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:

- Showing where net income or loss is recorded
- Understanding the concept of accrual accounting
- The three sections of the cash flow statement



The cash flow statement will be the last concept that we discuss in this introductory accounting course. The cash flow statement offers information to both internal and external users about the company's payments and receipts to give insight as to the future income needs.
 
This financial statement can often be the most complex, so we will break each topic down to minimize the chance for errors when you are preparing cash flow statements on your own.

Using the accrual basis of accounting means that revenues are reported on the income statement when they are earned, even if the cash has not been received yet. Accruals also apply to expenses, as they are reported when they are incurred, not necessarily when the company pays for the expenses.
 
After the expenses are deducted from the revenues, we are left with the net income figure. It is important to know that accrual accounting is not the same as cash accounting.
 
Let's start by looking at an income statement and where net loss is recorded.



Above is an example of a consolidated statement of income for the Barrick Gold Corporation.
 
Let's take note of the net loss figure that will be recorded in the cash flow statement.



The cash flow statement lists the amount of net loss in millions at the top as you can see in the example above.
 
If you look at the bottom of the cash flow statement, you can see that the cash and equivalents at the beginning of the year was roughly 2.1 billion. The cash at the end of the year was actually higher at 2.4 million. The cash flow statement reflected an increase of $327 million in cash while there was a net loss of 10 billion.

What is important to know here is that net income does not mean that the cash flow is going up. This always applies in the reverse as the net loss doesn't necessarily mean the cash is going down. As you can in see in this example, there was a net loss and the amount of cash increased.

The reason net income is not directly correlated with cash flow increasing or decreasing is because it is based on accrual accounting, meaning it compounds over the given time period.



In order to use the indirect approach to create the cash flow statement, we must start with the net income or net loss figure from the income statement. We then adjust it based on the accrual journal entries to come up with the cash basis section of net income.
 
The company ultimately wants to know how much cash has changed for the year when looking at the operating activities section of the cash flow statement. This section is one of three parts of the business activities sections including operating, investing and financing activities.

The investing and financing sections will remain the same whether the indirect or direct method is used. The only section that changes based on the indirect approach is the operating section that shows all of the cash flow items for operations.
 
In order to prepare this section, we will be learning how to convert the net income figure into a cash basis figure in the next several lessons.