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BU227 (27)
Chapter 2

Chapter 2 Investing & Financing Decisions, and Statement of FP

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Department
Business
Course
BU227
Professor
James Moore
Semester
Fall

Description
BU227 LectureCh 2 InvestingFinancing DecisionsStatement of FP 2013 Overview of Accounting ConceptsThe key accounting concepts are part of a theoretical framework that prescribes the nature function and limitations of both financial accounting and financial statements Primary objective of external financial reporting to provide useful economic information about a business to help external parties make financial decisions To achieve this objective financial reports must enable decision makers not only to assess the amounts timing and uncertainty of future cash flows but also to understand the financial value of both the assets owned and claims against those assets liabilities and equity Decision makers the users of accounting information investors creditors experts A companys audited financial statements help users to understand how well the company has implemented its strategy in the past and to evaluate future growth potentialUsers are most interested in information to assist in projecting the future cash flows of a businesso Creditors must assess an entitys ability to pay interest over time and repay the principalo Investors want to assess the entitys ability to pay dividends in the futureevaluate how successful the company may be so they can sell their shares to make a profitFundamental to be useful 1 Relevancy makes a difference in a decision predictive value feedbackconfirmatory vlue 2 Faithful representation complete neutral reasonable free from errorbiasEnhancing Degrees of usefulness 1 Comparability across companies 2 Verifiability similar results under independent measures 3 Timeliness information must be available before it loses its usefulness 4 Understandability allows reasonably informed users to see the significance of the informationAccounting AssumptionsSeparate entity assumption business transactions are separate from the transactions of ownernecessary for a proper evaluation of the entitys results of operations and its financial positionUnitofmeasure assumption accounting information should be measured and reported in the national monetary unit even if the entity has business operations in many countries Accountants assume that the unit of measure has a stable value over time although prices of goods usually increase over timeAllows for meaningful aggregation of financial amountsContinuity assumption businesses are assumed to continue to operate into the foreseeable future to carry out its objectives and meet contractual commitmentsViolation of this means that assetsliabilities should be valued and reported on the statement of FP as if the company were to be liquidated discontinues all assets sold and debts paid Basic Accounting PrincipleUnder the cost principle all financial statement assets are recorded on the date of the transaction at the historical cashequivalent cost cash paidcurrent monetary value of all noncash considerations any assets privileges or rights also given in the exchange Advantage many assets are acquired according to legal contracts that clearly state the acquisition costThus in most cases cost is relatively easy to determine and can be verified Disadvantage subsequent to the date of acquisition the continued reporting of historical cost on the statement of FP does not reflect any change in market value usually because market value is a less verifiable measure than historical cost1
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