Financial Accounting and Reporting
Core concepts
Know the conceptual framework (relevance, faithful representation) and how it drives recognition and measurement. Be fluent in the accounting cycle: journal entries, adjusting entries (accruals, deferrals, depreciation, bad debts), closing entries, and the trial balance. Understand the four financial statements and their linkages - net income flows to retained earnings, which flows to equity on the balance sheet, and the cash flow statement reconciles beginning and ending cash.
Measurement and topics to master
Revenue recognition under the five-step model (contract, performance obligations, transaction price, allocation, satisfaction). Inventory costing (FIFO, LIFO, weighted average), lower-of-cost-or-market, and the gross-margin and retail methods. Depreciation methods (straight-line, declining balance, units of production) and their effect on early-year income. Bonds: issuance at par, discount, premium, and effective-interest amortization. Leases, deferred taxes, and equity transactions (treasury stock, dividends).
Common traps
- Direction errors: a discount amortizes up to face value; interest expense exceeds the cash coupon when issued at a discount.
- Timing: adjusting entries affect the current period; closing entries zero out temporary accounts only.
- Classification: operating vs. financing cash flows (interest paid is operating under U.S. GAAP; dividends paid are financing).
- Confusing book value with market value.
Rule of thumb
When a question gives you a beginning balance, a purchase, and an ending balance, remember: Ending = Beginning + Additions − Reductions. Solve for the unknown. For example, if inventory begins at 40,000, purchases are 100,000, and ending is 50,000, cost of goods sold = 40,000 + 100,000 − 50,000 = 90,000.