Chapter 2 Lecture - CH AP TER 2 C LAS S N OTES FIN AN CIAL...

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CHAPTER 2 CLASS NOTES FINANCIAL STATEMENTS AND THE ANNUAL REPORT The Objective of Financial Reporting is to provide information for decision-making by some user. Remember that the information is provided to different users for different purposes and in different amounts of detail. However, all the information comes from the same accounting system within the business and is the culmination of recording all the same accounting transactions. The schematic below illustrates this: Events-- Transactions---- Accounting System--- Financial Reporting The exact nature of the information provided to a specific user will depend on the user’s relationship to the company, e.g. owner, creditor, supplier, etc. Other important considerations in preparing financial statements are: 1. Is the information understandable with full disclosure ? 2. Is the information of relevance ? 3. Is the information reliable? 4. Is the information comparable so the reader can see or determine the similarities or differences to other entities? 5. Is the information consistent so that the reader can compare different time periods of the same entity on the same basis so as establish a trend? 6. Is the information materially correct ? 7. Is the information presented on a conservative basis ? The time period for the financial statements that we have discussed earlier can be a month, quarter, or a year. The ending date of the time period is the date of the balance sheet date and the last day of the period for the other statements. Be careful that you clearly understand the period of time covered by the financial statements in any problem that you complete for homework or on an examination The Classified Balance Sheet , which is the primary format used in business, simply means that we break down each of three groupings ( assets, liabilities, equity) into specific categories or finer detail and then classify them as to when they will be converted to or be paid in cash. For example, will specific assets be converted to cash in the current period (less than one year) or whether they will be non current ( in excess of one year) or when will specific liabilities be paid---current, if to be paid within one year or non current, if to be paid after one year. Equity accounts are always considered non current. -2-
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There is a certain order to listing specific accounts within the current and noncurrent classification. Current assets are listed in the order in which the business expects to be able to convert them into cash or use them up within one year from the balance sheet date. The order is cash, marketable securities, accounts receivable, inventories, and prepayments . We will review each of these in more detail in Chapters5, 6 and 7. Non current assets are those the company does not intend to convert within one year from the balance sheet date in Chapter 8. These will be investments, property and equipment, and intangible assets such as patents, copyrights, etc. Depreciation is an important concept
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This note was uploaded on 09/23/2008 for the course ACCT 151 taught by Professor Largay during the Fall '07 term at Lehigh University .

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Chapter 2 Lecture - CH AP TER 2 C LAS S N OTES FIN AN CIAL...

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