Topic 2: Overview of the Financial Statements

Accounting Equation

Assets = Liabilities + Owners' Equity

Accumulated Other Comprehensive Income

Source of increased assets

Assets

Firm's economic resources with future benefits

Balance Sheet

Statement of financial position

Book Value

Asset's cost minus accumulated depreciation

Comparability

Information usefulness related to a benchmark

Conservatism

Recognize losses, not gains when in doubt

Consistency

Follow accounting principle consistently

Disclosure

Providing additional information

Earnings Per Share (EPS)

Informs shareholders' earnings per share

Entity Concept

Separates personal from business finances

Expenses

Assets consumed in business operations

External Audit

Audit by independent qualified accountants

Financing Activities

Cash obtained from owners or creditors

Gains

Money made outside normal business

Going Concern Assumption

Assumes company will continue operations

Historical Cost Convention

Values assets at acquisition price

Income Statement

Company's financial performance for a period

Investing Activities

Purchase and sale of assets

Liabilities

Future obligations from past transactions

Liquidity

Ease of turning an item into cash

Losses

Money lost outside normal business

Materiality

Determining item significance

Net Assets

Total assets minus total liabilities

Net Income

Revenue exceeding expenses

Net Loss

Expenses exceeding revenues

Notes to Financial Statements

Additional information integral to financials

Operating Activities

Producing and selling goods and services

Owners' Equity

Assets portion owned by owners

Paid-in Capital

Value of assets exchanged for stock

Recognition

Acknowledging an item's presence

Relevance

Timely, useful, predictive information

Reliability

Verifiable, objective, dependable information

Retained Earnings

Cumulative profits not paid as dividends

Revenue

Assets generated from business operations

Revenue Recognition

Recognizing revenue in financial statements

Statement of Cash Flows

Classifies cash flow into operating, investing, financing

Stockholders' Equity

Capital from investors, retained earnings

Time Period Concept

Reporting financial results over a standard time

Treasury Stock

Subtracted in stockholders' equity