1.

1 #Concept of financial accounting#

*Financial Accounting:
- The objective general purpose of financial
accounting is to report financial information
(financial statements) that is useful in making
decision.
- The general purpose of financial statement to be
useful it must be prepared in conformity with the
accounting principles (GAAP/IFRS).

*Management accounting:
- Assists management to:
1-Decision making
2- plaining
3- controlling
- Management accounting information mainly used
in internal use, information should not be shared to
external users, therefore it doesn’t need to follow
the (GAAP/IFRS) standards.
* Users of Financial Statements:
- Decision makers (we have two types):
1- Direct Interest users:
- investors & protentional investors.
- Suppliers & Creditors.
- Board of Directors.
- Employees
2- indirect interest users:
- Financial Advisors & analysts
- Stock Markets & exchange.
- Labor Unions.
- Regulatory Authorities (TAX).
*Usually, Annual Reports is prepared by the
Management to shareholders and External users.

* Features of Financial Statements:

1- Statement of Financial Position (Balance Sheet).
It should be AS it December 31, (year)
2- Statement of Comprehensive Income.
For the period ended 31 December (year).
3- Statement of Cash flows.
For the period ended 31 December (year).

4- Statement of change of equity.

For the period ended 31 December (year).
5- Disclosures and notes.
For the period ended 31 December (year).
Ch

* Characteristics of Financial Statement:

1- Usefulness
- Relevance:
To be relevant, accounting information must be
capable of making difference in a decision.
- faithfully represented:
Meant that the numbers and description
represented in the financial statements are really
existed or happened (complete, free of errors and
unbias).
- Timeliness:
The information must be available on the right time
to decision makers before it loses in capacity to
influence their decisions.
- Verifiability:
Verifiability occurs when independent measures,
using the same methods, obtain similar information
of the financial statement.
- comparability:
The information should be comparable with similar
information for 1- other entities 2- and for the same
entity for another period or date.
For the information to be comparable, the same
accounting period should be used.
- consistency:
For the information to be consistent, the same
accounting principles should be applied from one
accounting period to another.
* Assumption of financial statement:
- Going concern:
The going concern assumption assumes that the
entity will continue to operate in the foreseeable
futures, unless managers intends to liquate the
entity.
- Historical cost:
Suggest that assets and liability are recorded on the
balance sheet date at original cost, even if the value
of the same changes over the time.
- Disadvantage of the historical cost: based on the
historical cost, changes in the fair value over the
time such as market price are not reflected in the
assets of the balance sheet.
* Financial statements relationship:
- All Financial statements are linked together and
complete each other as well.
* Accrual VS. Cash basis of accounting:
- Financial statements re prepared under the
accrual basis of accounting. Accrual accounting
record the financial effects of the transaction and
other events and circumstances when the accrue
rather than when associated cash is paid or
received.
- Accrual basis: revenues are recognized in the
period in which they earned even if the cash will be
received in the future period.
- Cash basis: revenues are recognized in the period
when the associated cash is received.
- expenses accrual basis: expenses are recognized in
the period in which they were incurred even if the
cash will be paid in the future period.
Expenses cash basis: expenses are recognized in the
period when the associated cash is paid.
1.2 #Statement of Financial position(Balance Sheet)

The balance sheet is like a snapshot of company’s

financial position at one moment at time.
The statement of financial position also called
balance sheet reports the amount of asset, liability,
owner equity and their relationship at a moment in
time such as the end of the fiscal year.
The balance sheet helps the users to assess
liquidity, financial flexibility, and risk.
Balance sheet Elements

*Balance Sheet Element:

