred and common.
   4. Retained earnings and earnings per sharePrepares a statement of stockholders' equity, explains prior period adjustments, and computes basic EPS, payout ratio and return on common equity.
9. 9

   The statement of cash flows

   4 lessons

   1. Classifying cash flowsSorts cash flows into operating, investing and financing activities, and noncash investing and financing activities, using a list of sample transactions.
   2. The indirect methodPrepares operating cash flow by adjusting net income for depreciation, gains and losses, and changes in current assets and current liabilities.
   3. The direct methodComputes cash receipts from customers and cash payments to suppliers, employees and for interest and taxes, and reconciles to the indirect method total.
   4. Interpreting cash flowsComputes free cash flow as operating cash flow minus capital expenditures and dividends, and reads cash flow patterns across the life cycle of a firm.
10. 10

    Financial statement analysis

    4 lessons

    1. Horizontal and vertical analysisPrepares horizontal analysis of year over year changes and vertical common size statements as percentages of sales or total assets.
    2. Liquidity ratiosComputes the current ratio, quick (acid test) ratio, receivables turnover, inventory turnover and cash conversion figures, and interprets them against industry norms.
    3. Profitability ratios and DuPontComputes profit margin, asset turnover, ROA, ROE, EPS and P/E, and breaks ROE into margin times turnover times equity multiplier with the DuPont model.
    4. Solvency ratios and earnings qualityComputes debt to assets, debt to equity and times interest earned, and discusses quality of earnings, discontinued operations and other comprehensive income.