AFM101 Chapter Notes - Chapter 4: Trial Balance, Financial Statement, Retained Earnings
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AFM101 Full Course Notes
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Chapter 4: adjustments, financial statements, and the quality of earnings. Financial statements released only after management and external auditors make many critical evaluations. Management: ensure correct amounts on statement of financial position and income statement, require assumptions, estimations, judgements about timing of revenue, expense recognition, values for assets and liabilities. Auditors: assess strength of controls established by management, safeguard assets, ensure accuracy of financial records, evaluate appropriateness of estimates and accounting principles used by management in determining revenues & expenses. Expectation: revenues and expenses reported in proper period, based on the revenue principle and matching process revenues recorded when earned, expenses recorded when incurred, regardless of when cash is received or paid. Quality of financial info by judging how prudent (cid:373)a(cid:374)agers" esti(cid:373)ates a(cid:374)d judge(cid:373)e(cid:374)ts are (choices that do not overstate assets/revenues or understate liabilities/expenses); prudent estimates and judgements: believed to produce info of higher quality.