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Unformatted text preview: Ferris-Wallace Book Chapter 2 From Accounting Events to Financial Statements Learning Objectives By the time you complete this chapter you should be able to: • Understand why the balance sheet equation must balance. • Explain the accounting meaning behind the terms asset, liability, shareholders’ equity, revenue, expense and matching. • Understand how accounting events affect the balance sheet equation. • Prepare financial statements from accounting events. • Use selected financial ratios to evaluate a company’s financial performance. • Use the balance sheet equation to understand the managerial motives for selecting between alternative accounting methods. Where have we been? Chapter 1 examined why individuals use accounting information when making financial decisions and how this information can be made more valuable through the development and use of accounting standards. The chapter also examined the demand for and the supply of capital and how accounting information can help make capital markets efficient. Finally, the chapter examined the conflicts of interest that may arise between capital providers and business managers and how accounting information can be used to attenuate those conflicts. Where are we? In this chapter we examine the balance sheet equation and how financial statements are derived from a set of accounting events that affect a business. We also investigate how to use financial statements to evaluate a firm’s performance and to understand the managerial motives for selecting between alternative accounting methods. Where are we going? Chapter 3 examines the various components of the income statement and how cash flow statements can be derived from an income statement and a set of balance sheets. The chapter also examines the alternative ways that investment professionals define and measure earnings and cash flows when they evaluate the financial performance of a business. 2-1 Ferris-Wallace Book Chapter Outline • The Balance Sheet Equation o Defining Some Accounting Terms • Preparing Financial Statements from Accounting Events o A Case Study: The Russian River Valley Winery o Projected Business Events o Preparing the Basic Financial Statements o The Articulation of the Basic Financial Statements o Accounting Policy Decisions at the Russian River Valley Winery • Evaluating Business Performance and Making Financial Decisions o Evaluating Firm Profitability o Return on Equity Analysis o Evaluating Financial Risk • Managerial Discretion and Accounting Methods o Operating Revenues at B.J.’s Wholesale Club o Operating Expenses at America Online • Review Problem • Summary • Appendix: The Technical Language of Accounting – The Debit and Credit Paradigm The Balance Sheet Equation Graduation from a university is an exciting time in life. Graduates usually say farewell to old friends and look to life’s next set of challenges. This phase of life is likely to bring added responsibilities including a job and possibly a family. It may even involve to bring added responsibilities including a job and possibly a family....
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- Spring '11
- Balance Sheet, Generally Accepted Accounting Principles, Kate Miller, Russian River Valley Winery