chap002 - Investing and Financing Decisions Investing and...

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Unformatted text preview: Investing and Financing Decisions Investing and Financing Decisions and the Balance Sheet and the Balance Sheet Chapter 2 2 2-2 Understanding the Business To understand amounts appearing on a companys balance sheet we need to answer these questions: What business activities cause changes in the balance sheet? How do specific activities affect each balance? How do companies keep track of balance sheet amounts? 3 2-3 The Conceptual Framework Qualitative Characteristics Relevancy Reliability Comparability Consistency Elements of Statements Asset Liability Stockholders Equity Revenue Expense Gain Loss Objective of Financial Reporting To provide useful economic information to external users for decision making and for assessing future cash flows. 4 2-4 Elements of Statements Asset Liability Stockholders Equity Revenue Expense Gain Loss The Conceptual Framework Qualitative Characteristics Relevancy Reliability Comparability Consistency Objective of Financial Reporting To provide useful economic information to external users for decision making and for assessing future cash flows. Primary Characteristics Relevancy: predictive value, feedback value, and timeliness. Reliability: verifiability, representational faithfulness, and neutrality. Secondary Characteristics Comparability: across companies. Consistency: over time. 5 2-5 Qualitative Characteristics Relevancy Reliability Comparable Consistent The Conceptual Framework Elements of Statements Asset Liability Stockholders Equity Revenue Expense Gain Loss Objective of Financial Reporting To provide useful economic information to external users for decision making and for assessing future cash flows. Asset: economic resource with probable future benefits. Liability: probable future sacrifices of economic resources. Stockholders Equity: financing provided by owners and operations. Revenue: increase in assets or settlement of liabilities from ongoing operations. Expense: decrease in assets or increase in liabilities from ongoing operations. Gain: increase in assets or settlement of liabilities from peripheral activities. Loss: decrease in assets or increase in liabilities from peripheral activities. 6 2-6 The Conceptual Framework Assumptions Separate entity: Activities of the business are separate from activities of owners. Continuity: The entity will not go out of business in the near future. Unit-of-measure: Accounting measurements will be in the national monetary unit (i.e., $ in the U.S.). Principle Historical cost: Cash equivalent cost given up is the basis for the initial recording of elements. 7 2-7 Nature of Business Transactions External events External events : exchanges of assets and liabilities between the business and one or more other parties....
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chap002 - Investing and Financing Decisions Investing and...

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