ch. 2 - Chapter 2 Study Objectives After studying this...

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Financial Accounting - Chapter 2 1 Chapter 2 - Study Objectives After studying this chapter, you should be able to: 1. Explain the meaning of generally accepted accounting principles  (GAAP) and describe the basic objective of financial reporting. 1. Discuss the qualitative characteristics of accounting information. 1. Identify the two constraints in accounting. 1. Identify the sections of a classified balance sheet. 1. Identify and compute ratios analyzing a company’s profitability. 1. Explain the relationship between a retained earnings statement and a  statement of stockholders’ equity. 1. Identify and compute ratios for analyzing a company’s liquidity and  solvency using a balance sheet. 2. Identify and compute ratios for analyzing a company’s liquidity and  solvency using a statement of cash flows.
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Financial Accounting - Chapter 2 2 Objectives of Financial  Reporting Financial reporting  is the term used to describe all the financial  information presented by a company - both in its financial  statements (F/S) and in the additional disclosures.  The basic  objectives of financial reporting is to provide information that is: Useful to those making investment and credit decisions. Useful in assessing future cash flows. Useful about the enterprise’s resources, claims to resources,  and changes in them. Note:  These objectives are directed at persons with a reasonable  understanding of business and economic activities.
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Financial Accounting - Chapter 2 3 The Setting of Accounting  Standards Generally Accepted Accounting Principles  (GAAP)  represents the  consensus view, at a particular point in time, concerning the  appropriate concepts and standards to apply in financial accounting.   The following issues are resolved by reference to GAAP: How should accounting information be recorded? What information should be disclosed? How should that information be disclosed? What financial statements should be prepared? Note:  Accounting standards are generally set by the accounting profession  itself through its  Financial Accounting Standards Board (FASB).   However, the  Securities and Exchange Commission (SEC)  has the  legal authority to prescribe accounting standards.
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Financial Accounting - Chapter 2 4 Qualitative Characteristics of  Accounting Information In order to be useful and understandable, financial  information should possess the following primary  qualitative characteristics: Relevance -  the information is capable of making a  difference in a decision.  It can help  predict  future events,  provides feedback  about prior expectation, and it is  available in  time  to influence a decision.
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