Financial Accounting Exam Guide
Theory
● Accounting systems provide financial statements for external decision-makers and
managerial accounting reports for internal decision-makers
● The objective of accounting is to provide financial information about the reporting
company that is useful for decision-making
● IFRS (international financial reporting standards) and IASB (international accounting
standard board):
○ Provide the rules for accounting
○ Provide a common global language for business affairs.
○ Reason: so company accounts are understandable and comparable across
firms and international boundaries
● Elements related to the financial position are:
○ Assets: resources (good or right) controlled by the company and from which
economic benefits are expected to flow to the firm.
○ Liabilities: a present obligation of the company arising from past events
○ Equity: residual interest in the assets of the company after deducting all of its
liabilities.
● Elements related to the performance ie. profit:
○ Revenues/income
○ Expenses
● According to IFRS:
○ Financial statements shall present fairly the financial performance, financial
position, and cash flows of a company.
● Accrual basis of accounting:
○ Economic facts must be recorded as they occur, regardless of related
cashflows.
○ Meaning that revenues and expenses should be recorded when they are
incurred, not when cash is paid or received.
, ● The double-entry system is based on the duality principle
● Types of businesses:
○ Soleproprietorship: a single owner
○ Partnership: two or more co-owners
○ Corporation:
■ Publicly owned: owned by the public through the sale of shares.
■ Privately owned: owned by fsamilies or a small group of shareholders,
shares are not traded in the open market.
● Corporations must use the accrual priprinciples of accounting.
Financial Statements:
● Income statement: evaluates performance/profitability.
○ Revenues - expenses = profit
○ Earnings generated in the operations (value added)
○ Shows the performance of an accounting period
● Balance Sheet: evaluates financial position.
○ Assets = liabilities + equity
○ Assets are economic resources, and liabilities and owners' equity are the
sources of financing for the assets.
○ Shows a snapshot of the assets, liabilities, and equity at a point in time
○ Also known as the statement of financial position.
● Cash-flow statement: evaluates the cash-flow generation and management
○ Shows cash inflows and outflows related to investing, financing, and operating
activities.
○ Measures changes over an accounting period
● Statement of owner’s equity: shows the changes in equity.
○ Changes in the company’s stockholder's equity accounts
○ Measures changes over an accounting period
○ Also known as change equity statement
● It is important to understand that the balance sheet is the only financial statement
that reports on a certain point in time and not over a given accounting period, and to
, see how the statements are linked together. This can be better explained by the
following graphs:
Balance Sheet
● Assets:
○ Current/short-term: Assets expected to be converted into cash or used in the
operating cycle within a year
■ Cash and marketable securities
■ Receivables
■ Inventory
■ Prepaid expenses
○ Non-current/long-term: Not expected to expire or be converted into cash
within a year
Theory
● Accounting systems provide financial statements for external decision-makers and
managerial accounting reports for internal decision-makers
● The objective of accounting is to provide financial information about the reporting
company that is useful for decision-making
● IFRS (international financial reporting standards) and IASB (international accounting
standard board):
○ Provide the rules for accounting
○ Provide a common global language for business affairs.
○ Reason: so company accounts are understandable and comparable across
firms and international boundaries
● Elements related to the financial position are:
○ Assets: resources (good or right) controlled by the company and from which
economic benefits are expected to flow to the firm.
○ Liabilities: a present obligation of the company arising from past events
○ Equity: residual interest in the assets of the company after deducting all of its
liabilities.
● Elements related to the performance ie. profit:
○ Revenues/income
○ Expenses
● According to IFRS:
○ Financial statements shall present fairly the financial performance, financial
position, and cash flows of a company.
● Accrual basis of accounting:
○ Economic facts must be recorded as they occur, regardless of related
cashflows.
○ Meaning that revenues and expenses should be recorded when they are
incurred, not when cash is paid or received.
, ● The double-entry system is based on the duality principle
● Types of businesses:
○ Soleproprietorship: a single owner
○ Partnership: two or more co-owners
○ Corporation:
■ Publicly owned: owned by the public through the sale of shares.
■ Privately owned: owned by fsamilies or a small group of shareholders,
shares are not traded in the open market.
● Corporations must use the accrual priprinciples of accounting.
Financial Statements:
● Income statement: evaluates performance/profitability.
○ Revenues - expenses = profit
○ Earnings generated in the operations (value added)
○ Shows the performance of an accounting period
● Balance Sheet: evaluates financial position.
○ Assets = liabilities + equity
○ Assets are economic resources, and liabilities and owners' equity are the
sources of financing for the assets.
○ Shows a snapshot of the assets, liabilities, and equity at a point in time
○ Also known as the statement of financial position.
● Cash-flow statement: evaluates the cash-flow generation and management
○ Shows cash inflows and outflows related to investing, financing, and operating
activities.
○ Measures changes over an accounting period
● Statement of owner’s equity: shows the changes in equity.
○ Changes in the company’s stockholder's equity accounts
○ Measures changes over an accounting period
○ Also known as change equity statement
● It is important to understand that the balance sheet is the only financial statement
that reports on a certain point in time and not over a given accounting period, and to
, see how the statements are linked together. This can be better explained by the
following graphs:
Balance Sheet
● Assets:
○ Current/short-term: Assets expected to be converted into cash or used in the
operating cycle within a year
■ Cash and marketable securities
■ Receivables
■ Inventory
■ Prepaid expenses
○ Non-current/long-term: Not expected to expire or be converted into cash
within a year
