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:

- The importance of business activities
- Different types of business activities including operating, investing and financing
- How financial statements are used to summarize activity transactions
- Examples of business activities



Now that you've learned about the three different business structures, let's say you've decided on what type of business to start, whether it be a sole proprietorship, partnership or corporation. Now you are ready to put a business plan in place; you will need to look at what type of activities your business will be involved in as it relates to financial accounting.

Business activities involve conducting transactions such as paying debts, selling inventory and paying wages. The primary purpose of any activity will be to help generate profits and keep the business running.
 
You may ask: Why are these activities important? No matter how long your company has been in business, there are certain things that the entity must do to be successful. While every entity may not take part in the exact same activities, they will use business activities that fit their needs in order to remain solvent and ultimately grow larger.



All economic activities will fall into one of the three categories: operating, investing and financing. The cash flow that is generated or consumed in these activities is recorded on the financial statements.
 
The best way to think of the types of business activities is by using the acronym OIF:
 
OIF only if I could remember the business activities!
 
Operating activities involve your current short term actions, primarily activities that help to generate revenue for the business. These items include both current liabilities and assets.
 
Investing activities have to do with purchasing and selling long term assets such as property, equipment and plant.
 
Financing involves the long term, or non-current liabilities and equity. These activities are related to the amount of debt and owners' equity
 
All business activities will fall within one of these three categories.



By looking at the format of the balance sheet, we can see how the business activities are distributed amongst this financial statement. The balance sheet essentially represents what the business is made up of. Let's break down each section of the sample balance sheet example above.
 
1. Under the assets section, the current assets are considered operating activities along the current liabilities on the opposite side. The operating activities involve the short term operations and actions of the business.
 
2. Below the current assets, investing activities are recorded as long term financial activities.  
 
3. To the right of investments, financing involves the non-current liabilities and equity.



The cash flow statement format incorporates all three business activities to determine the ending cash balance as reflected on the cash line of the balance sheet. The operating section lists activities that are directly related to running the business to earn profit. The investing section lists involved in buying and selling resources, such as equipment or investment opportunities. The financing section lists loans, stockholder contributions, and dividends paid out to stockholders.



Using the same OIF acronym to remember the types of business activities, let's review some real-world examples.

Operating Examples
• A bakery sells pastries and cakes in order to generate revenue.
• Change consultants provide services to help organizations adapt to changing market conditions.
• Small business owners participate in networking opportunities to market their company and ultimately increase sales.

Investing Examples
• A property management company purchases a vacant house with the intent of remodeling and selling it for a profit.
• An angel investment firm loans money to a new startup business.
• A manufacturing firm purchases a machine that helps to reduce production times.

Financing Examples
• Corporations issue preferred stock to shareholders to finance operations.
• A clothing store borrows funds from the bank to purchase inventory.
• A cell phone company sees a significant increase in equity and pays out dividends to their shareholders.

These are just a few examples from each category to demonstrate the concepts of operating, investing and financing. Businesses take part in a wide range of activities that they use to generate profits and all activities will ultimately fall into one of the three categories.