MY CFA REVISION FOR UPCOMING EXAM

Accounting is the process of recording financial transactions in relation to business.

The Accounting Equation

The Accounting Equation states that at all times, and without exceptions, the following will be true:

Assets = Liabilities + Owners’ Equity

Assets: items your company owns that can provide future economic benefit examples are Cash, Investments, Inventory, Office equipment, Machinery, Real estate, Company-owned vehicles, etc

Liabilities: All of the debts that the company currently has outstanding to lenders Examples are Bank debt, Mortgage debt, Money owed to suppliers (accounts payable), Wages owed, Taxes owed, etc

Owners’ Equity (a.k.a. Shareholders’ Equity): The Company’s ownership interest in its assets, after all debts have been repaid.

Current  Vs Non-Current Asset

Current assets are a company’s short-term assets that can be liquidated quickly and used for a company’s immediate needs. Examples of current assets include cash, marketable securities, inventory, and accounts receivable.

Noncurrent assets on the other hand are long-term and have a useful life of more than a year. Examples of noncurrent assets include long-term investments, land, property, plant, and equipment (PP&E), etc

Current vs. Long-Term Liabilities

Current liabilities are those that are due in the twelve months, while long-term liabilities will not be due until at least twelve months later.

Types of financial statement

• Statement of financial position (Balance sheet)
• Statement of profit or loss and other comprehensive income (Income Statement)
• Statement of Change in equity
• Statement of Cash Flow

*Notes of the Account

Statement of financial position (Balance sheet)

A company’s balance sheet shows its financial situation at a given point in time. It is, quite simply, a formal presentation of the Accounting Equation.

Statement of profit or loss and other comprehensive income (Income Statement)

A company’s income statement shows the company’s financial performance over a period of time (usually one year). This is in contrast to the balance sheet, which shows the financial position at a point in time.

I recall the lecturer referring to the Balance sheet as a photograph and the income statement as a Video

Net Income = Revenue – Expense

Also, A company’s Operating Income is equal to its Gross Profit minus its Operating Expenses. A company’s Net Income is equal to its Operating Income, minus any Non-Operating Expenses.

Statement of Change in equity (Statement of Retained Earnings)

The statement of retained earnings is a very brief financial statement which, as expected is to detail the changes in a company’s retained earnings over a period of time. Retained earnings is the sum of all of a company’s undistributed profits over the entire existence of the company.

Statement  of Cash Flow

It reports a company’s cash inflows and outflows over an accounting period.