RelativeResourceManager9 - UNDERSTANDING FINANCIAL...

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UNDERSTANDING FINANCIAL STATEMENTS Maryanne M. Rouse, MBA, CPA University of South Florida Financial statements serve as both milestones and signposts. As milestones, financial statements help the reader assess the past financial performance and current financial condition of a proprietorship, partnership, or corporation. As signposts, financial statements provide information about the past and present that is useful in predicting future financial performance and condition. The three most frequently encountered and most widely used financial statements are the Balance Sheet, the Income Statement, and the Statement of Cash Flows. These three general- purpose financial statements are intended to provide information to shareholders, creditors, and other stakeholders about the financial position, operating results, and investing/financing activities of an organization. Financial statements reflect only past transactions and events. A transaction typically involves an exchange of resources between the business and other parties. Purchase of goods held for resale, either on open account or for cash, is an example of a transaction. BASES OF ACCOUNTING Although there are hybrid systems that combine elements of both, the two most widely used bases of accounting are the cash basis and the accrual basis. Cash Basis. Under the cash basis of accounting, revenue is recognized when cash is received and expenses are recognized when cash is disbursed. Many small businesses and most individuals use the cash basis of accounting when preparing financial statements and tax returns. A key reason for its popularity is that it is simple: any cash coming in is treated as revenue while any cash going out is treated as expense. The cash basis also allows individuals to shift (legally!) receipts and payments from one period to another to reduce taxable income. Since the timing of receipts and disbursements will influence reported profit (or taxable income), the cash basis doesn’t reflect true results of operations for a period of time or true financial position at a point in time . And, since timing of receipts and disbursements can distort reported information, many small businesses, as well as large corporations, use the accrual basis of accounting. Accrual Basis . Under the accrual basis of accounting, revenues are recognized when they are realized and expenses are matched against revenue. Realized. Revenue is realized when the earning process is virtually complete and the amount that will be collected is measurable and reasonably assured. Recognized. Revenue is recognized by making an entry in the financial records.
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Understanding Financial Statements B- 1 Matching. Insures that expenses are recognized in the same period as the revenue they helped generate. Important measurement as sumptions and concepts that underlie the preparation and
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RelativeResourceManager9 - UNDERSTANDING FINANCIAL...

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