Maire Loughran, CPA, is a university professor who teaches both undergraduate and graduate accounting classes. She is the author of Auditing For Dummies as well as the previous edition of Financial Accounting For Dummies.

Introduction 1

About This Book 2

Foolish Assumptions 2

Icons Used in This Book 3

Beyond the Book 3

Where to Go from Here 4

Part 1: Getting a Financial Accounting Initiation 5

Chapter 1: Seeing the Big Picture of Financial Accounting 7

Knowing the Purposes of Financial Accounting 8

Preparing financial statements 8

Showing historic performance 10

Providing results for the annual report 10

Getting to Know Financial Accounting Users 11

Identifying the most likely users 11

Recognizing their needs 11

Providing information for decision-making 12

Respecting the Key Characteristics of Financial Accounting Information 13

Relevance 13

Reliability 14

Comparability 14

Consistency 15

Accepting Financial Accounting Constraints 17

Considering Your Ethical Responsibilities 18

Following the accountant's code of conduct 18

Having integrity 19

Maintaining objectivity 19

Achieving independence 20

Introducing the Conceptual Framework of Financial Accounting 21

Chapter 2: Introducing the Big Three Financial Statements 23

Gauging the Health of a Business through Its Financials 24

Reporting Assets and Claims: The Balance Sheet 25

Realizing why the balance sheet is "classified" 26

Studying the balance sheet components 26

Seeing an example of a classified balance sheet 29

Posting Profit or Loss: The Income Statement 30

Keeping a scorecard for business activity 30

Studying the income statement components 31

Seeing an example of an income statement 33

Showing the Money: The Statement of Cash Flows 33

Tracking sources and uses of cash 34

Studying sections of the cash flow statement 34

Seeing a short statement of cash flows 35

Chapter 3: Running the Numbers for Success 37

Identifying Accounting Issues and Solutions 38

Selecting a Business Entity 38

Advantages of the sole proprietorship 39

Owners' capital 39

Limiting liability with the S Corporation 40

Learning about recognition options 41

Reporting for Small Businesses 42

Preparing reports 42

Analyzing reporting 45

Identifying cost issues 46

Managing Cash 48

Identifying cost issues 48

Improving cash flow 53

Chapter 4: Acronym Alert! Setting the Standards for Financial Accounting 55

Walking through the Origins of Number Crunching 56

Knowing the Role of the American Institute of Certified Public Accountants (AICPA) 58

