5 min read•Last Updated on July 30, 2024
Financial accounting is all about providing crucial info to outsiders through financial statements. These statements, like income statements and balance sheets, give a snapshot of a company's financial health.
The accounting cycle is the backbone of financial reporting, involving steps from recording transactions to preparing statements. Key principles like accrual basis and matching guide how we recognize and report financial events.
The Basic Financial Statements – Financial Strategy for Public Managers View original
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Why It Matters: Completing the Accounting Cycle | Financial Accounting View original
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Overview of Financial Statement Analysis | Boundless Accounting View original
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The Basic Financial Statements – Financial Strategy for Public Managers View original
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Why It Matters: Completing the Accounting Cycle | Financial Accounting View original
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The Basic Financial Statements – Financial Strategy for Public Managers View original
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Why It Matters: Completing the Accounting Cycle | Financial Accounting View original
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Overview of Financial Statement Analysis | Boundless Accounting View original
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The Basic Financial Statements – Financial Strategy for Public Managers View original
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Why It Matters: Completing the Accounting Cycle | Financial Accounting View original
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A balance sheet is a financial statement that provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. It shows what the company owns and owes, offering insight into its financial health and stability.
Term 1 of 16
A balance sheet is a financial statement that provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. It shows what the company owns and owes, offering insight into its financial health and stability.
Term 1 of 16
A balance sheet is a financial statement that provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. It shows what the company owns and owes, offering insight into its financial health and stability.
Assets: Resources owned by a company that have economic value and can provide future benefits.
Liabilities: Obligations or debts that a company is required to pay to outside parties.
Equity: The residual interest in the assets of the entity after deducting liabilities, representing the ownership value held by shareholders.
The matching principle is an accounting concept that requires expenses to be recorded in the same period as the revenues they help generate. This principle ensures that a company's financial statements accurately reflect its financial performance, linking income and related expenses for a clearer view of profitability over specific time frames.
Accrual Accounting: An accounting method that records revenues and expenses when they are incurred, regardless of when cash transactions occur.
Revenue Recognition Principle: The accounting guideline that determines the specific conditions under which revenue is recognized or accounted for in financial statements.
Deferred Revenue: Payments received before goods or services are delivered, representing a liability until the revenue can be recognized.
Horizontal analysis is a financial analysis technique used to evaluate changes in financial statement items over time, allowing for the comparison of historical data to identify trends and growth patterns. This method helps stakeholders assess a company's performance and make informed decisions by examining financial ratios and key metrics across multiple periods.
Vertical analysis: A method that analyzes financial statement items by expressing each item as a percentage of a base figure, facilitating comparison within a single period.
Financial ratios: Metrics derived from financial statements used to evaluate a company's performance, liquidity, profitability, and solvency.
Trend analysis: A technique that uses historical data to predict future financial performance by identifying consistent patterns over time.
Vertical analysis is a method used in financial statement analysis where each line item is expressed as a percentage of a base figure within the statement. This approach helps in comparing financial statements over different periods and with other companies, making it easier to identify trends and assess relative financial performance.
Horizontal Analysis: A technique used to analyze financial statements by comparing line items over multiple periods to identify growth trends.
Common-Size Statements: Financial statements that present all line items as a percentage of a common figure, typically total revenue or total assets, facilitating easy comparison across different companies or periods.
Financial Ratios: Quantitative measures derived from financial statement data that help assess a company's performance and financial health.
The current ratio is a financial metric that measures a company's ability to pay its short-term liabilities with its short-term assets. This ratio is important for assessing liquidity, as it indicates how well a firm can cover its obligations due within a year. A higher current ratio suggests better financial health and less risk of insolvency, making it essential in analyzing the relationship between asset management and liability structure.
liquidity: Liquidity refers to the ability of an asset to be quickly converted into cash without significantly affecting its value.
current assets: Current assets are assets that are expected to be converted into cash or used up within one year, such as cash, accounts receivable, and inventory.
current liabilities: Current liabilities are obligations that a company is expected to settle within one year, including accounts payable, short-term loans, and accrued expenses.
The debt-to-equity ratio is a financial metric that indicates the relative proportion of a company's debt to its shareholders' equity, showing how much leverage a company is using to finance its assets. A higher ratio suggests more risk as the company relies more on borrowed funds compared to equity, impacting its financial stability and operational decisions.
Leverage: Leverage refers to the use of borrowed capital to increase the potential return on investment, but it also increases the risk if the investment does not perform well.
Equity Financing: Equity financing involves raising capital through the sale of shares, providing investors with ownership stakes in the company in exchange for their investment.
Solvency Ratios: Solvency ratios measure a company's ability to meet its long-term debts and obligations, providing insights into its financial health and risk level.
Goodwill is an intangible asset that arises when a company acquires another business for more than the fair value of its net identifiable assets. This excess payment often reflects factors such as brand reputation, customer relationships, and employee morale that can contribute to future profitability. Understanding goodwill is crucial because it impacts financial statements and has implications for business combination accounting, as well as recognition and impairment considerations.
Intangible Assets: Non-physical assets that are not financial in nature, such as trademarks, patents, and goodwill itself.
Business Combination: A transaction where two or more companies merge or one company acquires another, leading to changes in ownership and the creation of goodwill.
Impairment: A reduction in the carrying value of an asset when its market value falls below its book value, relevant for assessing goodwill.
Impairment refers to a significant reduction in the recoverable amount of an asset below its carrying value on the balance sheet. This can occur due to various factors such as economic downturns, changes in market conditions, or technological obsolescence, leading to a write-down of the asset's value. Recognizing impairment is essential for ensuring that financial statements accurately reflect the company's financial health and performance.
Fair Value: The estimated price at which an asset could be bought or sold in a current transaction between willing parties, often used in assessing impairment.
Asset Write-Down: The reduction in the book value of an asset when its market value falls below its carrying amount, often due to impairment.
Recoverable Amount: The higher of an asset's fair value less costs to sell and its value in use, used to determine if an asset is impaired.