Lesson 97 - Intermediate Accounting Course

97. Recap of Key Intermediate Accounting Concepts

Intermediate accounting builds upon basic accounting principles and focuses on more complex financial reporting, valuation, and decision-making topics. Below is a recap of the key concepts every accountant should understand:

📌 1. Financial Statements & Their Interconnections

✔ Income Statement (P&L Statement) – Shows revenues, expenses, and net income
✔ Balance Sheet (Statement of Financial Position) – Reports assets, liabilities, and equity
✔ Statement of Cash Flows – Tracks operating, investing, and financing activities

💡 These statements are interconnected:

• Net income (from the income statement) affects equity on the balance sheet.
  
  

• Cash flows link net income and balance sheet changes.

📊 2. Revenue Recognition (IFRS 15 & ASC 606)

✔ Revenue is recognized when:
🔹 Performance obligations are satisfied (goods/services delivered)
🔹 Payment is probable and measurable

💡 Key Applications:

• Subscription revenue (e.g., SaaS) is recognized over time
  
  

• Product sales recognize revenue at point of sale

📉 3. Accounting for Inventory (FIFO, LIFO, Weighted Average)

✔ FIFO (First-In, First-Out) – Oldest inventory is sold first (higher profit during inflation)
✔ LIFO (Last-In, First-Out) – Newest inventory is sold first (lower taxable income in inflation)
✔ Weighted Average – Costs are averaged for each unit

💡 Choosing an inventory method impacts net income, taxes, and financial ratios.

🏢 4. Fixed Assets & Depreciation Methods

✔ Depreciation Methods:

• Straight-Line – Equal expense over useful life
  
  

• Declining Balance – Higher depreciation in early years
  
  

• Units of Production – Based on actual usage
  
  

💡 Companies use depreciation to spread the cost of assets over time and manage tax liabilities.

📈 5. Liabilities: Bonds, Leases, and Contingent Liabilities

✔ Bonds Payable:

• Issued at par, discount, or premium
  
  

• Interest expense is amortized using effective interest method
  
  

✔ Leases (IFRS 16 / ASC 842):

• Operating Leases – No asset recorded, expense recognized over time
  
  

• Finance Leases – Lessee records both asset & liability
  
  

✔ Contingent Liabilities:

• Probable & estimable → record as liability
  
  

• Possible but not certain → disclose in notes

📑 6. Equity Transactions: Dividends, Treasury Stock, and Stock Splits

✔ Dividends:

• Declared → Creates liability
  
  

• Paid → Reduces cash & retained earnings
  
  

✔ Treasury Stock:

• Repurchased shares reduce equity
  
  

• Can be reissued or retired
  
  

✔ Stock Splits & Reverse Splits:

• Stock Split (e.g., 2-for-1) → Increases shares, decreases price
  
  

• Reverse Split (e.g., 1-for-5) → Decreases shares, increases price
  
  

💡 Stock splits do not change total equity; they just adjust share count & price.

💰 7. Deferred Taxes (Temporary Differences)

✔ Deferred Tax Assets (DTA) – Overpaid taxes today → reduce future tax
✔ Deferred Tax Liabilities (DTL) – Underpaid taxes today → increase future tax

💡 Common temporary differences come from depreciation methods and revenue recognition timing.

📌 8. Cash Flow Statement Analysis

✔ Operating Activities: Cash flows from day-to-day business operations
✔ Investing Activities: Buying/selling assets & investments
✔ Financing Activities: Issuing debt, repurchasing stock, paying dividends

💡 Cash flow analysis helps determine a company's liquidity and financial health.

🎯 Final Takeaway

Mastering intermediate accounting means understanding financial statements, revenue recognition, inventory, depreciation, liabilities, equity transactions, taxes, and cash flow analysis.