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Financial Accounting

Financial accounting is focused on four general-purpose, external financial statements:

balance sheet
income statement
statement of cash flows
statement of stockholders' equity

Because these financial statements will be used by many different individuals outside of the company, the financial statements must follow generally accepted accounting principles (GAAP). These common rules or standards are developed by the Financial Accounting Standards Board (FASB). All of the rules are based on basic accounting principles and concepts such as cost, matching, full disclosure, going concern, consistency, and more.

GAAP also requires that large corporations follow the accrual basis of accounting. This means that revenues are reported when they are earned (not when the money is received), and expenses are reported when they are incurred (not when paid).

If a corporation's stock is publicly-traded, it is also required to follow the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government. This means the corporation's financial statements must be audited by an independent registered public accounting firm. The corporation must also provide additional financial reporting such as annual reports to stockholders and to the SEC (Form 10-K), proxy statements, and other financial information.

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Sample Financial Accounting Questions

1) Cost, full disclosure, and matching are three of the basic accounting ______________.

2) The FASB is responsible for developing new accounting _____________, which will become part of GAAP.

3) GAAP is the acronym for generally ___________ accounting principles.

4) Large companies must use the _________-basis of accounting, rather than the cash-basis of accounting.

5) A corporation's annual report to the SEC is the Form _______-K.

6) The difference between the amounts of assets and liabilities is stockholders' __________.

7) The balance sheet is also referred to as the statement of financial __________.

8) If a corporation's stock is _________-traded, it will have additional financial reporting requirements.

9) Distributions of some of a corporation's net income to the stockholders.

10) The word for an entry on the right side of an account.