Financial Accounting For Dummies

Maire Loughran, CPA, is a university professor who teaches both undergraduate and graduate accounting classes. She is the author of Auditing For Dummies as well as the previous edition of Financial Accounting For Dummies.

• Introduction 1About This Book 2Foolish Assumptions 2Icons Used in This Book 3Beyond the Book 3Where to Go from Here 4Part 1: Getting a Financial Accounting Initiation 5Chapter 1: Seeing the Big Picture of Financial Accounting 7Knowing the Purposes of Financial Accounting 8Preparing financial statements 8Showing historic performance 10Providing results for the annual report 10Getting to Know Financial Accounting Users 11Identifying the most likely users 11Recognizing their needs 11Providing information for decision-making 12Respecting the Key Characteristics of Financial Accounting Information 13Relevance 13Reliability 14Comparability 14Consistency 15Accepting Financial Accounting Constraints 17Considering Your Ethical Responsibilities 18Following the accountant’s code of conduct 18Having integrity 19Maintaining objectivity 19Achieving independence 20Introducing the Conceptual Framework of Financial Accounting 21Chapter 2: Introducing the Big Three Financial Statements 23Gauging the Health of a Business through Its Financials 24Reporting Assets and Claims: The Balance Sheet 25Realizing why the balance sheet is “classified” 26Studying the balance sheet components 26Seeing an example of a classified balance sheet 29Posting Profit or Loss: The Income Statement 30Keeping a scorecard for business activity 30Studying the income statement components 31Seeing an example of an income statement 33Showing the Money: The Statement of Cash Flows 33Tracking sources and uses of cash 34Studying sections of the cash flow statement 34Seeing a short statement of cash flows 35Chapter 3: Running the Numbers for Success 37Identifying Accounting Issues and Solutions 38Selecting a Business Entity 38Advantages of the sole proprietorship 39Owners’ capital 39Limiting liability with the S Corporation 40Learning about recognition options 41Reporting for Small Businesses 42Preparing reports 42Analyzing reporting 45Identifying cost issues 46Managing Cash 48Identifying cost issues 48Improving cash flow 53Chapter 4: Acronym Alert! Setting the Standards for Financial Accounting 55Walking through the Origins of Number Crunching 56Knowing the Role of the American Institute of Certified Public Accountants (AICPA) 58ASB audit and attestation standards 59AICPA Code of Professional Conduct 60Following Regulatory Issues 61The U.S Securities and Exchange Commission (SEC) 62The Sarbanes-Oxley Act of 2002 (SOX) 63The Public Company Accounting Oversight Board (PCAOB) 64Getting to Know the Financial Accounting Standards Board (FASB) 65Understanding generally accepted accounting principles (GAAP) 66Looking online for the FASB’s standards 67Part 2: Reviewing Some Accounting Basics 69Chapter 5: Booking It: The Process Behind Financial Accounting 71Shedding Some Light on Bookkeeping 72Analyzing the Effect of Business Transactions 73Working the fundamental accounting equation 73Getting familiar with accounts 74Defining debits and credits 76Learning about the transaction methodology 77Defining Journals 78Using journals to record cash transactions 78Recording accrual transactions 82Learning about other journals 84Seeing examples of common journal entries 86Bringing It All Together in the Ledger 88Realizing what a ledger is 88Posting to the ledgers 89Viewing an example of a general ledger 89Recognizing the purpose of the trial balance 91Chapter 6: Focusing on Accounting Methods and Concepts 93Distinguishing between Key Accounting Methods 94The cash basis 94The accrual basis 95Sorting through Standards for Other Types of Accounting 96Managerial accounting 96Not-for-profit accounting 97Governmental accounting 98International accounting 98Considering the Conceptual Framework of Financial Accounting 99The objective of financial reporting 100Characteristics of accounting information 101Elements of the financial statements 101Financial statement measurements 102Part 3: Spending Quality Time with the Balance Sheet 103Chapter 7: Assessing the Balance Sheet’s Asset Section 