CLEP Financial Accounting cheat sheet

Accounting equation: Assets = Liabilities + Equity; every transaction preserves it.

Double-entry rule: each transaction has equal debits and credits; total debits always equal total credits.

Normal balances: assets and expenses debit; liabilities, equity, and revenue credit.

Debit increases assets and expenses; credit increases liabilities, equity, and revenues.

Accrual basis: revenue recognized when earned, expenses when incurred, regardless of cash timing.

Revenue recognition: record when performance obligation is satisfied and collection is reasonably assured.

Matching principle: expenses are recorded in the same period as the revenues they helped generate.

Going concern and cost principles: assume continued operation and record assets at acquisition cost.

Journal entries post to the ledger, then to the trial balance; closing entries zero temporary accounts.

Multi-step income: Sales - COGS = Gross profit; Gross profit - operating expenses = Operating income.

Net income = Revenues - Expenses; it flows to retained earnings on the balance sheet.

COGS under periodic: Beginning inventory + Purchases - Ending inventory.

Gross profit margin = Gross profit / Net sales; higher margin means more retained per sales dollar.

Operating expenses split into selling expenses and general/administrative expenses.

Non-operating items (interest, gains/losses) appear after operating income, before income tax.

Income tax expense = pretax income x tax rate; net income is after-tax.

Temporary (nominal) accounts - revenues, expenses, dividends - are closed to retained earnings each period.

Earnings per share = (Net income - preferred dividends) / weighted-average common shares outstanding.

Classified balance sheet order: current assets, long-term assets, current liabilities, long-term liabilities, equity.

Current assets are expected to convert to cash or be used within one year or operating cycle.

Current ratio = Current assets / Current liabilities; measures short-term liquidity.

Working capital = Current assets - Current liabilities.

Inventory costing: FIFO, LIFO, and weighted average assign different costs to COGS and ending inventory.

Depreciation methods: straight-line = (Cost - Salvage) / Useful life; declining balance applies a fixed rate to book value.

Book value = Cost - Accumulated depreciation; accumulated depreciation is a contra-asset.

Retained earnings = Beginning retained earnings + Net income - Dividends declared.

Three sections: operating, investing, and financing activities; net change in cash reconciles beginning to ending cash.

Operating activities: cash from core operations; can be presented by direct or indirect method.

Indirect method starts with net income, adds back noncash expenses (e.g., depreciation), adjusts for working-capital changes.

Investing activities: purchases/sales of long-term assets and investments.

Financing activities: borrowing/repaying debt, issuing/repurchasing stock, paying dividends.

Increase in current asset (e.g., receivables, inventory) is subtracted under the indirect method; increase in current liability is added.

Dividends paid and interest paid are financing and operating outflows respectively under U.S. GAAP classification.

Cash flow from operations differs from net income because of accruals, noncash items, and timing.

Current ratio = Current assets / Current liabilities; quick ratio = (Cash + Marketable securities + Receivables) / Current liabilities.

Inventory turnover = COGS / Average inventory; receivables turnover = Net credit sales / Average receivables.

Return on assets = Net income / Average total assets; return on equity = Net income / Average equity.

Debt-to-equity = Total liabilities / Total stockholders' equity; measures leverage.

Internal control: segregation of duties, physical safeguards, independent verification, and documentation.

Bank reconciliation: adjust book balance for bank fees, interest, and errors; adjust bank balance for deposits in transit and outstanding checks.

FOB shipping point transfers ownership at shipment; FOB destination transfers at delivery.

Consistency and full-disclosure principles require stable methods and reporting of all material information.