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Chapter 2

ACC 100 Chapter Notes - Chapter 2: Asset, Financial Statement, Cash Flow

Course Code
ACC 100
Else Grech

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Chapter 2 – Financial statements and the annual report
Objectives of financial reporting
The primary objective: provide information for decision making
Main objective of financial reporting is to communicate information to authorize users of
the information to make informed decisions
Users include both management in a company (internal users) and others not involved in
the company (external users)
Since external users have no access to the detailed records of the business, they make
decisions based on financial statements prepared by management in a company
The purpose of financial reporting is to help the users reach their decisions in an
informed manner
Supporting objective: reflect prospective cash receipts to investors and creditors
Shareholders must decide whether if they should hold shares in a company or sell them,
bankers must decide if they should lend money or not, their decisions depend partly on
the financial statements information
Bankers are concerned about receiving the money that was lent and the interest on the
Provide info that will allow users to make decisions about the future cash flows of a
Supporting objective: reflect the enterprises resources and claims to its resources
Financial statements should reveal what resources the company has, what claims to these
resources there are and the effects of transactions and events that change these resources
and claims
What makes accounting information useful? Qualitative characteristics
Understandability means that financial information should be clear to those who holds a
reasonable understanding of business and economic activities and accounting and have a
enthusiasm to study the information with reasonable care
Relevance is the capacity of information to make a difference in a decision (example on
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Reliability is the quality that makes accounting information dependable in representing
the events that it claims to represent
It has 4 characteristics
oVerifiability is when we can make sure that it is free from error
oRepresentational faithfulness is when it match to an actual event
oNeutrality is when companys in neutral condition and not hiding to show its
actual financial position whether its better or worse
oConservatism is when information that are unclear and should be presented so
that assets and revenues are not exaggerated and liabilities and expenses are not
Comparability allows comparisons made between or among companies
Depreciation is the process of distributing the cost of a long-term tangible asset over its
useful life
Consistency means financial statements can be compared within a single company from
one accounting period to the next
Materiality means if an issue is large enough to influence the judgment of someone
relying on the information
Benefits versus cost means that benefits of accounting information should exceed the
costs of providing the information
Financial reporting: an international perspective
Primary objective of financial reporting is to provide information useful in making
economic decisions
The classified balance sheet
What are the parts of the balance sheet? Understanding the operating cycle
Operating cycle begins when cash is invested in inventory and ends when cash is
collected by the company from its customers
Current assets
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