Maire Loughran - Financial Accounting For Dummies

210 214

211 215

212 216

213 217

214 218

215 219

216 220

217 221

218 222

219 223

220 224

221 225

222 226

223 227

224 228

225 229

226 230

227 231

228 232

229 233

230 235

231 236

232 237

233 238

234 239

235 240

236 241

237 242

238 243

239 244

240 245

241 246

242 247

243 248

244 249

245 250

246 251

247 252

248 253

249 254

250 255

251 256

252 257

253 258

254 259

255 260

256 261

257 262

258 263

259 264

260 265

261 266

262 267

263 268

264 269

265 270

266 271

267 272

268 273

269 274

270 275

271 276

272 277

273 278

274 279

275 280

276 281

277 282

278 283

279 284

280 285

281 286

282 287

283 288

284 289

285 290

286 291

287 292

288 293

289 294

290 295

291 296

292 297

293 298

294 299

295 300

296 301

297 302

298 303

299 304

300 305

301 306

302 307

303 309

304 310

305 311

306 312

307 313

308 314

309 315

310 316

311 317

312 318

313 319

314 320

315 321

316 323

317 324

318 325

319 326

320 327

321 328

322 329

323 330

324 331

325 332

326 333

327 334

328 335

329 336

330 337

331 338

332 339

333 340

334 341

335 342

336 343

337 344

338 345

339 346

340 347

341 348

342 349

343 350

344 351

345 352

346 353

347 354

348 355

349 356

350 357

351 358

352 359

353 361

354 362

Accounting is known as the language of business because it communicates financial and economic facts about a business to all sorts of interested parties — both internal (employees of the company) and external (people not employed by the company in question). External users include investors, creditors, banks, and regulatory agencies such as the Internal Revenue Service and the U.S. Securities and Exchange Commission.

Zeroing in on the external users of accounting information, this book is about financial accounting . Financial accounting serves the needs of external users by providing them with understandable, materially correct financial statements. There are three financial statements: the income statement, balance sheet, and statement of cash flows. This book is a step-by-step guide on how to prepare all three.

You also find out the purposes of the financial statements:

To report on the financial position of the company — what types of assets the company owns and what types of liabilities it owes.

To show how well the company performs over a period of time, which is referred to as an accounting period. You measure performance by seeing whether the company made or lost money during the accounting period.

A lot of first-time accounting students tell me that they are afraid they won’t do well in their financial accounting class because they haven’t done well in math classes they’ve taken in the past. Forgot about the math — that’s why you have a computer and a calculator! Financial accounting is less about adding and subtracting than using logic-based skills. Added to the mix is the importance of gaining a working understanding of the standards set in place by authoritative accounting bodies.

After years spent in the classroom as both a professor and student, I realize that many accounting textbooks are, well, boring. My purpose in writing this book is to breathe some life into the subject of financial accounting and make it more understandable.

This book, like all For Dummies books, is written so that each chapter stands on its own. I always assume that whatever chapter you’re reading is the first one you’ve tackled in the book. Therefore, you can understand the concepts I explain in each chapter regardless of whether it’s your first chapter or your last.

However, certain terms and concepts pertain to more than one subject in this book. To avoid writing the same explanations over and over, whenever I reference a financial accounting term, method, or other type of fact that I fully explain in another chapter, I give you a brief overview and direct you to the spot where you can get more information. For example, I may suggest that you “see Chapter 11” (which, by the way, discusses the statement of cash flows).

Also, in this book I break financial accounting down to its lowest common denominator. I avoid using jargon that only accounting majors with several accounting classes already under their belts will understand. Please keep in mind that the list of financial accounting topics and methods I present in this book isn’t all-inclusive. I simply can’t cover every possible nuance and twist related to preparing financial accounting data and statements. This book is meant to illuminate the rather dry presentation of topics given in all the financial accounting textbooks from which I’ve taught, providing a perfect companion to the financial accounting textbook your professor is using.

Furthermore, I briefly discuss the Sarbanes-Oxley Act of 2002 (SOX) and the watchdog over the audits of publicly traded companies, the Public Company Accounting Oversight Board (PCAOB). If you have the time, I recommend reading Sarbanes-Oxley For Dummies by Jill Gilbert Welytok, JD, CPA (published by Wiley). This handbook walks you through the new and revised SOX laws.

I assume you don’t have more than a rudimentary knowledge of accounting, and I’m guessing you’re one of the following people:

A college financial accounting student who just isn’t getting it by reading (and rereading) the assigned textbook. (I’ve seen that deer-in-the-headlights look many times in my classroom.)

A non-accounting student currently enrolled in either business or liberal arts who’s considering changing his major to accounting.

A business owner (particularly someone operating a small business with gross receipts of under $1 million) who wants to attempt preparing her own financial statements or just wants to have a better understanding about the financial statements prepared by the in-house or external accountant.

A brand-new accountant working in financial accounting who needs a plain-talk refresher of accounting concepts.

Throughout the book, you see the following icons in the left margin:

Text accompanied by this icon contains useful hints that you can apply during your class (or on the job) to make your studies (or work) a bit easier and more successful.

When you see this icon, warm up your brain cells, because it sits next to information you want to commit to memory.

Looking for what not to do in the world of financial accounting? Check out paragraphs next to this icon because they alert you to what can trip you up while taking your class or working in the field.