A-201: Financial Accounting Study Guide

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Chapter 1

Financial Accounting
A system through which managers report financial information about an economic entity to a variety of individuals who use this information for various decision making purposes.
The process of identifying, recording, summarizing, and reporting economic information to decision makers.
Managers of Companies Must Understand 2 Things:
1) Economic Consequence Perspective:
Considering and understanding how such events affect the financial statements.
2) User Orientation:
Managers must also know how to read, evaluate, and analyze financial statements.
The Annual Report:
1) The Auditor’s Report – A short letter written by the auditor that describes the activities of the audit and comments on the financial
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depreciation, amortization).
Include Selling & Admin. Expenses and estimates of uncollectible receivables and depreciation on the equipment.
3) Statement of Retained Earnings
Explains the changes in the shareholders’ equity items (Common Stock and Retained Earnings) from one year to the next. * Beginning Retained Earnings * + Net Income * - Dividends Paid * = Ending Retained Earnings
The amount in the Ending Retained Earnings goes onto the Balance Sheet under “Retained Earnings” and is the Beginning Retained Earnings for the next period.
4) Statement of Cash Flows
Summarizes the increase and decrease in CASH over a period of time. * Beginning Cash Balance (should equal the “Cash” account on Bal. Sheet.) * +/- Cash from Operating Activities * +/- Cash from Investing Activities * +/- Cash from Financing Activities * = Ending Cash Balance *
Operating Activities: Activities associated w/ acquisition (buy inventory) and sale of company’s products and services. Also interest received or paid.
Investing Activities: Involve the management of a company’s long-term assets – primarily purchases and sales of fixed assets (esp. land and equipment) and investments in equity securities.
Financing Activities: The cash collections and payments related to the company’s capital sources.
Involves collection of capital through equity or debt issuances and any related payments such as dividends, debt

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