Financial Accounting

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Previous Lessons
Open Chapter Ch. 1: Basics of Financial Accounting
Lesson #1 Introduction to Financial Accounting
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Lesson #2 Structures of a Business
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Lesson #3 Comparing Internal vs. External Users
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Lesson #4 Business Activities
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Lesson #5 Financial Statements
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Lesson #6 Elements of Financial Accounting
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Open Chapter Ch. 2: Assets, Liability, and Equity
Lesson #7 Assets
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Lesson #8 Liabilities
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Lesson #9 Equity
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Open Chapter Ch. 3: The Double-Entry System and Conceptual Framework
Lesson #10 Accounting Equation
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Lesson #11 Conceptual Framework
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Lesson #12 Double Entry Accounting System
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Lesson #13 Debits and Credits
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Lesson #14 Normal Balances and RED Accounts
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Exam Exam 1
Open Chapter Ch. 4: The Accounting Cycle
Lesson #15 Journalizing and the Accounting Cycle
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Lesson #16 Posting to the General Ledger
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Lesson #17 Trial Balance
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Lesson #18 Adjusting Entries for Accrued Expenses
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Lesson #19 Adjusting Entries for Prepaid Expenses
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Lesson #20 Adjusting Entries for Unearned Revenue
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Lesson #21 Adjusting Entries for Accrued Revenue
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Lesson #22 Adjusting Entries for Amortization and Depreciation
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Lesson #23 Adjusted Trial Balance
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Lesson #24 Preparing the Financial Statements
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Lesson #25 Permanent vs. Temporary Accounts
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Lesson #26 Closing Entries
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Open Chapter Ch. 5: Merchandise Inventory
Lesson #27 Introduction to Merchandise Inventory
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Lesson #28 Periodic vs. Perpetual Inventory Systems
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Lesson #29 Journalizing Purchase Entries
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Lesson #30 Journalizing Sales Transactions
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Lesson #31 Preparing a Multiple-Step Income Statement
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Lesson #32 Periodic Inventory System Purchases
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Lesson #33 Periodic System and the Multiple-Step Accounting System
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Exam Midterm Exam
Open Chapter Ch. 6: Cost Flow Assumptions: FIFO, LIFO, and Average Cost Methods
Lesson #34 Specific Identification Method and Inventory Costing
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Lesson #35 FIFO Method and Inventory Costing
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Lesson #36 Average Cost Method and Inventory Costing
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Lesson #37 The LIFO Method
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Lesson #38 Average Cost Method for the Perpetual System
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Lesson #39 Comparing Inventory Costing Methods
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Open Chapter Ch. 7: Receivables and Bad Debts
Lesson #40 Allowance Method and Uncollectibles
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Lesson #41 The Allowance Method
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Lesson #42 Percentage of Sales Method
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Lesson #43 Percentage of Receivables Method
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Lesson #44 Receivables Method and the Aging Table
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Lesson #45 Write Off Receivables Using the Allowance Method
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Lesson #46 Direct Write-Off Method
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Open Chapter Ch. 8: Revenue Recognition
Lesson #47 Revenue Recognition
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Lesson #48 Revenue Recognition Examples
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Lesson #49 Revenue Recognition and Long Term Contracts
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Lesson #50 Percentage of Completion Method
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Lesson #51 Percentage of Completion Method Journal Entries
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Lesson #52 Percentage of Completion Method and Journalizing Losses
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Lesson #53 Cost Recovery Method
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Lesson #54 Completed Contract Method and Journal Entries
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Lesson #55 Completed Contract Method and Losses
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Exam Exam 3
Open Chapter Ch. 9: Depreciation of Fixed Assets and Gains and Losses
Lesson #56 Depreciation, Amortization and Depletion
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Lesson #57 Straight Line and Declining Balance Methods
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Lesson #58 Straight Line and Double Declining Balance Depreciation Examples
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Lesson #59 Gains and Losses on Disposals of Property, Plant & Equipment
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Open Chapter Ch. 10: Intangible Assets
Lesson #60 Intangible Assets
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Lesson #61 Amortizing Intangible Assets
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Lesson #62 Impairment of Intangible Assets
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Lesson #63 Recording Goodwill, Amortization and Impairment
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Open Chapter Ch. 11: The Indirect Cash Flow Statement
Lesson #64 Preparing a Cash Flow Statement Using the Indirect Method Part 1
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Lesson #65 Cash Flow Statement Using Indirect Method Part 2, Receivables
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Lesson #66 Cash Flow Statement Using Indirect Method Part 3, Inventory
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Lesson #67 Cash Flow Statement Using Indirect Method Part 4, Payables
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Lesson #68 Cash Flow Statement Using Indirect Method Part 5, Non Cash Expenses
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Lesson #69 Cash Flow Statement- Investing and Financing Activities
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Exam Final Exam

