Committing ch4 notes so I can work on PM stuff

book_notes/ch4_The_mechanics/ch4_the_mechanics.md

+# Ch 4 The Mechanics of Financial Accounting
+
+- This chapter discusses the mechanics of preparing financial statements to report transactions accurately, timely and completely.
+- This chapter also discusses reading financial statements using T-account analysis
+
+## Economic Events
+
+- Financial statements must only report relevant and objectively measurable __Economic events__.
+
+### Relevant Events
+
+- __Relevant event__: an economic event large enough to affect a company's financial condition
+  - ex: elections, wars, changing CEOs...
+
+### Objectivity
+
+- The normal standard for __objectivity__ is when parties with conflicting objectives can agree on the truth
+  - for example, when buyers (who want a low price) and sellers (who want a high price) agree on an objective price
+  - objectivity also requires documentation
+
+- If you can't honestly be objective, be conservative
+
+## The Fundamental Accounting Equation
+
+```Accounting
+Assets = Liabilities + Shareholders' Equity
+```
+
+- All financial statements are based on the fundamental Accounting equation, but the balance sheet explicitly states how everything relates to it.
+- The accounting must always balance, but even if it does, there might be accounting errors.
+
+### Assets
+
+- __Assets__: Items and rights obtained through objectively measurable transactions that can be used to generate revenue in the future
+  - Assets are exchanged for other assets (usually cash or payables)
+  - ex: cash, securities, receivables, land, buildings, machinery, equipment, and rights
+
+- sources of assets:
+  - borrow (liabilities)
+  - owner contributions (Shareholders' Equity)
+  - operating activities (asset exchanges)
+
+### Liabilities
+
+- __Liabilities__: obligations made on assets
+  - ex: debts and payables
+
+### Shareholders' Equity
+
+- 2 Components of __shareholders equity__
+  1. __contributed capital__: the dollar value of assets contributed by shareholders
+  2. __Retained earnings__: the dollar value of assets generated by operating activities and retained in the business (not paid in dividends)
+    - Operating activities are transactions directly associated with the acquisition and sale of a company's products or services.
+
+``` Accounting
+Assets = Liabilities + (Contributed Capital + Retained Earnings)
+```
+
+## Business Transactions, the Accounting Equation, and the Financial Statements
+
+- __Business transactions__: the economic events of exchanging assets and liabilities.
+- all business transactions can change the accounting equation, but it will always balance
+
+### Transactions and the Accounting Equation
+
+- This gives some examples of how different transactions affect the accounting equation
+
+### The Accounting Equation and the Financial Statements
+
+- Here they:
+  - define "account"
+  - prepare simplified balance sheets, statements of cash flows, income statement and statements of shareholders' equity
+
+#### Accounts and the Accounting Equation
+
+- Accounts subdivide the categories of the accounting equation
+  - for example assets could have the accounts cash, receivables, land...
+
+- Of a company's account, only a handful of the most informative accounts will appear on financial statements.
+  - Financial statements should provide meaning to but not overwhelm users.
+
+- US GAAP and IFRS use the same accounting equation
+
+#### The Balance Sheet
+
+- The balance sheet states the accounting equation as of a particular date.
+  - It's named a "balance sheet" because the equation must balance
+
+- Balance sheets include the accounts associated with each part of the accounting equation.
+
+#### Statement of Cash Flows
+
+- The statement of cash flows is only concerned with the cash account in the assets portion of the accounting equation (and balance sheet)
+
+- The statement of cash flows divides this cash account into 3 sections:
+  1. Operating
+  2. Investing
+  3. Financing
+
+#### Income Statement
+
+- The income statement measures assets generated from operating activities over a period of time.
+  - *revenues*: asset inflows due to operating activities
+  - *expenses*: asset outflows required to generate the revenues
+  - *net income* (or *net loss*) = revenues - expenses
+
+- Operating activities convert assets into the retained earnings account of the shareholders' equity section, hence the equation stays equal.
+  - The retained earnings section includes these accounts: revenue accounts, expense accounts, and dividend accounts.
+    - expenses and dividends decrease retained earnings; revenues increase retained earnings.
+
+#### Statement of Shareholders' Equity
+
+- The Statement of Shareholders' Equity just analyzes how the shareholders' equity part of the accounting equation has changed.
+  - Example accounts in shareholders' equity: contributed capital, retained earnings
+  - dividends affect shareholder's equity?
+
+## The Journal Entry
+
+- __Journal entries__: A short-hand way to represent which accounts are affected by a transaction and how they are affected.
+  - __debit__: cash inflows
+    - on the left side of a journal entry
+  - __credit__: cash outflows
+    - on the right side of a journal entry
+
+- __Compound journal entries__ involve more than 2 accountss
+
+### The Double Entry System
+
+- 
\ No newline at end of file