Introduction 1 About This Book 2 Foolish Assumptions 2 Icons Used in This Book 3 Beyond the Book 3 Where to Go from Here 4 Part 1: Getting a Financial Accounting Initiation 5 Chapter 1: Seeing the Big Picture of Financial Accounting 7 Knowing the Purposes of Financial Accounting 8 Preparing financial statements 8 Showing historic performance 10 Providing results for the annual report 10 Getting to Know Financial Accounting Users 11 Identifying the most likely users 11 Recognizing their needs 11 Providing information for decision-making 12 Respecting the Key Characteristics of Financial Accounting Information 13 Relevance 13 Reliability 14 Comparability 14 Consistency 15 Accepting Financial Accounting Constraints 17 Considering Your Ethical Responsibilities 18 Following the accountant''s code of conduct 18 Having integrity 19 Maintaining objectivity 19 Achieving independence 20 Introducing the Conceptual Framework of Financial Accounting 21 Chapter 2: Introducing the Big Three Financial Statements 23 Gauging the Health of a Business through Its Financials 24 Reporting Assets and Claims: The Balance Sheet 25 Realizing why the balance sheet is "classified" 26 Studying the balance sheet components 26 Seeing an example of a classified balance sheet 29 Posting Profit or Loss: The Income Statement 30 Keeping a scorecard for business activity 30 Studying the income statement components 31 Seeing an example of an income statement 33 Showing the Money: The Statement of Cash Flows 33 Tracking sources and uses of cash 34 Studying sections of the cash flow statement 34 Seeing a short statement of cash flows 35 Chapter 3: Running the Numbers for Success 37 Identifying Accounting Issues and Solutions 38 Selecting a Business Entity 38 Advantages of the sole proprietorship 39 Owners'' capital 39 Limiting liability with the S Corporation 40 Learning about recognition options 41 Reporting for Small Businesses 42 Preparing reports 42 Analyzing reporting 45 Identifying cost issues 46 Managing Cash 48 Identifying cost issues 48 Improving cash flow 53 Chapter 4: Acronym Alert! Setting the Standards for Financial Accounting 55 Walking through the Origins of Number Crunching 56 Knowing the Role of the American Institute of Certified Public Accountants (AICPA) 58 ASB audit and attestation standards 59 AICPA Code of Professional Conduct 60 Following Regulatory Issues 61 The U.S Securities and Exchange Commission (SEC) 62 The Sarbanes-Oxley Act of 2002 (SOX) 63 The Public Company Accounting Oversight Board (PCAOB) 64 Getting to Know the Financial Accounting Standards Board (FASB) 65 Understanding generally accepted accounting principles (GAAP) 66 Looking online for the FASB''s standards 67 Part 2: Reviewing Some Accounting Basics 69 Chapter 5: Booking It: The Process Behind Financial Accounting 71 Shedding Some Light on Bookkeeping 72 Analyzing the Effect of Business Transactions 73 Working the fundamental accounting equation 73 Getting familiar with accounts 74 Defining debits and credits 76 Learning about the transaction methodology 77 Defining Journals 78 Using journals to record cash transactions 78 Recording accrual transactions 82 Learning about other journals 84 Seeing examples of common journal entries 86 Bringing It All Together in the Ledger 88 Realizing what a ledger is 88 Posting to the ledgers 89 Viewing an example of a general ledger 89 Recognizing the purpose of the trial balance 91 Chapter 6: Focusing on Accounting Methods and Concepts 93 Distinguishing between Key Accounting Methods 94 The cash basis 94 The accrual basis 95 Sorting through Standards for Other Types of Accounting 96 Managerial accounting 96 Not-for-profit accounting 97 Governmental accounting 98 International accounting 98 Considering the Conceptual Framework of Financial Accounting 99 The objective of financial reporting 100 Characteristics of accounting information 101 Elements of the financial statements 101 Financial statement measurements 102 Part 3: Spending Quality Time with the Balance Sheet 103 Chapter 7: Assessing the Balance Sheet''s Asset Section 105 Homing in on Historic Cost 106 Learning