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Chapter 1: What Financial Accounting Is For

About 45 minutes of reading and working. Read in order, and stop at every Pause and work box. The problems are the point, the prose is the setup.

The question this chapter answers

Costco collects about $5 billion a year in membership fees, paid up front for a year of shopping. When a member pays $65 in September, has Costco earned $65 yet? The answer to that question is the difference between counting cash and keeping score, and it's the whole point of this course.

What you'll be able to do

  • LO1.1. Describe the two jobs of financial accounting: measuring a business's activities and communicating them to people outside the business.
  • LO1.2. Sort a business's activities into financing, investing, and operating, and give an example of each.
  • LO1.3. Name the four financial statements, state the question each one answers, and show how they connect through net income, retained earnings, and cash. (we'll spend class time here)
  • LO1.4. Explain how outsiders (investors, lenders, regulators) use financial statements to make decisions, and why accrual information differs from cash. (we'll spend class time here)
  • LO1.5. Explain what GAAP is and the roles of the FASB, the SEC, and independent auditors.
  • LO1.6. Identify career paths in accounting and finance that use this material.
  • LO1.7. (Optional) Describe the conceptual framework: the objective of financial reporting, the qualitative characteristics of useful information, and the key assumptions.

Sections

  1. Why anyone keeps score
  2. The four financial statements
  3. How the statements connect
  4. Who uses this, and why cash isn't the whole story
  5. The rules and the referees
  6. Optional: the ideas behind the rules
  7. Summary, practice, and an exam-style warm-up

How to read this chapter

  • Check yourself boxes are ungraded. Answer before you reveal, then read the explanation even if you were right.
  • Pause and work boxes come in three flavors: a worked example, a faded example where you finish the last step, and a your turn with fresh numbers. Hit New numbers until it feels routine.
  • Nothing you type here is recorded anywhere. Practice as much as you like.
  • The last section has a practice set and a five-question, closed-book warm-up. Do the warm-up with no notes and a timer. It's the best predictor of how the exam will feel.