105Homing in on Historic Cost 106Learning What Makes an Asset Current 106Cash 107Short-term investments 108Accounts receivable 110Notes receivable 111Inventory 112Prepaid expenses 113Keeping Track of Noncurrent (Long-Term) Assets 114Meeting the tangibles: Property, plant, and equipment (PP&E) 114Investigating intangible assets 116Studying the Asset Section of the Balance Sheet 118Chapter 8: Digging for Debt in the Liabilities Section 121Seeing How Businesses Account for Liabilities 122Keeping Current Liabilities under Control 123Accounts payable 124Payroll and taxes 125Unearned revenue 127Other short-term liabilities 128Planning for Long-Term Obligations 130Managing long-term debt 131Anticipating contingent liabilities 132Accounting for Bond Issuances 133Understanding bond basics 133Accounting for bonds sold at face value 134Addressing interest payments 134Getting and amortizing a premium 134Reporting a bond discount 135Retiring and converting bonds 136Chapter 9: Letting Owners Know Where They Stand: The Equity Section 137Distinguishing Different Types of Business Entities 138Sole proprietorship 138Partnership 139Corporate 140Defining Paid-in Capital 141Recording Retained Earnings 143Spotting Reductions to Stockholders’ Equity 143Paying dividends 144Buying treasury stock 146Learning about Stock Splits 146Accounting for Accumulated Other Comprehensive Income 147Seeing a Sample Equity Section of the Balance Sheet 148Part 4: Investigating Income and Cash Flow 149Chapter 10: Searching for Profit or Loss on the Income Statement 151Presenting the Income Statement in One of Two Ways 152Recognizing the single-step format 152Breaking it out with the multiple-step format 153Defining Different Types of Businesses 154Providing a service 154Merchandising to the public 154Manufacturing a product 155Examining Income Statement Sections 155Two types of revenue 156Contra revenue accounts 157Cost of goods sold 159Gross profit 162Operating expenses 162Heading toward the bottom line 163Earnings per share 165Watching Out for Unusual Income Statement Items 166Discontinued operations 167Noncontrolling subsidiary interests 168Arriving at the Final Product 168Chapter 11: Following the Money by Studying Cash Flow 171Understanding the Difference between Cash and Profit 172Seeing how noncash transactions affect profit 172Distinguishing costs from expenses 173Realizing the Purpose of the Statement of Cash Flows 173Walking through the Cash Flow Sections 175Figuring cash operating results 175Showing cash investing transactions 178Accounting for financing activities 180Recognizing Methods for Preparing the Statement of Cash Flows 181Using the direct method 181Starting indirectly with net income 182Interpreting the Statement of Cash Flows 183Looking at Two Sample Statements of Cash Flows 183Chapter 12: Examining Depreciation Cost Flow Assumptions 187Discovering How Depreciation Affects All Financial Statements 188Mastering Costs 189Defining costs and expenses in the business world 190Satisfying the matching principle 190Identifying product and period costs 191Learning which costs are depreciated 191Distinguishing among Depreciation Methods 194Walking through the straight-line method 196Accelerating by using declining balance 196Calculating sum-of-the-years’-digits 197Using the units-of-production method 198Seeing how the methods compare 198Figuring partial year depreciation 199Preparing a Depreciation Schedule 200Chapter 13: Learning about Inventory Cost Flow Assumptions 203Discovering How Inventory Valuation Affects the Financial Statements 204Do Service Companies Have Inventory? 