Textbook Notes (363,144)
Canada (158,220)
Accounting (526)
ACC 100 (209)
Else Grech (70)
Chapter 2

Chapter 2

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Ryerson University
ACC 100
Else Grech

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 loan • Provide info that will allow users to make decisions about the future cash flows of a company Supporting objective: reflect the enterprise’s 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 pg 54) www.notesolution.com • Reliability is the quality that makes accounting information dependable in representing the events that it claims to represent • It has 4 characteristics o Verifiability is when we can make sure that it is free from error o Representational faithfulness is when it match to an actual event o Neutrality is when company’s in neutral condition and not hiding to show its actual financial position whether its better or worse o Conservatism is when information that are unclear and should be presented so that assets and revenues are not exaggerated and liabilities and expenses are not minimize • 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 www.notesolution.com • Current assets are cash and other assets that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of a business or within 1 year if the operating
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