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iii. Ultimately, all net income (loss) and dividends are reflected in retained earnings
on the balance sheet. The statement of retained earnings links the income
statement to the balance sheet by showing how net income (loss) and dividends
affect the retained earnings account.
1. Links balance sheet and income statement by showing the how net
income becomes retained earnings after dividends have all been paid.
2. Dividends are not an expense, and so they do not appear on the income
statement. Instead they are a distribution of the income of the business
to the shareholders.
5. Identify and explain the primary assumptions made in preparing financial statements. (p. 19)
a. The usefulness of accounting information is enhanced through the various assumptions
set forth in the conceptual framework for the methods, rules, and practices that
comprise generally accepted accounting principles (GAAP).
b. Important assumptions in the conceptual framework are:
i. Economic entity concept t The assumption that a single, identifiable, unit must
be accounted for in all situations.
ii. Cost principle t Assets are recorded at the cost to acquire them.
iii. Going concern t The assumption that an entity is not in the process of
liquidation and it will continue indefinitely.
iv. Monetary unit t The yardstick used to measure amounts in financial statements,
v. Time period t Artificial segment on the calendar, used as the basis for preparing
6. Describe the various roles of accountants in organizations (p.21)
a. Accountants play an important role in the measurement, analysis, and communication
of financial information and are employed by business, non-business, and governmental
b. Public accounting also employs many accountants that provide auditing, tax, and
management consulting services.
x Financial Statements
o Balance sheet
Shows obligations due in near future, and what assets can satisfy them.
o Income statement
Shows revenues and expenses for a period of time.
o Statement of cash flows
Shows where cash came from and how it was used during a period.
x Objectives of financial reporting
o Primary objective: Provide information for decision making.
Provide info for decision making.