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BASIC FINANCIAL STATEMENTS

Chapter 2. BASIC FINANCIAL STATEMENTS. Previous Lecture. Accounting information is for decision maker which enable them to make economic activities. Types of business Types of organizations & theirs plus & minus Business Stakeholders Internal : Owners, managers, employees

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BASIC FINANCIAL STATEMENTS

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  1. Chapter2 BASIC FINANCIAL STATEMENTS

  2. Previous Lecture • Accounting information is for decision maker which enable them to make economic activities. • Types of business • Types of organizations & theirs plus & minus • Business Stakeholders Internal : Owners, managers, employees External: Customers, creditors, government

  3. Types of Accounting Information Financial, Managerial, Tax • Types of BusinessActivities Financing, Investing, Operating • Types of Financial Statement Statement of earnings Statement of retained earnings Balance sheet Cash flow statement

  4. Conceptual Framework of Accounting • Guides choices about • what to present in financial statements • decisions about alternative ways of reporting economic events • the selection of appropriate ways of communicating such information Chapter 2

  5. Conceptual Framework of Accounting • Four main sections • Objective of financial reporting • Qualitative characteristics of accounting information • Elements of financial statements • Recognition and measurement criteria Chapter 2

  6. Objective of Financial Reporting • To provide information that is useful to individuals who are making investment and credit decisions Chapter 2

  7. Qualitative Characteristics • To be useful for decision-making, information should have these qualitative characteristics • Relevance • Faithful representation • Comparability • Understandability Chapter 2

  8. Qualitative Characteristics of Accounting Information • Relevance • Information is relevant if it makes a difference in a decision. It is said to have predictive value, feedback value, and timeliness • Faithful representation • Information should reflect economic reality. It must be verifiable,neutral, and complete Chapter 2

  9. Qualitative Characteristics of Accounting Information • Comparability • Accounting information can be compared when companies with similar circumstances use the same accounting standards consistently from year to year • Understandability • Average user is assumed to understand the accounting information Chapter 2

  10. Elements of Financial Statements • Assets • Liabilities • Equity • Revenues • Expenses Chapter 2

  11. Recognition and Measurement Criteria • Accountants need detailed criteria to help them decide when and where an item is included in the financial statements. • Includes • Assumptions • Principles • Constraints Chapter 2

  12. Assumptions • Monetary unit • Economic entity • Time period • Going concern Chapter 2

  13. Monetary Unit Assumption • Only those things that can be expressed in terms of money should be included in the accounting records • Important presumption is that the monetary unit remains stable over time and the effects of inflation are nominal Chapter 2

  14. Economic Entity • Every economic entity can be separately identified and accounted for • Personal items relating to shareholders are not accounted for by the business Chapter 2

  15. Time Period Assumption • The economic life of a business can be divided into artificial time periods Chapter 2

  16. Going Concern Assumption • The business will continue operating in the foreseeable future • Justifies the use of the cost principle Chapter 2

  17. Companies prepare interim financial statements and annual financial statements Introduction to Financial Statements 2000 X

  18. Three primary financial statements. Balance Sheet Income Statement Statement of Cash Flows We will use a corporation to describe these statements. Introduction to Financial Statements

  19. Describes where the enterprise stands at a specific date. Balance Sheet Income Statement Statement of Cash Flows Introduction to Financial Statements

  20. Balance Sheet Depicts the revenue and expenses for a designated period of time. Income Statement Statement of Cash Flows Introduction to Financial Statements

  21. Introduction to Financial Statements Revenues result in positive cash flow. Expenses result in negative cash flow. Either in the past, present, or future.

  22. Balance Sheet Net income (or net loss) is simply the difference between revenues and expenses. Income Statement Statement of Cash Flows Introduction to Financial Statements

  23. Balance Sheet Income Statement Statement of Cash Flows Depicts the ways cash has changed during a designated period of time. Introduction to Financial Statements

  24. The Concept of the Business Entity A business entity is separate from the personal affairs of its owner. Vagabond Travel Agency

  25. A Starting Point: Statement of Financial Position

  26. Assets Assets are economic resources that are owned by the business and are expected to provide positive future cash flows.

  27. Assets Cost Principle These accounting principles support cost as the basis for asset valuation. Going-Concern Assumption Stable-Dollar Assumption Objectivity Principle

  28. Liabilities Liabilities are debts that represent negative future cash flows for the enterprise.

  29. Owners’ Equity Owners’ equity represents the owner’s claim to the assets of the business.

  30. Payments to Owners • Business Losses • Owners’ Investments • Business Earnings Owners’ Equity Changes in Owners’ Equity

  31. End of Todays session

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