Financial Reporting Mechanics
Unearned revenue = liability
Gains = count as revenue
Accounting equation:
- Assets = Liabilities + Equity
- Expanded: Assets = Liabilities + contributed capital + ending retained earnings
- OR Assets = L + contributed capital + beginning RE + revenue - expense - dividends
Double entry accounting
Need for accruals
- Unearned revenue - cash goes up, liability goes up
- When recognized, liability goes down, sales goes up
- Accrued revenue - firm provides good before it receives cash
- Prepaid/accrued expenses
- Effect is to recognize expense in the proper period
Changes in asset values are gains/losses, or shown in 'other comprehensive income'
Accounting system
- Journal entries for every transaction > general journal
- General ledger organizes entries by account
- End of each period, initial trial balance is prepared, then adjusted if needed
- Account balances from adjusted trial balances is presented in financial statements
Crucial for an analyst to look at MD&A. Can help spot things that look out of line.
End
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