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Reimersppt_ch02 - Chapter 2 Preparing Financial Statements...

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Chapter 2 Preparing Financial Statements and Analyzing Business Transactions
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Financial Reporting The Process of preparing and presenting financial information, to include: The four financial statements: Income Statement Statement of Changes in Shareholders’ Equity Balance Sheet Statement of Cash Flows
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The Financial Accounting Standards Board Establishes the guidelines for financial statements. These broad principles are referred to as Generally Accepted Accounting Principles. The goal is to increase the quality and usefulness of the information
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It takes good information To make good decisions
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Is the Information Useful? It must be capable of making a difference in the decision making process
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Qualities of Accounting Information Information is only good if it is: Relevant Reliable Comparable Consistent
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Relevant Information is…. Important to the company Has the potential to influence decisions Provided on a timely basis “I hear that our neighbor is selling their land” “We would be able to expand our operations…” “Someone else bought it this morning “No longer relevant”
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Reliable Information is…. Neutral Verifiable And independent of the specific person who prepared it “Is this information accurate and free of bias?”
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Comparable Information Each company has prepared its information using the same set of rules Allows meaningful comparisons of two companies “Are we doing better or worse than they are? Why?
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Consistent Information The company uses the same set of rules from year to year Allows meaningful comparisons of a company’s performance at two points in time “How are we doing this year versus last year?
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Assumptions and Principles underlying financial reporting Assumptions: Separate Entity Assumption Monetary Unit Assumption Time-period Assumption Going-Concern Assumption Principles: Historical Cost Principle Revenue Recognition Principle Matching Principle
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