Textbook Notes (362,815)
Canada (158,059)
Business (2,364)
BU227 (27)
Chapter 4

Chapter 4 Adjustments, Financial Statements, Quality of Earnings

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Wilfrid Laurier University
James Moore

BU227Ch 4 Adjustments Financial Statements Quality of Earnings 2013 ESTIMATING REVENUESEXPENSES AT YEARENDmay not need to know this it was under NestleFinancial statements are not distributed to users the day of completion Theyre released after managementexternal auditors make critical evaluations 1 Managers ensure that correct amounts are reported on Statement of FP and Income Statement2 Auditors must assess the controls by management to safeguard the assetsensure accuracy3 Auditors must evaluate the appropriateness of estimatesaccounting principles used in determining revenuesexpenses To detect errors external auditors allocate more testing to transactions most likely to be in errorHigh quality information is relevant important in the analysis timely and represents the substance of the underlying transactions faithfully complete neutral free from material errorPrudent choices that dont overstate assetsrevenues or understate liabilities and expensesADJUSTING REVENUESEXPENSESAccounting Cycle process used by entities to analyze and record transactions adjust the records at the end of the period prepare financial statements and prepare the records for the next cycle During accounting period external transactions are analyzedrecorded in general journal in chronological order journal entries and related accounts are updated in GL TaccountsAt periodend account balances are analyzed and adjusting journal entries are recorded for transactions that have a directmeasurable effect on the accounting entityPurpose of AdjustmentsAccounting systems record most recurring daily transactions particularly those involving cash But cash receiptspayments arent always in the period of the activities that create revenuesexpenses Solution to difference in timing is to record adjusting entries at the end of every accounting period 1 Revenues are recorded when earned the revenue principle 2 Expenses are recorded when incurred to generate revenue in that period the matching process 3 Assets are reported as the probable future benefits remaining at the end of the period 4 Liabilities are reported as the probable future sacrifices of assetsservices owed at periodendRecording all activities daily is costlytimeconsuming so firms do end of period adjustments to revenueexpense accounts to reflect the proper amounts in the correct period Adjusting entries are required every time a company wants to prepare financial statements for external users In practice almost every account could require an adjustment 1
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