{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

ch03 - Chapter 3 Financial Statements Cash Flows and Taxes...

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 3 Financial Statements, Cash Flows, and Taxes Learning Objectives 1. Discuss generally accepted accounting principles (GAAP) and their importance to the economy. 2. Explain the balance sheet identity and why a balance sheet must balance. 3. Describe how market-value balance sheets differ from book-value balance sheets. 4. Identify the basic equation for the income statement and the information it provides. 5. Understand the calculation of cash flows from operating, investing, and financing activities required in the statement of cash flows. 6. Explain how the four major financial statements discussed in this chapter are related. 7. Identify the cash flow to a firm’s investors using its financial statements. 8. Discuss the difference between average and marginal tax rates. I. Chapter Outline 3.1 Financial Statements and Accounting Principles A. Annual Reports The annual report is a vehicle by which management communicates with the firm’s shareholders and the general public. Page 1 of 16
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
The annual report has three sections—a financial summary related to the past year’s performance; information about the company, its products, and its activities; and audited financial statements, including historical financial data. B. Generally Accepted Accounting Principles (GAAP) The GAAP is accounting rules and standards that companies need to adhere to when they prepare financial statements and reports. GAAP is prepared by the Financial Accounting Standards Board (FASB) and is authorized by the SEC. C. Fundamental Accounting Principles The Assumption of Arm’s-Length Transaction Two parties involved in an economic transaction arrive at a decision independently and rationally. The Cost Principle The value of an asset that is recorded on a company’s books reflects its historical cost. The Realization Principle —Revenue is recognized when transaction is completed, while cash may not be collected until a later time. The Matching Principle —Expenses related to generating any revenue are matched. The Going Concern Assumption —It is assumed that a company will continue to operate for the foreseeable future. D. International GAAP The SEC is reviewing proposals for U.S. corporations to adopt IASB for financial reporting by as early as 2015. Page 2 of 16
Image of page 2
3.2 The Balance Sheet A. The balance sheet identifies all the assets and liabilities of a firm at a point in time. The left-hand side of the balance sheet shows all the assets that the firm owns and uses to generate revenues. The right-hand side represents the liabilities of the firm. In addition to the amount borrowed from suppliers and other creditors, the balance sheet also lists the capital raised from its shareholders.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern