StudyGuideChap02 - CHAPTER 2 A Further Look at Financial...

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2-1 CHAPTER 2 A Further Look at Financial Statements Study Objectives 1. Explain the meaning of generally accepted accounting principles and describe the basic objective of financial reporting. 2. Discuss the qualitative characteristics of accounting information. 3. Identify the two constraints in accounting. 4. Identify sections of a classified balance sheet. 5. Identify and compute ratios for analyzing a company's profitability. 6. Explain the relationship between a retained earnings statement and a statement of stockholders' equity. 7. Identify and compute ratios for analyzing a company's liquidity and solvency using a balance sheet. 8. Identify and compute ratios for analyzing a company’s liquidity and solvency using a statement of cash flows.
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2-2 Study Objective 1 - Explain the Meaning of Generally Accepted Accounting Principles and Describe the Basis Objective of Financial Reporting The basic objective for financial reporting is to provide information useful for decision making . Generally Accepted Accounting Principles (GAAP) are the agreed-upon accounting rules which most U. S. companies use in preparing financial statements. GAAP are promulgated by the Financial Accounting Standards Board . Study Objective 2 - Discuss the Qualitative Characteristics of Accounting Informatio n In order to be useful, financial information should possess the following qualitative characteristics : Relevance - if information has the ability to make a difference in a decision scenario, it is relevant. Accounting information is also relevant to business decisions because it confirms or corrects prior expectations. Financial statements both help predict future events and confirm or correct prior expectations about the financial health of the company. In order to be relevant accounting information must be timely . Reliability - information is reliable if it can be depended on. To be reliable information must be: ± verifiable --free from error and bias, ± faithful representative --factual, and ± neutral --cannot be selected, prepared, or presented to favor one set of users over another. Comparability and Consistency ± comparability --when different firms use the same accounting principles. ± consistency --when firms use the same accounting principles and methods from year to year. Study Objective 3 - Identify the Two Constraints in Accounting Constraints allow a company to modify generally accepted accounting principles without reducing the usefulness of the information content. These constraints are: Materiality - an item is material if it can influence the decision of an investor or a creditor. An item is immaterial if inclusion has no impact on the decision. Conservatism - allows the accountant to choose the accounting method that will be the least likely to overstate assets and income. Many times items in inventory become obsolete or damaged. In this instance inventory items should be listed at market value if it is lower than cost. Study Objective 4 - Identify the Sections of a Classified Balance Sheet
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This note was uploaded on 04/04/2010 for the course ACCOUTING ACCOUNTING taught by Professor Paigee.gee during the Fall '07 term at N.C. State.

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StudyGuideChap02 - CHAPTER 2 A Further Look at Financial...

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