1- Current Assets is an asset is classified as a current
on the statement of the financial position if it is
exposed to be realized in cash or sold or consumed
within entity’s operating cycle or 1 year whichever
is longer.
- Cash & cash equivalent (cash equivalent is what
the bank account of the company have).
- short term Investment which includes:
^Available for sale securities.
^^Trading securities.
^^^held to maturity security.
- Account receivable which includes two type the
first one account receivable and the second one
note receivable.
- inventories includes (raw materials, work in
process, Finished goods)
- Prepaid expenses such as rent, insurance.
2- Noncurrent assets: are those not qualifying as
current assets.
-Long term investment (such as investment that is
more than one year)
- restricted funds (owned assets that you can’t use
such as pawned inventory.)
- Property plant & equipment (building, land,
vehicle, equipment & machinery, furniture and
fixtures)
- Intangible assets (goodwill, copyright, patent)
- other noncurrent assets (AR, Prepaid)
3- current liabilities (are liability expected to be
settled or liquidated withing one year from the
balance sheet date.
- Account/note payable (due checks and suppliers)
- unearned revenue.
- income tax payable.
- current maturities of long-term debt (such as debt
that will be paid in two payments in two years).
4- Noncurrent liability ( are those liability that is not
qualifying as noncurrent liabilities.
- long term debt.
- noncurrent (long term) note payable.
- current liabilities that will be financed on
noncurrent basis (if the bank agreed to reschedule
that loan that should be paid in two months to
future date).
Current liability do not include short-term debt if an
entity:
One intends to refinance them on a noncurrent
basis and
Two the ability to refinance may be demonstrated
by entering into a refinance agreement before the
balance sheet issued.
5- owners equity:
- common stock
- preferred stock.
- additional paid in capital.
- retained earnings.
- accumulated other comprehensive income.
- treasury stocks (are the firm’s own stocks has
been repurchased from the market for the same
company, always shows in negative sign).
6- discourse and notes:
- Accounting basis (accrual VS cash basis VS
modified cash basis).
- significant accounting policies (LIFO, FIFO, etc.).
Details of investment securities (held to maturity,
available for sale and/or trading securities).
- maturity of bonds/debt.
- details of capital stocks/preferred stock (how
much does the company issue new stocks, what is
the status of them).
* Footnotes are integral part of financial
statements.
** footnotes should not be used to correct an error
or an improper presentation of the financial
statement.
7- balance sheet benefits:
- balance sheets provide a basis of computing rate
of return, evaluating the capital structure (capital
leverage) of the business, and predicting the future
cash flows.
- the balance sheet helps users to assess the
company’s liquidity, solvency, financial flexibility
and risk.
*liquidity is the ability transfer assets to cash as
fast as the company can, so they can pay their
debts.
** Financial Flexibility the company’s OE should be
higher that their debt if not that means the
company doesn’t have financial flexibility because
of their debt and commitment.
Solvency is the inability to pay debt.
8- balance sheet limitations:
- balance sheet shows a company’s financial
position at a single point in time, however accounts
may vary significantly a few days before or after the
publication of the balance sheet.
- many assets are not reported in the balance sheet
such as human resources and it competitive
advantage.
- values of certain assets are measured at historical
cost, not market values.
1.3 income statement and statement of
comprehensive income
1- Income statement: reports on the result (profit or
loss) of the company operation during a given
period of time.
* the income statement provides the users with
information to help them to predict the amounts,
timing, and uncertainty of (prospect for) future cash
flow.
*- the income statement element:
- revenue: are inflows from delivering or producing
goods, providing services, or other activity that
qualify as ongoing major or core operation.
- cost of goods sold: is the cost of delivering and
cost of service provided to the client.
- expenses: are outflows from delivering goods,
providing services, or other activity qualify as
ongoing major or core operation expenses that
incurred for selling and marketing (such as sale
representative salaries, commissions, traveling
expenses, advertising, shipping expenses).

*General and administration expenses: expenses

that incurred for the benefit of the enterprise as a
whole or not related wholly to a specific function
(such as salaries, rent cost, insurance, legal and
other expenses for professional service, and income
tax).
- gains: inflows other than revenue or investment
by owner (gains from selling fixed assets for a profit,
interest income, gain (dividend on investment in
other entities, gain from sale on investment in other
entity, lawsuit gain (under certain condition)).
- Loses: outflows other than from expenses or
distribution by owner (loses from fixed assets for a
profit, loss on sale on investment in other entity,
lawsuit loss (under creatin condition)).
Income statement format: we have two ways to
prepare income statement which is :
- single step income statement (revenue + gains -
cost of goods sold – expenses – loses = net profit).
EPS (Earnings per share): should always be
presented at the button of the income statement
based on GAAP rule which we can calculate as net
income divided by the number of shares in the
market for the same company.
- multi step income statement (revenue – cost of
goods sold = gross profit – expenses + gains – loses
= net income).
2- Irregular items- discounted operations:
*Income or loss from operations of the components
that has been disposed of or is classified as held for
sale from the first day of the reporting period until
the date of disposal.
* gain or loss of the disposal is net of tax.
- shared based payment and employee benefit
three types:
First one: call option, call option gives the employee
the right to purchase an entity shares in exchange
of their services (if they continue their employment
at the entity for a certain period).