205Classifying Inventory Types 206Accounting for merchandising company inventory 206Accounting for manufacturing company inventory 208Getting to Know Inventory Valuation Methods 210Specific identification 211Weighted average 211First-in, first out (FIFO) 211Last-in, first-out (LIFO) 212Comparing inventory cost-flow assumptions 212Preparing an Inventory Worksheet 216Part 5: Analyzing the Financial Statements 217Chapter 14: Using Ratios and Other Tools 219Learning about Liquidity Measurements 220Figuring the current ratio 221Putting the acid test to work 222Working with working capital 223Measuring Profitability 224Explaining trend analysis 224Focusing on return on investment 225Homing in on return on equity 227Exploring Activity Measures 227Accounts receivable turnover 228Inventory turnover 228Number of days’ sales in accounts receivable 229Analyzing Financial Statements 230Using horizontal analysis 230Comparing with vertical analysis 231Using Common Size Financial Statements 232Chapter 15: Got Your Dictionary Ready? Reading Explanatory Notes and Disclosures 235Realizing How Corporations Should Govern Themselves 236Identifying Corporate Characteristics 236Reviewing Common Explanatory Notes 239Leveling the playing field among financial statements 239Explaining significant accounting policies 240Looking for important event disclosures 244Putting the Onus on the Preparer 249Chapter 16: Studying the Report to the Shareholders 251Why Private and Public Companies Treat Annual Reports Differently 252Fulfilling Three Purposes 253Serving a marketing and PR function 253Stating financial performance and goals 253Meeting regulatory requirements 254Reading the Annual Report to Shareholders 254Meeting the chair of the board of directors 255Highlighting key financial data 255Touting company achievements 257Looking into the future 257Getting to know key management and board members 258Walking through the Form 10-K 259Facing page: Identifying the affected company 259Part I: Learning more about the registrant 260Part II: Revealing the company’s financial performance 260Part III: Identifying management and corporate governance 264Part IV: Exhibits, financial statement schedules, and signature 264Part 6: Feeling Brave? Tackling More Advanced Financial Accounting Topics 265Chapter 17: Accounting for Emerging Issues 267Reviewing Different Technological Effects on Financial Accounting 268Working in a digital world 268Discussing transitional recording 272Introducing the Pharmaceutical Industry 273Booking pharmaceutical transactions 274Crediting Research and Development Costs 279Walking through the background of research and development (R&D) 280Explaining the effect on relevant industries 281Realizing constraints for costs and expenses 281Reporting in the books 282Recognizing Losses 282Different types of business interruptions 282Properly expensing or accruing costs 284Chapter 18: Accounting for Income Taxes 285Identifying Financial Income versus Taxable Income 286Figuring out financial income 287Taking a look at taxable income 287Explaining why the two incomes differ 289Taking Advantage of Net Operating Losses 292Identifying loss carrybacks 292Understanding loss carryforwards 293Presenting a Side-by-Side Comparison of Book and Tax Calculations 294Taking Deferred Tax Liabilities or Assets to the Balance Sheet 295Chapter 19: Accounting for Leases 297Reviewing Lease Basics 298Identifying leasing advantages 298Introducing the lessor and lessee 299Accounting for the Lessee 300Looking at operating leases 300Walking through finance leases 302Presenting a finance lease on the financial statements 304Accounting for the Lessor 305Operating leases 305Direct financing leases 306Sales-type leases 307Chapter 20: Reporting Changes in Methods and the Correction of Errors 309Coping with Accounting Changes 310Reporting changes in accounting principles 310Changing a company’s estimates 316Understanding changes in reporting entities 318Dealing with Errors 319Reviewing common types of errors 319Letting counterbalancing errors lie 320Restating the financial statements 321Part 7: The Part of Tens 323Chapter 21: Ten Financial Accounting Shenanigans 325Reporting Revenue in the Wrong Period 325Reporting Fictitious Income 326Increasing Income with Misleading Events 327Shifting Expenses Between Periods 327Misclassifying Cash 328Failing to Record Liabilities 329Reporting Liabilities in the Wrong Period 329Not Disclosing Related-Party Transactions 330Capitalizing Normal Operating Expenses 331Deleting Transactions 331Chapter 22: Ten Accounting Career Opportunities 333Certified Public Accountant 334Consultant 335Corporate Accountant 335Forensic Accountant 336Government Accountant 337Information Technology Auditor 338Income Tax Accountant 338International Accountant 339Non-Accounting Accountant 339Not-for-Profit Accountant 340Index 341