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:

- Defining what an asset is
- Characteristics that embody assets
- Identifying assets based on their transaction activity
- Real world applications of the asset criteria



When you think of an asset, there can be many different things that come to mind. Cash, physical property, land, trademarks and so on. Assets can either be tangible, meaning a physical asset, or intangible, which lacks substance but has economic value.
 
Assets are defined as the probable future economic benefits that are controlled by a business entity as a result of past transactions or events.
 
Current assets are items that the company can easily access such as cash, manufacturing supplies and accounts receivable. In contrast, long term assets are positioned to be kept for an extended period of time for items such as investments, machinery and vehicles.



In order to accurately record transactions and prepare financial statements, you must be able to decide whether something is an asset or not. Instead of looking merely at the textbook definition, the easiest way to identify assets is by looking at the three main characteristics.

The following characteristics are embodied by assets:
1. They involve a future benefit: revenue or growth.
2. The business has control over the access to the benefit. This simply means that the company legally owns the assets and the risks and rewards remain connected.
3. The transaction has occurred or is more likely to occur than not. If it is positioned with a very high chance to occur and is measurable, it can likely be recorded as an asset.



Look at the chart above for various examples of assets and see how they have the characteristics of assets.



Now that you know how to identify an asset, let's put your skills to the test with two real world examples.

Example 1: A manufacturing plant purchased a new piece of equipment that is used for packaging products. The equipment was financed through the bank, meaning the company purchased it on credit.

Now, can this machine be classified as an asset?

Let's review the asset criteria:
Does it involve a future benefit of revenue for the business?
Yes, the products created using the machine will be sold for a profit.

Does the business control the benefit?
Yes, it was purchased using debt and the plant owns the equipment.

Has the transaction occurred?
Yes, the machinery has been purchased.

We've answered yes to all three questions. In this case, it is easy to conclude that the manufacturing equipment is considered an asset.



Let's look at another example that is not very straightforward. Keep in mind if the answers to the criteria are not clear, use your best judgement to determine whether it is an asset.

Example 2: A corporation is leasing an airplane for $4,000,000 per year and they sell tickets to fly passengers to locations all over the world. The lease is signed for yearly payments with a purchase option price of $20,000,000 at the end of a 5-year term.


Is the airplane considered an asset?

Here are the criteria again:
- Does it involve a future benefit of revenue for the business?
Yes, the plane tickets will be sold for the company to receive revenue.

- Does the business control the benefit?
They have partial control, they can use the airplane but the person who owns the plane technically has full control.

- Has the transaction occurred?
Yes, the transaction has occurred.

In this example, the control over the benefit is not crystal clear in the case of the lease. Since the corporation has the option to purchase the plane at the end of the lease, we can consider the plane as an asset. Leases without a purchase option are not considered assets; the transaction has not occurred if there is no chance of formally purchasing the leased item.

Leases can be difficult to determine whether something is an asset or not. Often, you have to look at the length of the lease and potential for purchase and use best judgement to decide whether it can be classified as an asset.

Items that are consigned are not considered assets because you are not legally purchasing them, meaning the transaction has not occurred. If the item doesn't sell, you won't be responsible for the costs.