Accounting Fundamentals

What this video covers

• The three levels of financial statement assurance: full audit (reasonable assurance with formal opinion), review (limited assurance), and compilation (zero assurance, data formatting only)
• When a certified public accountant (CPA) issues a formal opinion versus merely assembling data, and which clients rely on each level
• Generally Accepted Accounting Principles (GAAP): who establishes them (Financial Accounting Standards Board, FASB), who must follow them, and what an audit verifies
• The Sarbanes-Oxley Act of 2002 (SOX): what scandal prompted it, what it created (Public Company Accounting Oversight Board, PCAOB), and what the PCAOB does to auditors of public companies
• Cash basis accounting versus accrual basis accounting: revenue recognition timing, expense recognition timing, and which method public companies must use
• The matching principle: why expenses must be recognized in the same period as the revenue they generate, and how this creates a disconnect between reported income and cash position
• Why the statement of cash flows is essential even when the income statement looks strong, and how the exam uses this as a gotcha