Accounting Chapter 2
Tells what obligations will be due in the near future and what
assets will be available to satisfy them.
Tells the revenues and expenses for a period of time.
Statement of cash flow
Tells where cash came from and how it was used during the period.
When preparing financial statements, accountants consider,
The objectives of financial reporting
The characteristics that make accounting information useful
The most useful way to display the information found in the
balance sheet, the income statement, and statement of cash
Objectives of Financial Reporting
The Primary Objective: Provide Information for Decision
Supporting Objective: Reflect Prospective Cash Receipts to
Investors and Creditors
Provide information to help present and potential creditors
and investors “in predicting the ability of the entity to earn
income and generate cash flows in the future to meet its
obligations and to generate a return in investment.”
Supporting Objective: Reflect the Enterprise’s Resources and
Claims to its Resource
How much a company has invested in assets like property
and equipment What claims to these resources (liabilities and shareholders
Qualitative Characteristics of Accounting
Understandability: The quality of accounting information that
makes it comprehensible to those willing to spend the necessary
Relevance: The capacity of information to make a difference in a
Reliability: The quality that makes accounting information
dependable in representing the events that it purports to represent.
Verifiability Free from error
Representational Faithfulness When information corresponds to
an actual even.
Neutrality When info is not slanted to portray a companies
position in a better or worse light
Conservatism Info that is uncertain should be represented so that
the assets and revenues are not overstated and liabilities and
expenses are not understated
Comparability and Consistency: For accounting information, the
quality that allows a user to analyze two or more companies and
look for similarities and differences.
Depreciation (amortization): The process of allocating
the cost of a longterm tangible asset over its
Consistency: For accounting information, the quality that
allows a user to compare two or more accounting periods