The concepts of financial accounting are

Entity
Money measurement
Going concern
Materiality
Consistency.

The quality attributes are relevance and reliability. Relevance refers to timeliness
where reliability refers to objectivity and verifiability of the information. GAAP-
Relevance

Accrual Accounting records economic benefits of a transaction

Cash Based accounting records cash flow of a transaction

Principal based substance of the transaction

Rule based form of the transaction

GAAP (Generally Accepted Accounting Principles by FASB) principal based

IFRS (International Financial Reporting Standards by IASB)
Dual aspect- two sides of every accounting transaction
5
0
0Current ratio = current assets/ current liabilities
Total Debt to equity Ratio = Total debt / Owners equity
Current ratio high for software as they hold more cash and doesnt require fixed
assets like pharmaceuticals. Shouldnt be too high as the firm may be locking up the
potential capital. Shouldnt be too low as it casts doubt on firms ability to meet
current obligations in a timely manner.
Total Debt to equity Ratio is high for finance firms which holds high debts 3 whereas
low for software as they potentially have lower debts. Shouldnt be too high as it
questions companys long term financial viability. Shouldnt be too low as it
questions whether the company is aggressive enough to raise debt to further its
growth.
Hiring is not recorded in the books as assets as the employers are paid in future for
the work to be done. Also there is no guarantee that they will continue working with
the firm.
Income statement
It is the description of a companys operating expenses over an accounting period.
 Conservatism revenues should be recognized only when prudently certain.
Expenses should be recognized immediately
Realization revenue must be earned and recognized (IFRS risks and
rewards are transferred, GAAP when earned)
Matching what expenses should be recognized when the revenue is
recorded.
Net Income = sales expenses
Ratios for Income statement

Gross Margin percentage -Gross Margin/sales

Return on sales - Net Income/sales

Relative lesser gross margin percent cost of goods sold is very less. Example
pharmaceutical and software. Higher gross margin percent selling price is relatively
higher. Example Automobile
Return on Sales percentage depends on operating expenses of firm
Accounting Records

Ledger is a T account. Left is for debit and right for credit

Adjusting entities Doesnt involve any external entities. Must be recognized for the
current time frame. Example prepaid expenses
Closing entries close out each temporary or income statement account and reset it
to a zero balance, in preparation for the next accounting period

After closing out the income statement (temporary) accounts, the balances in the ledger's balance sheet (permanent)
accounts are transferred to the balance sheet at the end of the period.

The closing entry shows the balances in all the income statement accounts just before they were closed, and hence
provides the information needed to prepare the income statement of the period.

In this chapter, you were introduced to a simple form of the formal book-keeping performed by any accounting
system. You learned that:

In double-entry book-keeping, both sides of each transaction are recorded, and at least two accounts are
affected.
After analyzing a transaction, a journal entry is prepared using the rule that debits indicate increases in
assets and in expenses and credits indicate increases in liabilities, owners' equity and sales.
Journal entries are posted into a ledger of T-accounts where 'debit' means left side of the T-account and
'credit' means right side of the T-account.
Once all transactions with outside entities are recorded for the period, adjusting entries are made to
accounts.
A closing entry is made to close or reset all sales and expense accounts to zero.
Finally, the balance sheet and income statement are prepared.

Statement of cash flows

The direct method statement of cash flows for an accounting period summarizes the transactions that have been
posted to the cash ledger account during the perio
 f
.
By organizing the information in a particular way, the indirect method statement of cash flows provides important
information to users of an entity's financial statements that is not available from a direct method statement of cash
flows. This may be explained by the fact that the company is growing rapidly, making sales on credit, and raising the
necessary cash from financing activities. But, it could also indicate that the company, despite a healthy net income, is
failing to collect cash from its customers in a timely manner. These sorts of effects would be easily seen from the
change in receivables in the operating section of the indirect method statement of cash flow.
Allowance to bad debt is a contra account for accounts receivable. Hence both
accounts wipe out each others and no change in the balance sheet.
When a refund is made assets would decrease liabilities would decrease and
owners equity remains constant

Financial analysts incorporate account receivables in ratios to gain some insight into the quality and reliability of
current assets and their ability to generate cash in the future. The following two ratios represent some of those
most commonly used.

