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Financial Accounting Key Concepts and Formulas

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  • Accounting Equation

    Assets = Liabilities + Shareholders' Equity

  • Working Capital Formula

    Working Capital = Current Assets − Current Liabilities

    Indicates short-term liquidity.

  • Current Assets Examples

    Cash, Accounts Receivable, Inventory, Prepaid Expenses expected to convert to cash or be used within 1 year.

  • Allowance for Doubtful Accounts

    A contra-asset below Accounts Receivable showing net realizable value; estimates receivables not collectible.

  • Goodwill Definition

    Intangible asset created when acquiring a company for more than fair value of net assets; not amortized but tested annually for impairment.

  • Single-Step Income Statement

    Groups all revenues and expenses separately; one subtraction to get Net Income; simple but limited analysis.

  • Multi-Step Income Statement

    Shows multiple subtotals: Gross Profit, Operating Income, EBT, Net Income; separates operating from non-operating items.

  • Gross Profit Formula

    Gross Profit = Net Revenue − Cost of Goods Sold (COGS)

  • Operating Income Formula

    Operating Income = Gross Profit − Operating Expenses (SG&A, D&A, R&D)

  • 10-K Report

    Annual SEC report with comprehensive, audited financial statements.

  • 10-Q Report

    Quarterly SEC report with condensed, unaudited financial statements.

  • 8-K Report

    SEC report filed as needed to disclose material events like mergers or CEO changes.

  • Audit Opinion Types (Best to Worst)

    Unqualified (clean), Qualified, Adverse, Disclaimer of Opinion.

  • SEC vs. FASB Roles

    SEC has legal authority over public company accounting; FASB sets U.S. GAAP standards.

  • Basic Earnings Per Share (EPS) Formula

    Basic EPS = (Net Income − Preferred Dividends) ÷ Weighted Avg. Common Shares

  • Diluted EPS

    EPS including potentially dilutive securities; always less than or equal to Basic EPS.

  • Quality of Earnings Indicators

    Operating Cash Flow ≥ Net Income, low accruals, no sudden policy changes, no large unusual items, unqualified audit opinion.

  • Other Comprehensive Income (OCI) Items

    Unrealized gains/losses on AFS securities, foreign currency translation, pension adjustments, cash flow hedges.

  • Depreciation & Amortization (D&A) Impact

    Non-cash expense reducing Net Income but added back in cash flow statement (indirect method).

  • Cash Flow Statement Sections

    Operating (day-to-day), Investing (long-term assets), Financing (debt and equity transactions).

  • Indirect Cash Flow Method

    Starts with Net Income, adjusts for non-cash items and working capital changes.

  • Effect of Current Asset Changes on Cash

    Current Assets decrease → Cash increases; Current Assets increase → Cash decreases.

  • Effect of Current Liability Changes on Cash

    Current Liabilities increase → Cash increases; Current Liabilities decrease → Cash decreases.

  • Common-Size Balance Sheet Calculation

    Each line item ÷ Total Assets × 100 to compare companies and track changes.

  • Common-Size Income Statement Calculation

    Each line item ÷ Net Revenue × 100 to analyze cost structure and margins.

  • Multi-Step Income Statement Order

    Net Revenue → Gross Profit → Operating Income (EBIT) → Income Before Taxes (EBT) → Net Income.

  • Proxy Statement Purpose

    Filed before shareholder meetings to inform voting on executive compensation, board nominees, and proposals.