PHASE 2 – Investing and Financing Decisions and the "balance sheet"

CHAPTER 2 – Investing and Financing Decisions and the "balance sheet"

I. THE PURPOSE OF FINANCIAL REVEALING, THE ASPECTS OF THE BALANCE LINEN, AND THE RELATED KEY ACCOUNTING ASSUMPTIONS AND PRINCIPLES. A. Primary aim of financial revealing

1 . To supply useful monetary information about a company to help investors and collectors make great financial decisions. a. Decision makers are expected to have a sensible understanding of accounting concepts and procedures. m. Decision producers need to be capable to use economic information to help these groups predict foreseeable future cash flows related to investing and financing.

B. Components of the Balance Piece

1 . "balance sheet" elements present the basic accounting equation (A = M + SE).

a. Resources: economic solutions with possible future benefits owned by entity resulting from past ventures.

1 . Listed on the balance sheet inside the order of liquidity.

2 . Current property are assets that will be applied or changed into cash inside one year.

m. Liabilities: potential debts or perhaps obligations from the company that result from previous transactions, which will be paid with assets or perhaps services.

1 ) Listed overall sheet in the order of maturity schedules.

2 . Current liabilities will be obligations that is to be paid in cash or perhaps other current assets or satisfied by giving cash, products, or companies within 12 months.

c. Stockholders equity: the owners' left over interest in net assets (assets minus liabilities).

Two categories:

1 . Added capital (Stock)

Assets (usually cash) given by the owners in exchange intended for ownership installment payments on your Retained revenue

a) The cumulative earnings which are not distributed towards the owners and they are reinvested in the business. b) Improved by net income and reduced by declared dividends. Categorized Balance Sheet accounts:

1 . RESOURCES:

a. Current resources:

1 . Money

2 . Valuable securities

3. Receivables

some. Inventory

your five. Supplies

6th. Prepaid expenditures

n. Property, Plant, and Tools

c. Intangibles

d. Long lasting investments

installment payments on your LIABILITIES:

a. Current financial obligations:

1 . Payables

2 . " Unearned”

b. Long lasting liabilities

three or more. STOCKHOLDERS' FAIRNESS

a. Prevalent Stock, Recommended Stock

n. Retained Income

C. Key Accounting Presumptions and Guidelines

1 . Fundamental assumptions of accounting ensure that the decision maker to understand what accounting data reports in addition to the inherent limits.

a. Separate-entity assumption – " business” deals are individual from " owner” ventures.

b. Unit-of-measure assumption – accounting data will be scored and reported in the countrywide monetary product of that organization.

c. Continuity (going-concern) assumption – a company is anticipated to continue businesses in the foreseeable future without forced liquidation.

d. Time frame assumption

installment payments on your There are 4 basic accounting principles. The first directly relates to the balance sheet:

a. Historical Expense Principle: The historical price principle declares that the cash (or cash-equivalent cost) needs to be used to at first record economical statement factors. This famous cost quantity is tested on the initial transaction particular date and does not typically reflect their market value changes.

n. Revenue Identification Principle

c. Matching Rule

d. Complete Disclosure Theory

D. Leading Principles to get Communicating Beneficial Information

1 ) Information should be reliable to be useful: it must be accurate, impartial, and verifiable.

2 . Details should be consistent within a organization so that it can be looked at over time. This requires similar accounting methods to be applied over time.

three or more. Information ought to be comparable: identical information enables comparisons throughout business since similar accounting methods had been applied.

four. All materials amounts should be disclosed. Material...

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