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This post addresses several topics in accounting.

- The essentials of record-keeping.
- Preparation of simple financial statements.
- Balance sheet: Asset and Liability measurement and recognition.
- Income Statement: Revenue and expense recognition and measurement
- Account receivable; advances form customers; revenue recognition.

- Measuring and reporting working capital accounts: cash; prepayments; inventory; accounts payable; warranties; restructuring charges.

- Cost Behavior, decision making and simple budgeting: fixed and variable costs; relevant costs for decision making; cost-volume-profit analysis.

- Noncurrent assets: recognition and measurement of noncurrent assets; tangible and intangible assets; depreciation; impairment testing.

- Introduction to investments: introduction to investment in debt and equity securities; marketable securities and equity method investment.

- Statement of cash flows: preparing and understanding a statement of cash flows.

- Bonds: liabilities-bonds.

- Performance measurement: introduction to financial statement analysis; assessing firm level performance and an introduction to FSA.

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- The essentials of record-keeping.

It is imperative for companies to practice accurate record keeping. The basics include making the proper accounting entries and retaining all applicable documentation and paper trails for the transactions. When all records are in order, internal and external audits are more efficient and more accurate. In addition, accurate record keeping assists each area of the company by maintaining efficiency and accuracy. Companies that do not maintain accurate records can face legal violations, as well as lose shareholder confidence because their operations are not being run efficiently.

- Preparation of simple financial statements

The preparation of simple financial statements includes preparing the income statement, the balance sheet, and the statement of cash flows. Each statement is prepared based on the accounting information that has been entered as transactions. Accurate financial statements benefit the company because it acts as a reliable, transparent tool for investors to make financial decisions based on the reported information. The balance sheet contains assets, liabilities, and stockholders' equity.

The income statement is the statement that contains revenue, gross profit, expenses and net profit. The statement of cash flows shows the cash inflows and outflows from the company. All three statements make up the financial statements. Each statement ties into the next statement. The net income from the income statement transfers to the balance sheet, and the statement of cash flows is tied to both the balance sheet and income statement, because it is a depiction of the changes that have taken place with the company's cash.

- Balance sheet: Asset and Liability measurement and recognition.

The balance sheet is a report of the company's assets and liabilities, which include both short-term and long-term. Also reported on the balance sheet is the statement of stockholders' equity. A properly prepared balance sheet acts as a benefit to the company because the proper financial ratios can be calculated to determine the company's liquidity, and to use for internal and external decision-making. The balance sheet follows the fundamental accounting equation of assets equal liabilities plus stockholders' equity.

The balance sheet is prepared under the premise that the left side (assets) must equal the right side (liabilities and shareholders' equity). The balance sheet cannot balance if the sides are not equal in total amount to each other. If the balance sheet is not correct, it flaws all of the other parts of the financial statement, and makes them predominantly worthless.

- Income Statement: Revenue and expense recognition and measurement

The income statement includes revenue; costs of goods sold, and gross profit. Operating expenses are then listed, and the total operating expenses are subtracted from the gross profit, which comes down to the net income or loss for the accounting period. Investors and creditors use the financial statements to determine the financial health and general financial position of the company for the current accounting period as reported in the financial statements.

The income statement is one of the primary statements that are audited in a financial audit, and the income statement, balance sheet, and statement of cash flows are the primary statements that an auditor bases his or her audit opinion on, when performing an audit. The income statement is given the most amount of attention in an audit because it contains the company's net income, which creditors, analysts, and others use for financial decision-making.

- Account receivable; advances form customers; revenue recognition.

Accounts receivable, also called A/R, is the amount that is due to the company from sales that the company made and extended credit for to customers. Customers usually pay A/R's monthly. When a company has a high amount in A/R, it doesn't necessarily mean that the company is making more sales. Increases in A/R should be investigated to determine if the amount is higher due to sales or if the amount is higher because collections on A/R have been slower. If the collection period is taking longer, management should consider revising their A/R collection policies. This would allow the company to collect sooner on accounts, and would have the effect of decreasing the days' sales outstanding, which increases the associated balance sheet ratios for the company, since the A/R is a current asset on the company's balance sheet.

Advances from customers are considered unearned revenue until the obligation from the company has been fulfilled for the good/service where the company can consider it as earned. Unearned revenue and advances from customers would be treated the same for accounting purposes.

Unearned revenue is a current liability. Revenue recognition takes place when the company is able to recognize revenue because they have fulfilled their obligations to earn the revenue. A/R advances from customers and revenue recognition all benefit the company because the proper recognition of each category determines the appropriate net income for the period. ...

Solution Summary

The solution provides an explanation for each topic presented in the student's accounting review along with additional student resources.