What Makes an Asset Current 106 Cash 107 Short-term investments 108 Accounts receivable 110 Notes receivable 111 Inventory 112 Prepaid expenses 113 Keeping Track of Noncurrent (Long-Term) Assets 114 Meeting the tangibles: Property, plant, and equipment (PP&E) 114 Investigating intangible assets 116 Studying the Asset Section of the Balance Sheet 118 Chapter 8: Digging for Debt in the Liabilities Section 121 Seeing How Businesses Account for Liabilities 122 Keeping Current Liabilities under Control 123 Accounts payable 124 Payroll and taxes 125 Unearned revenue 127 Other short-term liabilities 128 Planning for Long-Term Obligations 130 Managing long-term debt 131 Anticipating contingent liabilities 132 Accounting for Bond Issuances 133 Understanding bond basics 133 Accounting for bonds sold at face value 134 Addressing interest payments 134 Getting and amortizing a premium 134 Reporting a bond discount 135 Retiring and converting bonds 136 Chapter 9: Letting Owners Know Where They Stand: The Equity Section 137 Distinguishing Different Types of Business Entities 138 Sole proprietorship 138 Partnership 139 Corporate 140 Defining Paid-in Capital 141 Recording Retained Earnings 143 Spotting Reductions to Stockholders'' Equity 143 Paying dividends 144 Buying treasury stock 146 Learning about Stock Splits 146 Accounting for Accumulated Other Comprehensive Income 147 Seeing a Sample Equity Section of the Balance Sheet 148 Part 4: Investigating Income and Cash Flow 149 Chapter 10: Searching for Profit or Loss on the Income Statement 151 Presenting the Income Statement in One of Two Ways 152 Recognizing the single-step format 152 Breaking it out with the multiple-step format 153 Defining Different Types of Businesses 154 Providing a service 154 Merchandising to the public 154 Manufacturing a product 155 Examining Income Statement Sections 155 Two types of revenue 156 Contra revenue accounts 157 Cost of goods sold 159 Gross profit 162 Operating expenses 162 Heading toward the bottom line 163 Earnings per share 165 Watching Out for Unusual Income Statement Items 166 Discontinued operations 167 Noncontrolling subsidiary interests 168 Arriving at the Final Product 168 Chapter 11: Following the Money by Studying Cash Flow 171 Understanding the Difference between Cash and Profit 172 Seeing how noncash transactions affect profit 172 Distinguishing costs from expenses 173 Realizing the Purpose of the Statement of Cash Flows 173 Walking through the Cash Flow Sections 175 Figuring cash operating results 175 Showing cash investing transactions 178 Accounting for financing activities 180 Recognizing Methods for Preparing the Statement of Cash Flows 181 Using the direct method 181 Starting indirectly with net income 182 Interpreting the Statement of Cash Flows 183 Looking at Two Sample Statements of Cash Flows 183 Chapter 12: Examining Depreciation Cost Flow Assumptions 187 Discovering How Depreciation Affects All Financial Statements 188 Mastering Costs 189 Defining costs and expenses in the business world 190 Satisfying the matching principle 190 Identifying product and period costs 191 Learning which costs are depreciated 191 Distinguishing among Depreciation Methods 194 Walking through the straight-line method 196 Accelerating by using declining balance 196 Calculating sum-of-the-years''-digits 197 Using the units-of-production method 198 Seeing how the methods compare 198 Figuring partial year depreciation 199 Preparing a Depreciation Schedule 200 Chapter 13: Learning about Inventory Cost Flow Assumptions 203 Discovering How Inventory Valuation Affects the Financial Statements 204 Do Service Companies Have Inventory? 205 Classifying Inventory Types 206 Accounting for merchandising company inventory 206 Accounting for manufacturing company inventory 208 Getting to Know Inventory Valuation Methods 210 Specific identification 211 Weighted average 211 First-in, first out (FIFO) 211 Last-in, first-out (LIFO) 212 Comparing inventory cost-flow assumptions 212 Preparing an Inventory Worksheet 216 Part 5: Analyzing the Financial Statements 217 Chapter 14: Using Ratios and Other Tools 219.