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Chapter 2 Review - CHAPTER 2 INVESTING AND FINANCING...

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CHAPTER 2 - INVESTING AND FINANCING DECISIONS AND THE BALANCE SHEET I mentioned to you during the first class that the objective of this course was your understanding of financial statements and how they are used to make financial and business decisions. I also mentioned that the objective was not to teach you to become bookkeepers, but that it would be necessary to delve into the details behind the statements so you would have a thorough understanding of financial statements and how to interpret and use them in decision making. With Chapter 2, we begin to do both by answering the following questions: Business Background What business activities cause changes in the balance sheet amounts from one period to another? How do specific business activities affect each of the balance sheet amounts? How do companies keep track of the balance sheet amounts? After we answer these questions we should be able to: Analyze and predict the effects of business decisions on a company’s financial statements Use the financial statements to identify and evaluate the activities managers engaged in during the past period. We will focus on two activities in this chapter: Investing activities (asset acquisition) Related financing activities o Borrowing from creditors o Selling stock to investors And we will focus only on those activities that affect the balance sheet . The Conceptual Framework The Primary Objectives of External Reporting To provide useful economic information about a business To help external parties make sound financial decisions To help external parties assess future cash flows o Meet debt obligations o Pay dividends Chapter 2 Review Notes Acc 311 - Page 1
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External Parties Primarily o creditors and o investors Also o Suppliers o Customers o Experts who provide financial advice Conceptual Framework - Qualitative The reporting of financial information is organized and governed by five concepts, some of which we discussed in Chapter 1. Qualitative Characteristics Elements Assumptions Principles Constraints To be useful, financial information should possess the following Q ualitative C haracteristics: Relevant - has predictive value, allows assessment of prior expectations and is timely Reliable - can be verified independently, represents reality and is unbiased Comparable across companies Consistent over time Conceptual Framework - Assumptions Underlying assumptions of accounting help the decision maker to understand what accounting information purports as well as the inherent limitations of that information. Recall assumptions noted earlier in the text: Separate-entity assumption - "business" transactions are separate from “owner” transactions.
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