Bad debt allowance to gross accounts receivable

Turnover of accounts receivable or "days receivable" or "days sales outstanding" or simply "DSO's"

High bad debt ration company failing to screen its clients before offering them
credit. Company also subjects to credit extension costs which reduces net income.
The "days receivable" ratio or the "days sales outstanding" (DSO) ratio indicates the average number of days
necessary for the company to collect its outstanding accounts receivable. The days receivable ratio is sometimes
called receivables turnover, because it tells you how fast the receivable are turning over and being converted into
cash.

The slowing of a company's days receivables or a high days receivables compared to its competitors has a negative
impact on the firm's liquidity; it ties up capital that might otherwise be used to finance the production of saleable
assets. An increasing days receivable ratio might also be an indication that more of the receivables will become bad
debts.

Inventory and Cost of sales

There are different kinds of product costs. The main ones are listed here:

Labor: The compensation of all manufacturing labor that can be traced to the production of the product.
 Materials: Acquisition costs of all materials that eventually become part of the product.
Manufacturing Overhead: Manufacturing costs that are closely related to the making of the product, but
that are not specifically production labor or materials. Depreciation on manufacturing equipment is an
example.

Excluded costs

Advertising costs for the product

The cost of the running the purchasing department
Office cleaning expenses

Raw materials
Work in Progress
Finished Goods
Beginning raw materials inventory + raw materials purchases - ending raw materials inventory = raw
materials transferred to work-in-process account.

Two methods to track inventory Periodic and perpetual methods. Under the perpetual
method, the inventory account is adjusted as each addition and withdrawal is made. The periodic method, as its name
indicates, adjusts the inventory account periodically based on actual inventory counts. For example, at the end of
each accounting period, inventory on hand is counted and valued. This amount becomes the ending inventory.
FIFO and LIFO, reflect different assumptions about the flow of costs out of the inventory account. These cost
assumptions do not necessarily reflect the actual physical flow out of its physical inventory, which may be very
different altogether.

LIFO not permitted under IFRS

Firms choose LIFO or FIFO for a variety of reasons. But one important consideration is taxes. Under the US tax code,
if a company uses LIFO for tax return purposes, it must also use LIFO for financial reporting purposes. As a result, in
the US, many companies whose merchandise or production costs are rising with inflation tend to use LIFO since it
enables them to report lower taxable income and to pay lower taxes than under FIFO. In contrast, companies with
falling per unit inventory costs, such as firms in the computer and electronics industries, tend to use FIFO because
this method leads to lower taxable income for their firms.

The cost difference between FIFO and LIFO inventory is called the LIFO reserve.

Specific identification and weighted average not as popular as FIFO and LIFO
Inventory write down

Effective inventory management is an important determinant of how well a company manages its working capital
(current assets - current liabilities). The shorter the time period an item is in inventory, the lower the average
investment in inventory. Two ratios - inventory turnover and days inventory - are used to gauge the effectiveness of
inventory investment management.

The "inventory turnover" ratio measures the average number of times inventory is sold during the year. Turnover
is computed by dividing Cost of Goods Sold by the average inventory on hand during the year. The "days
inventory" calculation converts the turnover ratio to its days equivalent. The formula for computing days inventory
is 365 divided by the turnover ratio
 Managers keep a close eye on inventory turnovers for signs of inventory build-ups which could indicate
obsolescence or anticipated sales growth in the next period.

Whether a company uses LIFO or FIFO has an impact on inventory ratios; if input costs are increasing, days
inventory for a company under LIFO will be lower than under FIFO. This can make it difficult to compare the
inventory ratios of companies when some use the LIFO method and others the FIFO method. One way to
overcome this problem is to convert a LIFO inventory amount to its FIFO value equivalent by adding the LIFO
reserve back to the LIFO inventory amount and then using the LIFO inventory's FIFO equivalent to compute
inventory ratios.

Acquisition costs

The acquisition of a fixed asset, such as Global Grocer's purchase of the packaging machine, is often referred to as a
capital investment. Cost delivery install and test are a part of acquisition costs.

In accordance with the matching principle, in each accounting period a depreciation expense, based on the asset's
original cost, is recorded as an expense in the income statement.

Depreciation cost methods: Straight line depreciation and Accelerated depreciation.

The most commonly-used accelerated depreciation method is the double-declining balance (DDB) method. Under the
DDB method, the annual depreciation expense is estimated as follows:

Repair and maintenance costs