Assignments:

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Lesson Objectives:

- Differences between internal and external users of financial accounting
- Specific uses of financial data
- Questions that internal and external users ask to interpret economic information
- Examples of uses of accounting information



It wouldn't make sense to record financial transactions if no one had a use for the data. Luckily, there are many users that have a business use for the company's financial position. Accounting involves communicating important economic information about a company to the end users. Who are those end users?
 
The easiest way to look at the individual end users is by breaking them down into two categories: internal and external users.

We discussed in the Introduction to Accounting lesson that financial accounting is primarily used by external parties. Internal users lean more toward the use of managerial accounting but financial accounting still plays a vital role in the success of the company.
 
Let's dig into the individual users in each company both internally and externally.



External users are individuals that exist outside of the company. Creditors, analysts and investors are the most common types of external users that use financial statements in order to make decisions.
 
Creditors need to look at the financial statements of a business in order to evaluate the risk level of extending credit to your business, also known as the credit worthiness. The financial statements will reflect the levels of debt and income which are vital to determine whether the company has the ability to pay their debts.
 
Analysts make independent evaluations of the company's position. The financial information is analyzed in order to examine the performance and advise whether the stocks buy, sell or hold position.
 
Investors need to be able to decide if it is a profitable investment.



Looking at the year-to year comparisons of financial statements often gives investors a picture of the company's growth and profitability. They will also reflect whether the income will be distributed through dividends or in the form of share appreciation.



In contrast to external users, any individual that uses financial accounting within the company is considered an internal user. The first type of person that comes to mind is the employees as they make up the mass majority of the company.
 
Employees consist of the accounting department, collections, sales and any users that have access to financial information. One example of a use of financial information is to look at the profit and loss statement in order to identify whether there may be cash flow issues for the upcoming quarter. Another example would be that the collections department is responsible for collecting unpaid debt amounts.



Managers evaluate the performance of the business by looking at the financial statements. One thing that managers use this information for is to evaluate the capital structure; how the company is distributed among assets, debt and stock shares. Managers also look at areas of opportunity within the financial statements such as reducing expenses or increasing cash reserves.



At the top of the management structure is the chief financial officer (CFO). The CFO owns the overall responsibility of managing economic decisions and making improvements to the company's bottom line. The CFO must help the company identify cost savings and drive insights for profitability.
 
Plant supervisors differ from managers in the sense that they have more control over wages of the employees. Generally, they use financial data to manage operational items such as labor costs and overhead expenses.



External users can be asking a wide range of questions when looking at data from the financial statements. Some of these questions from external users include:
 
Is the company seeing income or loss each year?
How profitable is the company in comparison with their competitors?
Will the company pay their loan payment?
What interest rate should I charge?



Now, internal users have completely different motives for examining transactions and statements. They want to know things such as:
 
Does the company have enough cash to pay their bills?
What is the manufacturing cost for each individual unit?
Can we allocate money for employee pay raises?
Which product that we sell is the most profitable?
 
The answers to each of these questions lies within the data summarized on financial statements.



The primary difference between internal and external users is that the internal users work within the company while external users exist outside of the company.
Internal users want to be able to drive positive change for the company. External users have their own interests in the data such as considering a loan application or deciding to invest.
 
Internal users are more likely to use managerial accounting which is a separate type of accounting. External users rely on the financial accounting data that is provided in the financial statements, while internal users are often responsible for recording and interpreting the transactions.
 
While both types of users differ in their purpose for examining financial information, they are essentially using the same information records on the statements including the balance sheet, retained earnings, income and cash flow statements. We will be diving into the specific uses of each statement in one of the next lessons.