ASB audit and attestation standards 59

AICPA Code of Professional Conduct 60

Following Regulatory Issues 61

The U.S Securities and Exchange Commission (SEC) 62

The Sarbanes-Oxley Act of 2002 (SOX) 63

The Public Company Accounting Oversight Board (PCAOB) 64

Getting to Know the Financial Accounting Standards Board (FASB) 65

Understanding generally accepted accounting principles (GAAP) 66

Looking online for the FASB's standards 67

Part 2: Reviewing Some Accounting Basics 69

Chapter 5: Booking It: The Process Behind Financial Accounting 71

Shedding Some Light on Bookkeeping 72

Analyzing the Effect of Business Transactions 73

Working the fundamental accounting equation 73

Getting familiar with accounts 74

Defining debits and credits 76

Learning about the transaction methodology 77

Defining Journals 78

Using journals to record cash transactions 78

Recording accrual transactions 82

Learning about other journals 84

Seeing examples of common journal entries 86

Bringing It All Together in the Ledger 88

Realizing what a ledger is 88

Posting to the ledgers 89

Viewing an example of a general ledger 89

Recognizing the purpose of the trial balance 91

Chapter 6: Focusing on Accounting Methods and Concepts 93

Distinguishing between Key Accounting Methods 94

The cash basis 94

The accrual basis 95

Sorting through Standards for Other Types of Accounting 96

Managerial accounting 96

Not-for-profit accounting 97

Governmental accounting 98

International accounting 98

Considering the Conceptual Framework of Financial Accounting 99

The objective of financial reporting 100

Characteristics of accounting information 101

Elements of the financial statements 101

Financial statement measurements 102

Part 3: Spending Quality Time with the Balance Sheet 103

Chapter 7: Assessing the Balance Sheet's Asset Section 105

Homing in on Historic Cost 106

Learning What Makes an Asset Current 106

Cash 107

Short-term investments 108

Accounts receivable 110

Notes receivable 111

Inventory 112

Prepaid expenses 113

Keeping Track of Noncurrent (Long-Term) Assets 114

Meeting the tangibles: Property, plant, and equipment (PP&E) 114

Investigating intangible assets 116

Studying the Asset Section of the Balance Sheet 118

Chapter 8: Digging for Debt in the Liabilities Section 121

Seeing How Businesses Account for Liabilities 122

Keeping Current Liabilities under Control 123

Accounts payable 124

Payroll and taxes 125

Unearned revenue 127

Other short-term liabilities 128

Planning for Long-Term Obligations 130

Managing long-term debt 131

Anticipating contingent liabilities 132

Accounting for Bond Issuances 133

Understanding bond basics 133

Accounting for bonds sold at face value 134

Addressing interest payments 134

Getting and amortizing a premium 134

Reporting a bond discount 135

Retiring and converting bonds 136

Chapter 9: Letting Owners Know Where They Stand: The Equity Section 137

Distinguishing Different Types of Business Entities 138

Sole proprietorship 138

Partnership 139

Corporate 140

Defining Paid-in Capital 141

Recording Retained Earnings 143

Spotting Reductions to Stockholders' Equity 143

Paying dividends 144

Buying treasury stock 146

Learning about Stock Splits 146

Accounting for Accumulated Other Comprehensive Income 147

Seeing a Sample Equity Section of the Balance Sheet 148

Part 4: Investigating Income and Cash Flow 149

Chapter 10: Searching for Profit or Loss on the Income Statement 151

Presenting the Income Statement in One of Two Ways 152

Recognizing the single-step format 152

Breaking it out with the multiple-step format 153

Defining Different Types of Businesses 154

Providing a service 154

Merchandising to the public 154

Manufacturing a product 155

Examining Income Statement Sections 155

Two types of revenue 156

Contra revenue accounts 157

Cost of goods sold 159

Gross profit 162

Operating expenses 162

Heading toward the bottom line 163

Earnings per share 165

Watching Out for Unusual Income Statement Items 166

Discontinued operations 167

Noncontrolling subsidiary interests 168

Arriving at the Final Product 168

Chapter 11: Following the Money by Studying Cash Flow 171

Understanding the Difference between Cash and Profit 172

Seeing how noncash transactions affect profit 172

Distinguishing costs from expenses 173

Realizing the Purpose of the Statement of Cash Flows 173

Walking through the Cash Flow Sections 175

Figuring cash operating results 175

Showing cash investing transactions 178

Accounting for financing activities 180

Recognizing Methods for Preparing the Statement of Cash Flows 181

Using the direct method 181

Starting indirectly with net income 182

Interpreting the Statement of Cash Flows 183

Looking at Two Sample Statements of Cash Flows 183

Chapter 12: Examining Depreciation Cost Flow Assumptions 187

Discovering How Depreciation Affects All Financial Statements 188

Mastering Costs 189

Defining costs and expenses in the business world 190

Satisfying the matching principle 190

Identifying product and period costs 191

Learning which costs are depreciated 191

Distinguishing among Depreciation Methods 194

Walking through the straight-line method 196

Accelerating by using declining balance 196

Calculating sum-of-the-years'-digits 197

Using the units-of-production method 198

Seeing how the methods compare 198

Figuring partial year depreciation 199

Preparing a Depreciation Schedule 200

Chapter 13: Learning about Inventory Cost Flow Assumptions 203

Discovering How Inventory Valuation Affects the Financial Statements 204

Do Service Companies Have Inventory? 205

Classifying Inventory Types 206

Accounting for merchandising company inventory 206

Accounting for manufacturing company inventory 208

Getting to Know Inventory Valuation Methods 210

Specific identification 211

Weighted average 211

First-in, first out (FIFO) 211

Last-in, first-out (LIFO) 212

Comparing inventory cost-flow assumptions 212

Preparing an Inventory Worksheet 216

Part 5: Analyzing the Financial Statements 217

Chapter 14: Using Ratios and Other Tools 219

Learning about...