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Great job making it through all of the financial accounting topics up to this point. We are about to head into managerial accounting for the remaining third of the course. Before we do, let's refresh on the topics that we have covered up to this point. First, we have covered the various principles and concepts that underlie the double entry accounting system that we use to record transactions. Although the principles aren't explicitly referenced when you record most journal entries, they are needed when trying to determine what amount to record, how to record it, and when. Next, we talked about the normal balance rules that help you to determine how debits and credits impact each different type of account. We then talked about how to journalize the entries and then how to post those to the T accounts/general ledgers. Remember that when recording a journal entry, the total debits for each account must equal the total credits for each account in the journal entry. Once we complet...

Section 2.) Horizontal and Trend Analysis As stated in the overview, horizontal and trend analysis both compare items within a particular statement across one or more years. Horizontal analysis deals only with a “one year to the next” analysis. Trend analysis expands that comparison across multiple years. Assume you have the below selected data from the past four years’ balance sheets. Horizontal analysis would involve taking one year’s balance minus the prior year’s balance and then dividing that difference by the current year. In the example cash from above, we could take the cash amount of $80,000 from 12/31/2020, minus the 12/31/2019 cash balance of $140,000 to get a $-60,000 change. We would then divide that by the 12/31/2019 balance of $140,000 to get a percentage change of -42.8571% (i.e., a decrease.) We could do the same thing for any of the account balances and any of the years (one year to the immediately preceding year.) Trend analysis would allow us to see how something ha...

Overall Statement of Cash Flows – Direct Method Overall Statement of Cash Flows – Indirect Method Wrap-Up This chapter covered our final financial statement. Next week we will move on to actually analyzing the financial statements, as investors would. This next section will involve more calculations than we have seen up to this point, but they are relatively simple calculations. Section 1.) Overview of Cash Flow Statement The Statement of Cash Flows is one of the four required financial statements a company must publish. This statement identifies the sources of receipts and uses for cash during the year. In other words, where did the company get their cash from and where did they spend it? The cash flow statement represents activities across a period of time. In other words, it shows how much cash has gone into or out of the company over a period of time? More specifically, it shows the various reasons for those cash receipts or expenditures. Note that cash flow does not necessarily e...

Section 1.) Introduction to the Income Statement The purpose of the income statement (sometimes referred to as the statement of operations, or informally as the profit/loss statement) is to report revenues and expenses that have occurred in a period of time, such as a year. The goal is to arrive at a final net income, showing the ultimate profitability of the company throughout the year. This allows users to compare one year’s profit to another. If the revenues exceed the expenses, then the company will have net income for the year. If the expenses exceed the revenues, then the company will have a net loss (i.e., negative net income) throughout the year. The income statement records the revenues when they are earned and the expenses when they are incurred. This differs from the statement of cash flows that we will discuss next week. In that statement, everything is based on when the actual cash transaction takes place. Revenue is something that is recorded over a period of time, whethe...

Section 3.) Stock Dividends and Splits When a company has had success in its operations, a common result is that they issue a dividend to the investors as one of the returns on that investor’s investment. In some cases, this takes the form of a cash dividend where the investor gets a certain dollar amount per share. In other cases, this takes the place of a stock dividend where an existing shareholder gets additional “free” shares of stock based on their current percentage of ownership in the company. The important thing to note is that in both cases, the cash or stock dividend ends up reducing retained earnings (with a debit.) The credit for a cash dividend would go to cash. The credit for a stock dividend would go to the common stock account. However, it is important to note that the total equity doesn’t change with a stock dividend. Instead, one element of equity decreases (retained earnings) and the other increases (common stock.) Since more shares are being issued without a corres...