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:

- Balance sheet sections that are used for operating, investing and financing
- Categorizing items as a use or source
- Recording the receivables on the cash flow statement



As a continuance of the last lesson, we will now walk through how the cash flow statement is created. Let's start with a quick overview of the items that are listed in the balance sheet and what section they are located on in the cash flow statement.

Current assets and liabilities are listed in the operating section. Long term assets are shown in the investing section. The third section of non-current liabilities and equity are in the financing section.
 
Next, let's take a look at how the balances of current assets and liabilities are recorded for the operating section.



Every entry on the cash flow statement will either be a source of cash (+) or a use of cash (-).
 
Let's take a look at how this affects the operating section of current assets and current liabilities.

As you can see from the table above, when current assets are increasing they are recorded as a use while current liabilities are recorded as a source. If the balance is decreasing, the entries are the opposite: current assets are recorded as a source and liabilities are recorded as a use.
 
This may not make much sense right now but I will be getting into the theory behind this as we prepare the operations section of the cash flow statement.



We took a look at the example above of a cash flow statement and where the net loss is recorded. Below the net income or net loss figure, we adjust the balance for the current assets, current liabilities and non-cash expenses such as depreciation.

For non-cash expenses such as a depreciation expense, we would simply add the depreciation expense to the net income figure to help us get to the net income figure on a cash basis.
 
Let's take a look at the balance sheet that we will use to create the cash flow statement. We ultimately need to look at the difference between 2012 and 2013 in order to get the values needed for the cash flow statement.



First, we will record the net income figure which for this example, we will say is $200,000. The cash flow statement lists the net income figure at the top and then we will need to figure out whether the accounts receivable figure of $40,000 should be listed as a source or use of cash.
 
If accounts receivable goes up, normally the transaction associated with the activity is a sale. The net income figure has already factored in the amount of the sale based on accrual accounting. For the operating activity section, we need to convert the net income figure to a cash basis. In order to do so, we need to subtract the accounts receivable figure.
 
Since it is a current asset that is increasing, it will be a use of cash that needs to be subtracted to bring the net income figure down to a cash basis.

We've covered the receivables portion of the cash flow statement and in the next lesson we will be looking at how inventory is recorded.