Financial+chapter 2

Financial+chapter 2 - Chapter 2 - Financial Statements...

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Chapter 2 - Financial Statements Learning Objectives: After studying Chapter 2, you should Know and identify the four basic financial statements Understand the accounting equation Know the classifications of the accounts on the Balance Sheet Understand how the Balance Sheet accounts carry over from one period to the next Understand the classifications on a simple Income Statement Understand the differences between accrual and cash-basis accounting Know the four basic components of the Statement of Retained Earnings Be able to discuss how income flows through the statements to the Balance Sheet to bring it into balance at the end of the period Know the order in which the statements must be prepared Understand the purpose of the Statement of Cash Flows Understand the categories found in the Statement of Cash Flows According to both GAAP and IFRS, every company has to present four financial statements at least once a year. These are: 1) Balance Sheet 2) Income Statement 3) Statement of Retained Earnings 4) Statements of Cash Flows The first three of these statements work together in that they are dependent on each other. The Statement of Cash Flows stands alone, so we will cover it separately. These statements are typically prepared at the end of a period—such as the end of the month, quarter, or year— however, they could be prepared at any time. Balance Sheet: The Balance Sheet is the backbone of accounting. This financial statement ties the company’s records together and gives readers outside the company a picture of its status. The Balance Sheet is based on the accounting equation: Assets = Liabilities + Equity You can think of assets as what the business owns, liabilities are what the business owes, and equity is a representation of the owners’ interest in the assets. Think of the left side of this equation, the assets, as a listing of all the things the business owns. This listing includes all the property of the business. For all of the things owned by a business, the company either owns the asset “ outright ” (meaning no debt is associated with these assets) or owes something (has a debt) on them. The amounts that you owe are called your liabilities and the portion of the assets that you own outright is your equity. Another way to look at the accounting equation is to list everything the company owns (its assets) and subtract the amount owed to others (its liabilities). The result is the stockholder’s equity, or the stockholders’ interest, in the company’s assets. The stockholders’ equity is the
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portion of the assets that the company owns outright. Looking at the accounting equation in this manner changes the equation as follows: Assets – Liabilities = Equity Surprisingly enough, all of accounting is based on this simple formula, which is much more powerful than it seems at first glance. The accounting system is based on the concept of “
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This note was uploaded on 01/06/2012 for the course BUS-A 100 taught by Professor Tiller during the Fall '08 term at Indiana.

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Financial+chapter 2 - Chapter 2 - Financial Statements...

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