Study
2
Financial Statements and Accounting Concepts/Principles
Financial statements are the product of the financial accounting process. They are the means of communicating economic information about the entity to individuals who want to make decisions and informed judgments about the entity’s financial position, results of operations, and cash flows. Although each of the four principal financial statements has a unique purpose, they are interrelated, and all must be considered in order to get a complete financial picture of the reporting entity. Users cannot make meaningful interpretations of financial statement data without understanding the concepts and principles that relate to the entire financial accounting process. It is also important for users to understand that these concepts and principles are broad in nature; they do not constitute an inflexible set of rules, but instead serve as guidelines for the development of sound financial reporting practices.
LE ARNING O BJE CT I VE S ( LO )
After studying this chapter you should understand
1. What transactions are. 2. The kind of information reported in each financial statement and how financial statements are related to each other.
3. The meaning and usefulness of the accounting equation. 4. The meaning of each of the captions on the financial statements illustrated in this chapter. 5. The broad, generally accepted concepts and principles that apply to the accounting process. 6. Why investors must carefully consider cash flow information in conjunction with accrual accounting results.
7. Several limitations of financial statements. 8. What a corporation’s annual report is and why it is issued. 9. Business practices related to organizing a business, fiscal year, par value, and parent– subsidiary corporations.
Chapter 2
Financial Statements and Accounting Concepts/ Principles
33
Financial Statements
From Transactions to Financial Statements
An entity’s financial statements are the
Financial Statements and Accounting Concepts/Principles
Financial statements are the product of the financial accounting process. They are the means of communicating economic information about the entity to individuals who want to make decisions and informed judgments about the entity’s financial position, results of operations, and cash flows. Although each of the four principal financial statements has a unique purpose, they are interrelated, and all must be considered in order to get a complete financial picture of the reporting entity. Users cannot make meaningful interpretations of financial statement data without understanding the concepts and principles that relate to the entire financial accounting process. It is also important for users to understand that these concepts and principles are broad in nature; they do not constitute an inflexible set of rules, but instead serve as guidelines for the development of sound financial reporting practices.
LE ARNING O BJE CT I VE S ( LO )
After studying this chapter you should understand
1. What transactions are. 2. The kind of information reported in each financial statement and how financial statements are related to each other.
3. The meaning and usefulness of the accounting equation. 4. The meaning of each of the captions on the financial statements illustrated in this chapter. 5. The broad, generally accepted concepts and principles that apply to the accounting process. 6. Why investors must carefully consider cash flow information in conjunction with accrual accounting results.
7. Several limitations of financial statements. 8. What a corporation’s annual report is and why it is issued. 9. Business practices related to organizing a business, fiscal year, par value, and parent– subsidiary corporations.
Chapter 2
Financial Statements and Accounting Concepts/ Principles
33
Financial Statements
From Transactions to Financial Statements
An entity’s financial statements are the