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august_29_slides_chap_two

august_29_slides_chap_two - ORIE 350 Financial and...

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    ORIE 350 Financial and Managerial  Accounting Lecture #2 Part 2 August 29, 2006
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    Chapter 2 What information must be disclosed, and how? What steps are taken to ensure that accounting information is useful? How is a balance sheet classified?
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    GAAP GAAP means Generally Acceptable Accounting Principles. We must follow them. GAAP standards are under continual review, and a compendium of changes and standard practices is published annually. GAAP standards are formulated by the Financial Accounting Standards Board (FASB), an independent entity in the USA. Well, political pressure still rears its ugly head at times.
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    Accounting Information 1. Relevance - Accounting information must be relevant. That is, it must potentially influence decisions made today. For example, if a company made an error in its 2004 annual report, it would be required to revise that report, as that would affect its financial standing today. If it were discovered today that errors were made in 1992, it really would not be relevant, and corrections would not be necessary.
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    Accounting Information 2. Reliability - The company must report data that are accurate and that can be relied upon to make financial decisions. Assets and liabilities must be stated at their correct values, and revenues and expenses must be accurate as well.
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    Accounting Information 3. Comparability - To compare income statements, use time periods of the same length. That is, compare two quarterly income statements. It is obviously silly to compare a quarterly financial statement to an annual one, etc. Also, if the business has any seasonality to it (and many businesses do), you should compare accounting periods from the same season. Businesses do not always use the calendar year, but may choose any 12-month period as its fiscal year .
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    Seasonality For example, ToysЯUs should compare its fourth quarter results from 2003 to the fourth quarter results from 2002 (which were $4870).
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