Category Archives: Financial Accounting


Income Statement Format

A proper income statement format comes in two varieties. The first one discussed here is the single step income statement and the second is the multiple step income statement format. There are key differences between the two and you should know when to use each for the right situation. The downloadable spreadsheet is at the end of the tutorial.


Cash Flow Analysis

Cash flow analysis is so crucial because cash is king to any business. When evaluating a company’s performance, most stakeholders, both internal and external, are interested in how well the company is generating cash. Having a strong grasp of cash flow analysis can give you great insights into the company’s past, present and future performance. There are a few types of cash flow analysis methods available and in a series of tutorials, we will explore the cash flow statement, cash flow ratios, discounted cash flow and free cash flow.


U.S. GAAP (Generally Accepted Accounting Principles)

Generally Accepted Accounting Principles (GAAP) are a set of common and widely accepted standards used by accountants and organizations in preparing financial information about a business entity. GAAP is borne out of some clearly defined objectives which include the necessity for business organizations to provide financial information that are useful for evaluation by external parties like creditors and investors. Consistency in the approach, format and presentation derived from the accounting framework and applicable laws makes the provided information very helpful in the decision making process for outside parties.


Basics of Inventory Valuation

This tutorial covers the basics of inventory valuation. For merchandisers, manufacturers and wholesalers, inventory is often times the largest asset item represented on the balance sheet as a current asset. It is considered one of the more liquid assets because the basic assumption is that inventory owned by a company will be sold in the near future and converted to cash (the most liquid of any asset type). Inventory includes items that are ready for sale (finished goods), items in the process of being produced (work in progress) and raw materials that will be used to produce the final goods.


Accounting for Bonds

Accounting for Bonds is not a difficult topic to comprehend, nor is it a difficult task to execute. The journal entries involved are pretty straight forward and setting up the amortization schedule is also intuitive. Accounting for Bonds is a continuation of “The Basics and Pricing of Debt Securities” post. If you have not read that post or if you are unfamiliar with how bonds are priced, please do so before reading this article as it will only help you understand the concepts better. 


Difference Between Financial & Management Accounting

Accounting as we know it can be separated into two distinct branches. Although both involve heavy analysis and interpretation of performance data, use of assumptions and reporting in some form or fashion, they are very different in terms of approach and ultimate purpose. For starters, one of the two deals with information that is prepared specifically for external users of the economic information pertaining to a company’s ongoing operations (financial accounting) and the other prepared specifically for a corporation’s internal users enabling them to make better operating decisions (management accounting).

Relationship Between Financial Statements

Relationship Between Financial Statements

Understanding the relationship between financial statements enable you to manage business operations better. These relationships stem from the accounting information system and the way double-entry accounting is setup. The accounting cycle makes continuous utilization of this system to output four standard financial statements at the end of each accounting period. Those statements are :

(1) The Income Statement (2) Statement of Owner’s (Shareholder’s) Equity (3) The Balance Sheet (4) The Statement of Cash Flows

While each statement tells its own story, there are specific links and relationships between them that provide insights into the “bigger picture”. Moreover, a thorough comprehension of  the relationship between financial statements will make you feel more confident about the information you are looking at and in your ability to analyze the numbers.


How To Calculate Depreciation

Looking for a step by step tutorial on how to calculate depreciation? You’ve come to the right place! In this tutorial, we will explore how to calculate depreciation using [1] the straight line method, [2] double declining balance method, [3] units of production method and finally [4] sum of the years digits method. Not only that, you will also see how accounting journal entries correspond to each method also.


Cost Volume Profit – Breakeven Analysis

Cost-Volume-Profit analysis is used in the planning process by looking at the effects caused by varying levels of units sold, unit pricing, fixed costs and variable costs on bottom line profit. The primary objective from a managerial perspective is to maximize contribution margin (revenue less variable costs) and minimize fixed costs. In the process of planning, key stakeholders within an organization are likely to ask some very important questions such as “What’s the effect on profit if units sold decreased 3%?” “How much of an impact will a 10% price hike have on profit?” or “what’s the impact to the bottom line if variable cost per unit increased 8%?”


The Accounting Equation

Under U.S. GAAP (generally accepted accounting principles) financial accounting revolves more or less around one very important but simple equation. And that is: