Introduction to Financial Accounting

Explain the format and composition of the income statement, learn how to record transactions, and prepare a simple income statement from those transactions.

The income statement, also called the statement of operations or PNL, tracks a period's income, expenses, and resulting profits or losses, separate from the balance sheet.

Explore the income statement by tracing revenues (sales or turnover), subtracting cost of goods sold to reveal gross profit, and calculating the gross profit margin to cover indirect operating costs.

Explore how the income statement handles indirect operating costs like research and development, administration, and selling and distribution, and how subtracting costs yields operating income or EBIT.

From operating income, subtract debt financing costs to yield earnings before tax, then deduct taxes to obtain net income, or net profit, feeding retained earnings on the balance sheet.

Create a full income statement from the balance sheet, calculating revenues, cost of sales, gross profit, operating expenses, operating profit, interest, taxes, and net profit that flows into retained earnings.

Determine which revenues and expenses belong to the current accounting year on the income statement. Use the 12-month, $12,000 insurance policy example to illustrate period-appropriate recognition.

Record 1,000 per month for a 12-month insurance policy; recognize 1,000 expense this year and classify the remaining 11,000 as a prepaid expense on the balance sheet under current assets.

Explain how to recognize a $2000 office supplies expense in the current year's income statement, even though payment is made in the following year.

Record accrued expenses as current liabilities on the balance sheet when expenses are recognized on the income statement but not yet paid, reflecting the amount owed within the next year.

Apply what we've covered by completing the Luton Inc. exercise, following the instructions, and then consult the Luton solution file to check your answers.

Record depreciation expense to allocate the equipment's $80 cost over a four-year useful life, with a $30 salvage value, spreading the cost across property, plant and equipment.

Compute annual depreciation by subtracting the scrap value from the purchase price and dividing by useful life, yielding 12.5 per year and recording it on income statement and balance sheet.

Practice what we've covered by completing the Jenga Inc. exercise, follow its instructions, and review the solutions in the Jenga Inc. solution file.

Explore the format and structure of the cash flow statement, compare it with the income statement, and build a cash flow statement using the income statement and balance sheet.

Review the three key financial statements—balance sheet, income statement, and cash flow statement—covering assets, liabilities, equity, revenues, expenses, profit or loss, and cash flow from operating, investing, and financing activities.

Explore why the cash flow statement complements the balance sheet by detailing cash inflows and outflows, helping managers and analysts understand cash sources and uses.

Explore how the cash flow statement classifies cash movements into operating, investing, and financing activities, detailing operating cash flows that reflect revenue and expenses when cash is received or paid.

Explore how cash flow from investing activities records capital expenditures, asset purchases and sales, investments in other businesses, or M&A activity, and how these relate to operating cash flow.

Analyze financing activities on the cash flow statement, including issuing shares, raising debt, repurchasing or repaying shares, and paying dividends. Calculate the net cash movement from operating, investing, and financing.

Explore why profits and cash flow differ, and how accrual accounting recognizes revenues when earned and expenses when incurred, with the cash flow statement recording cash receipts and payments only.

Examine the matching principle over time by comparing cash flow and accrual costing of a $40 transit pass and assess which method reflects travel costs and personal cash flow better.

Compare cash flow basis and matching principle basis by spreading a $4,000 travel cost over five days to $8 per day, highlighting planning daily costs versus cash inflows.

Explore how property, plant and equipment and depreciation affect cash flow, income, and balance sheets through a truck purchase case with straight-line depreciation and a full first-year depreciation.

Analyze a $45,000 capital expenditure's impact on the cash flow, income statement, and balance sheet, with $6,000 yearly depreciation and a $39,000 property, plant and equipment value in year one.

Compare straight-line, double declining balance, and units of production depreciation methods, showing how each method calculates depreciation and how expenses relate to asset use and production.

Explore operating cash flows in the cash flow statement and why the direct approach, while straightforward, is rarely used because tracking every cash inflow and outflow is impractical.

Master the indirect method for cash flow from operations by adjusting net income for accounts receivable and payable, inventory, non-cash items like depreciation, stock-based compensation, and unrealized gains and losses.

Use the indirect method to compute operating cash flow by starting with net income and adding back non‑cash items like depreciation and amortization, then adjust for changes in working capital.

Build operating cash flow section of the cash flow statement using direct and indirect methods, with Yohannes inc. transactions: cash purchases, cash sales, cash expenses, depreciation, and no ending inventory.

Analyze period 1 transactions to prepare the income statement and direct and indirect cash flow statements, noting depreciation as a non-cash expense and a net change in cash of 80.

Analyze operating cash flows for period 2 by totaling cash purchases, cash sales, credit sales, cash expenses, receipts from receivables, and depreciation, noting no ending inventory, calculate cash flow statement.

Analyze period two transactions using direct and indirect cash flow methods, reconciling cash purchases, cash and credit sales, expenses, depreciation, accounts receivable, and net income.

Explore period 3 operating cash flows, detailing cash purchases and sales, credit movements, receipts and payments from receivables, cash expenses, depreciation, and no inventory left.

Compute the period 3 cash flow and income statement using direct and indirect methods in Excel. Include cash sales, credit sales, purchases, receivables, payables, and depreciation.

Practice operating cash flow concepts by working through the Johannes exercise file and then review the solution to check your work.

Derive the complete cash flow statement by combining this year's balance sheet, last year's balance sheet, and this year's income statement, as used in Excel-based financial modeling and evaluation courses.

Compare this year’s and last year’s balance sheets to calculate the cash change; asset increases imply cash outflows, liability increases imply cash inflows, by summing per-account differences.

Analyze how rising accounts receivable and inventory drain cash flow, while higher accounts payable improves cash flow, highlighting the interplay between assets and liabilities in the balance sheet.

Classify changes in accounts receivable, accounts payable, and inventories into operating, investing, or financing cash flows on the cash flow statement.

Classify ABC Incs cash flows from accounts receivable, accounts payable, and inventories under operating activities, and compute cash flow from operations totaling 28 with net income 8 and depreciation 90.

Disaggregate property, plant and equipment into depreciation expense and net capital expenditures to trace their effects on the operating and investing sections of the cash flow statement, with a real-world example.

Calculate net capex from opening and closing PPE and depreciation, using the formula closing PPE = opening PPE + net capex − depreciation, and record the outflow as investing activities.

Explain how retained earnings change due to net income and dividends, and show their flows to the cash flow statement, with net income to operating activities and dividends to financing.

practice two cash flow statement exercises—cash flow exercise and canned or cash flow exercise—by working through them independently and then checking solutions in the attached files.

Master the balance sheet format and double-entry recording, then prepare basic financial statements. Build a cash flow statement from these records and understand its differences from the income statement.