CONFIRMING PAGES F inancial Statements and Accounting 2 Concepts/Principles F inancial statements are the product of the financial accounting process. They are the means of communicating economic information about the entity to individuals who want to make decisions and informed judgments about the entity’s financial position, results of operations, and cash flows. Although each of the four principal financial statements has a unique purpose, they are interr elated, and all must be considered in order to get a complete financial picture of the reporting entity. Users cannot make meaningful interpretations of financial statement data without under- standing the concepts and principles that relate to the entire financial accounting process. It is also important for users to understand that these concepts
and principles are broad in nature; they do not constitute an inflexible set of rules, but instead serve as guidelines for the develop- ment of sound financial reporting practices. L E A R N I N G O B J E C T I V E S ( L O ) A fter studying this chapter you should understand 1. W hat transactions are. 2. T he kind of information reported in each financial statement and how financial statements are related to each other. 3. The meaning and usefulness of the accounting equation. 4. T he meaning of each of the captions on the financial statements illustrated in this chapter. 5. The broad, generally accepted concepts and principles that apply to the accounting process. 6. Why investors must carefully consider cash flow information in conjunction with accrual a ccounting results. 7. S everal limitations of financial statements. 8. What a corporation’s annual report is and why it is issued. 9. B usiness practices related to organizing a business, fiscal year, par value, and parent– subsidiary corporations. mmaarr2277006688__cchh0022__003322--007733..iinndddd 3322 99//1155//0099 1100::1133::0077 AAMM CONFIRMING PAGES Chapter 2 Financial Statements and Accounting Concepts/ Principles 33 Financial Statements F rom Transactions to Financial Statements An entity’s financial statements are the end product of a process that starts with LO 1 t ransactions between the entity and other organizations and individuals. Transactions Understand what are economic interchanges between entities: for example, a sale ∕ purchase, or a receipt t ransactions are. of cash by a borrower and the payment of cash by a lender. The flow from transactions to financial statements can be illustrated as follows: Procedures for sorting, classifying, and presenting (bookkeeping) Financial Transactions Selection of alternative methods statements of reflecting the effects of certain transactions (accounting) 1. What does it mean to say that there has been an accounting transaction between What Does you and your school? It Mean? A n s w e r o n Q p a g e 5 7 Transactions are summarized in a ccounts, and accounts are further summarized in the financial statements. In this sense, transactions can be seen as the bricks that build the financial statements. By learning about the form, content, and relationships among financial statements in this chapter, you will better understand the process of building those results—bookkeeping and transaction analysis—described in Chapter 4 and subsequent chapters. Current generally accepted accounting principles and...
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