Financial Accounting Essentials You Always Wanted To Know

4th Edition

Vibrant Publishers

• Publisher: Vibrant Publishers
• Year: 2019
• ISBN:
  9781949395334
• Edition: 4
• Topic: Business
• Subtopic: Managerial Accounting
• Index: Business

• Includes Chapter Summaries and Solutions to Practice Exercises
• Understanding of Financial Accounting Terms
• Need, nature and purpose of Financial Statements
• Audience of Financial Statements
• Balance Sheet
• Income Statement
• Statement of Cash Flows

Financial Accounting Essentials You Always Wanted To Know: 4th Edition prepares new managers and leaders with the foundation to understand financial accounting, a critical tool to document finances to shareholders, government tax authorities and other critical parts of the business ecosystem. The chapters follow in a logical flow to describe the key components of financial accounting, including:

• Why are financial accounting systems necessary?
• Financial accounting systems and terms
• The Balance Sheet
• The Income Statement
• The Statement of Cash Flows

Each chapter provides clear examples of the financial accounting tools and includes practice examples to help train the reader in the usage of these critical tools.

About the Series

The Self-Learning Management series is designed to help students, new managers, career switchers and entrepreneurs learn essential management lessons. This series is designed to address every aspect of business from HR to Finance to Marketing to Operations, be it any industry. Each book includes basic fundamentals, important concepts, standard and well-known principles as well as practical ways of application of the subject matter. The distinctiveness of the series lies in that all the relevant information is bundled in a compact form that is very easy to interpret.

The Income Statement

Income statement contains the revenue and expenses transactions over a period of time – generally a quarter or year. A balance sheet is a snapshot, whereas, an income statement is a running log. Like different types of assets and liabilities on the balance sheet, there are different kinds of revenues and expenses on the income statement. There are also several interim values in the income statement that carry importance. Below diagram shows all the major terms in an income statement.

Measures of Income

As seen in the above diagram, there are various ways using which one can measure a company’s income. Each of them conveys different information about a company’s revenue and expenses. Below is a description of these measures.

Gross Profit

For a company selling products gross profit is the difference between the selling price and the cost price of the product. For example, for a car manufacturer, gross profit is the difference between the price of the car at which the company sells to the dealer and the cost of manufacturing it. Similarly, for a grocery store, it is the difference between the price at which the store sells

groceries and the wholesale cost at which it buys it.

Operating Income (EBIT)

Every company has overheads related to administrative, selling, marketing, and other functions. When all these are removed from the gross profit, we get another important measure of profit called Operating Income or Earnings before Interest and Tax (EBIT).

Income (Profit) before Taxes (PBT)

Companies that have any kind of debt financing have an interest expense to pay. They can be bank loans, bonds, preferred stock, or any other such financing that pays interest. The only financing that does not have interest payments is common equity. When the interest expense is subtracted from EBIT, we get Income before Taxes or Profit before Taxes (PBT).

Income from Continuing Operations

After removing the income tax expense we get the bottom line called as Income from Continuing Operations. The items that this profit measure does not include are called “below the line items” – Income from discontinued operations, extraordinary items and cumulative effect of accounting changes.

Below the Line Items

Income from Discontinued Operations is reported when the revenue is generated by a part of business that is being discontinued. For example, when a retail chain plans to close a store in the year, it will report revenue from that store under this head.

Extraordinary Items are those items that are one time in nature and the company does not expect to see them on a regular basis in future. For example, a big loss due to a natural disaster like fire or earthquake would be sh...