Accounting Study Guide

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Financial statements are general purpose, external financial statements prepared according to generally accepted accounting principles. Some terms that apply to the financial statements include:

balance sheet reports the amounts of assets, liabilities, and stockholders' equity at a specified moment, such as midnight of December 31; also known as the statement of financial position.

income statement reports revenues, expenses, gains, losses, and net income during the period of time stated in its heading; also known as the statement of operations and as the profit and loss (P&L) statement.

statement of cash flows reports the changes in cash and cash equivalents during a period of time according to three activities: operating, investing, and financing.

statement of stockholders' equity reports the changes in the components of stockholders' equity, including net income, other comprehensive income, dividends, exercise of stock options.

interim financial statements issued between the annual financial statements, e.g. quarterly audited financial statements independent CPA firm gives assurance about reasonableness and compliance with accounting principles.

financial reporting includes financial statements, annual and quarterly reports to SEC and stockholders, press releases and other financial reports.


The balance sheet or statement of financial position reports assets, liabilities, owner's or stockholders' equity at a point in time. Some terms that apply to balance sheets include:

assets resources, things owned, and prepaid or deferred expenses; examples include cash, accounts receivable, inventory, prepaid insurance, land, equipment, vehicles, furnishings.

liabilities obligations and deferred revenues; examples include accounts payable, loans payable, wages payable, interest payable, customer deposits, deferred revenues.

owner's equity a sole proprietorship's assets minus its liabilities.

stockholders' equity a corporation's assets minus its liabilities; reports paid-in capital, retained earnings, and treasury stock.

accounting equation Assets = Liabilities + Stockholders' (Owner's) Equity.

classified balance sheet groups assets into the following classification: current assets, investments, property, plant and equipment, and other assets. Liabilities are classified as either current or long-term.

current asset will turn to cash within one year of the date of the balance sheet (unless the operating cycle is greater than one year).

current liability an obligation that will become due within one year of the balance sheet date (unless the operating cycle is greater than one year.).


The income statement (statement of operations, or P&L for profit and loss statement) reports a company's net income for a specified period of time. Net income is revenues and gains minus expenses and losses. Some terms associated with the income statement include:

revenues amounts earned, sales, service fees, interest earned.

expenses costs incurred to earn revenues, costs used up or expiring during the accounting period, and costs for which the future value cannot be measured.

gain sale of a long-term asset for more than its carrying (book) value; elimination of an obligation for less than its carrying value.

loss sale of a long-term asset for less than its carrying (book) value; elimination of an obligation for more than its carrying value.

gross profit sales minus cost of goods sold.

cost of goods sold beginning finished goods inventory + net purchases (or cost of goods manufactured) – ending finished goods inventory.

single-step income statement one subtraction to reach net income: operating and nonoperating revenues minus operating (including cost of goods sold) and nonoperating expenses.

multiple-step income statement at least one subtotal before reaching net income: sales – cost of goods sold = gross profit; gross profit – operating expenses = income from operations. Income from operations +/- nonoperating items = net income.

selling, general and administrative SG&A; operating expenses; noninventoriable costs.

operating income income from operations; pretax income before nonoperating revenues and expenses.

nonoperating income income from peripheral activities.


The statement of cash flows (or cash flow statement) explains the change in cash and cash equivalents during a period of time. The changes are categorized by operating, investing, and financing activities. Significant noncash transactions are also disclosed. Terms related to the statement of cash flows (SCF) include:

direct method the method preferred by the FASB for preparing the SCF

indirect method the method used by most companies when preparing the SCF; operating activities begins with net income which is then adjusted to the cash provided by operating activities.

operating activities activities involving net income

investing activities activities involving long-term assets

financing activities activities involving long-term liabilities and stockholders' equity (other than net income).

other noncash transactions activities such as the exchange of stock for bonds, stock for land, and so on must be disclosed in the SCF.


The statement of stockholders' equity reports the changes in the components of stockholders' equity for the specified period. Some of the terms involved with stockholders' equity include:

paid-in capital amount received by the corporation from the original issue of its shares of common and preferred stock; contributed capital

retained earnings generally, the cumulative earnings of the corporation since it began, minus the cumulative dividends declared by the corporation.

comprehensive income all changes in ownership interest other than owner investments and distributions to owners.

treasury stock a corporation's own stock that it repurchased; appears as a negative amount in stockholders' equity because it has a debit balance.

cash dividend distribution of cash to a corporation's stockholders.

stock dividend distribution of additional shares of a corporation's stock to its present stockholders. common stock dividend distributable a stockholders' equity account that reports the par value of the shares to be issued in the near future as the result of a stock (not cash) dividend.

declaration date the date a dividend is declared; the date a liability (dividend payable) is recorded and retained earnings is reduced.

record date the date which determines which stockholders will receive a dividend.

stock split a 2-for-1 stock split means all stockholders' number of shares of stock will double and should result in a 50% drop in market value of each share of stock.

dividend payable a current liability resulting from a corporation's directors declaring a cash dividend.

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