The second one: shared appreciation right: shared

appreciation right that entitle employees to cash
payment calculated by reference to increase in the
market price of an entity’s shares.
The third one: share ownership plans: shared
ownership plans distribute shares to employees in
exchange of their services (if they contuine their
employment at the entity for a certain period. The
promise to grant share to employment has
complicated arrangement).
*** According to US GAAP Statement 1,2,3 required
all entities to recognize compensation expenses in
an amount equal to their fair value of shares based
on payments.
3- disclosures and notes in income statement:
- earnings per share (EPS)
- Depreciation method and schedule and methods
(straight line or double declining method).
- components of general and administrative
expenses (we have to mention every expense in
detail).
- components of selling and marketing expenses
(we have to mention every expense in detail).
- components of income tax expenses (how to
calculate tax and based on which rate).
*** footnotes are integral part of financial
statements.
*** Footnotes should not be used to correct an
error or an improper presentation of the financial
statement.
*^ limitation of the income statements:
Operation result differ between accrual basis and
cash basis
**^this statement must be viewed in conjunction
with other financial statement such as balance
sheet and statement of cash flows.
4- matching principle:
- expenses should be recognized in the same period
as the revenue they help to generate.
5- Other comprehensive income:
Certain income items are excluded from the from
the calculation of the net income and instead they
are included in compressive income which are
reported:
- change in the fair values of available for sale
securities.
- foreign currency translation adjustment.
- other (gains and losses from prior service cost).
**All of the three should be recorded as net of Tax.
 1.4 statement of change in equity.
- A statement of change in equity presents a
reconciling for the accounting period of the
beginning balance for each component of equity to
the ending balance.
- Each change is disclosed separately in the
statement of equity.
The following are common change in the equity
component balance during the accounting period:
* Net income (loss) for the period which increase
(decrease) the retained earnings period.
**distributions to the owners (dividend paid), which
decrease the retained earnings balance.
***issuance of common stock, which increase the
common stock balance, if the amount paid for the
stock as above the par value of stock the balance of
additional paid in capital is also increase.
**** the total change in comprehensive income
during the period.
2- statement of retained earnings: a statement of
retained earnings reconcile the beginning and the
ending balances of the accounts, this statement is
reported as part of the statement of change in
equity in separate column.
* statement of retained earnings is only a support
schedule to statement of change in equity, it is not
separate statement.
- prior year adjustment:
* errors in prior year: retrospective effect >> prior
year adjustment
** change in estimation ( such as usfel life of fixed
asset) prospective effect >> no effect on retained
earnings.
*** change in accounting principle (LIFO,FIFO)
retrospective effect >> prior year adjustment.
**** retained earnings are sometimes restricted to
special accounts to disclose the retained earnings in
the business (not paid out to dividend) are being
used for special purpose, an appropriation must be
clearly displayed within the equity.
Purpose of appropriation of retained earnings
include:
^compliance with a bond indenture (bond contract)
^^ retention of asset for internally financed
expansion.
^^^ anticipation of losses.
^^^^ due to legal restrictions (such as banks in SA).
3- common and preferred stocks
-The following terminology is related to stocks:
^ stock authorized: is the maximum amount of
stock that corporations is legally allowed to issue.
^^ Stock issued: is the amount of stocks authorized
that has been actually been issued by the
corporation.
^^^ stock outstanding: is the amount of stock issued
that has been purchased and is held by
shareholders.
- the difference between common stocks and
preferred stocks.
*Common stocks:
^ commons stocks holders are the shareholders of
the company
^^ they select the company boards of directors.
^^^ they have voting rights (BoD’s resolutions)
^^^^ they are entitled to dividend (once declared
not an obligation), after payments to preferred
stocks.
^^^^^ preemptive rights give a current common
shareholder the right to purchase any additional
stock issuance proportion to their ownership
percentage.
** Preferred stocks:
^ preferred stock has features of debt in equity.
^^ they can’t selects the company’s boards of
directors.
^^^ no voting rights.
^^^^ preferred stocks has fixed dividends before
common stocks (not an obligation).
^^^^^ no preemptive rights to preferred stock.
# In case of liquidating the company, the company
will be as ordered:
^Liquidator.
^^Liabilities.
^^^preferred stocks holders.
^^^^common stocks holders.
Preferred stocks types: there are two types of
preferred stocks in companies
^cumulative preferred stocks accumulates unpaid
dividend (dividends in array)
^^ convertible preferred stocks: preferred stocks
that have the rights to convert to stock into shares
of another class (usually common stocks) at a
predetermined ratio.
4- equity transactions
(On the left side transaction preferred stock should
be 40,000 not 20,000
On the right side transaction in the cash should be
30,000 shares multiply by 6 which is the stock price
also it will be 6 as well in the common stock share
price).
5- dividend: there are four ways for dividends:
^ cash dividend: it is a dividend paid by cash to the
shareholders (common/ referred stocks).
^^property dividends: when an entity declares a
dividend consisting of tangible property (land,
building, machinery, etc.).
If the boards of directors decide to distribute a
property as dividend, the property should be re
measured to its fair value, any gain or loss on the
remeasurement is recognized in the income
statement.
^^^ stocks dividend stock dividend involves no
distribution in cash or other property, it is purely a
distribution of additional stocks.
^^^^ stock split: are issuance of shares that do not
affect any aggregate par value of shares issued and
outstanding or total equity. Stock split reduce the
par value of each stock and increase the number of
shares outstanding. (No entry is made and no
transaction in retained earnings occur, only
disclosure in financial statement).
6- treasury stocks:
^Treasury sticks is the firm’s own stocks that has
been repurchased (it is not an investment).
^^treasury stocks is either reported at cost ( as a
deduction from total equity) or at par (as a direct
reduction of the relevant contributed capital
account).
^^^treasury stocks is reported as a reduction of
equity.
* treasury stocks is a contra account which means
when we record this account it will be always
negative, but we are repurchasing the company’s
stocks so we are reducing the shares in the market
to our own company.
1.5 #statement of cash flows#
**The CMA Exam will requires candidate to know
how to prepare the statement of cash flows in using
the indirect method**
1- What is the statement of cash flows?
- Statement of cash flows provide us relevant
information about the cash receipts and cash
payments of an entity during the period.
- statement of cash flows help the users of financial
statements assess:
* entity’s ability to generate positive future net cash
flow (liquidity).
**entity’s ability to meet the obligation (solvency).
***entity’s financial flexibility.
2- items on statements of cash flow:
- operating activities: they generally result from
transactions and other event that entire into the
determination of net income.
We have two types of operations:
*operating cash inflow examples:
^cash receipts from sale of goods and services
including collection of account receivable.
^^cash receipts from other revenue (royalties, fees,
commissions, rentals, interest, dividends etc.).
**Operation cash outflows:
^ Cash payments to suppliers for goods and sevices.
^^cash payments to employees (salaries).
^^^ cash payments to other expenses (utilities,
rentals, communications, marketing, etc.).
^^^^cash payments to government for taxes,
duties, fines, and other fees or penalties.
^^^^^payments on interest on debt (always the
interest on the loans in the company should be
recorded in the operation in statement of cash
flows).
To record transactions to the operating in the
statement of cash flows, we should follow the
followings:
- financing activities: there activity generally results
from the transactions and other events that are
investment in nature (fixed assets, securities, etc.).
*Investing cash outflows examples:
^ cash payments to buy intangible assets (land,
buildings, equipment, vehicle, copyright, patent).
^^cash payments to make investment (debt or
equity).
**investing cash inflows example:
^ cash receipts from the sale of tangible and
intangible assets.
^^cash receipts from the sale of investment (debt
or equity)
To record transactions to the investing in the
statement of cash flows, we should follow the
followings:

- investing activities: cash flows form investing

activity generally involves the cash effects
transaction and other event that relate to the
issuance, settlement, or reacquisitions of the
entity’s debt and equity instruments.
* financing cash inflows example:
^ cash proceeds (receipts) from issuing shares and
other equity instrument (obtaining recourses from
owners).
^^ cash proceeds (receipts) from issuing loans,
notes, bonds, and other short term.
^^^ long term borrowings.
**Financing cash outflow examples:
^Cash repayments of amount borrowed.
^^Payment of cash dividends.
^^^cash payment to acquire or redeem the entity’s
own shares (treasury stocks).

- reconciling: to make the reconcile we need to add

together each account (operation, Financing,
investing) then we add the cash, after that the total
is the reconcile to our statement of cash flows.
3- formatting statement of cash flows: in the CMA
exam we are required to prepare the statement of
cash flows in the indirect method, which is the
method that we apply in the examples above, but if
we required to prepare the statement of cash flows
in the direct method the only change that we have
to make is in the operation activity it should be
registered in details and we are calculated
everything in details, IFRS and GAAP don’t prefer to
prepare it with the indirect method because it will
take too much time ,an example of indirect method
is showing below for operation activity:

If a company recorded the statement of cash flows

in the direct method there is no problem, but they
should prepare the operating activity and it should
be in the indirect method in a separate schedule
and mention it in the discloser notes.
4- notes and disclosures:
*The followings are examples of notes and
disclosures related to the statement of cash flows
which are non-cash transactions:
^ conversion of debt to equity.
^^acquisition of asset either by assuming directly
related liabilities or by means of capital lease.