Comprehensive Guide to GAAP, Financial Statements, and Regulatory Frameworks

Securities and Exchange Commission (SEC)

Created after the 1929 stock market crash to restore investor confidence and enforce securities laws.

Relevance

Information affects decisions (predictive and confirmatory value, materiality).

Faithful Representation

Accurate depiction (completeness, neutrality, free from error).

Verifiability

The quality of information that assures users that it represents what it purports to represent.

Cost Effectiveness

Benefits must exceed costs.

Transaction

An economic event involving an exchange with another entity that affects the company's financial position.

Non-transaction Event

Events that cause changes in financial position but do not involve exchanges with other entities.

Accounting Equation

Assets = Liabilities + Shareholders' Equity. Each transaction affects this equation in two ways (dual effect).

Journal

Provides a chronological record of all economic events affecting a firm, with each entry recording equal debits and credits.

General Ledger

A collection of accounts that summarizes all transactions recorded in the journal.

Unadjusted Trial Balance

A list of general ledger accounts and balances to verify debits equal credits before adjustments.

Types of Adjusting Entries

Prepaid Expenses, Deferred Revenues, Accrued Liabilities, Accrued Receivables, Estimates

Adjusted Trial Balance

A trial balance prepared after recording and posting adjusting entries to ensure accounts are balanced for financial statement preparation.

Income Statement

Reports revenues and expenses to show net income or loss for a period.

Statement of Comprehensive Income

Reports all changes in shareholders' equity not resulting from transactions with owners, including other comprehensive income (OCI).

Balance Sheet

Lists assets, liabilities, and shareholders' equity at a point in time, showing financial position.

Statement of Cash Flows

Shows cash inflows and outflows categorized by operating, investing, and financing activities.

Long-Term Solvency

A company's ability to pay all its liabilities, including long-term liabilities.

Limitations of the Balance Sheet

Many assets are recorded at historical costs, not market value. Some valuable company resources are not recorded as assets and have zero book value.

Current Assets

Assets expected to be converted to cash or consumed within one year or the operating cycle. Typical components include cash and cash equivalents, short-term investments, accounts receivable, inventory, and prepaid expenses.

Long-Term Assets

Assets to be used beyond one year or operating cycle, including property, plant, and equipment; intangible assets; investments; and other long-term assets.

Current Liabilities

Obligations expected to be settled within one year or operating cycle, e.g., accounts payable, notes payable, accrued liabilities, deferred revenues.

Long-Term Liabilities

Obligations payable beyond one year, such as long-term notes, bonds payable, and pension obligations.

Financial Statement Disclosures

Explain data in financial statements or provide information not directly reported. Examples include summary of significant accounting policies, subsequent events, related-party transactions, employee benefit plans, and property, plant, and equipment details.

Management's Discussion and Analysis (MD&A)

Provides management's perspective on significant events, trends, and uncertainties about operations, liquidity, and capital resources.

Management's Responsibilities Section

Asserts management's responsibility for financial statement accuracy and internal controls, with personal certification by corporate executives (Sarbanes-Oxley Act).

Proxy Statement

Includes director and executive compensation, sent annually to shareholders with the annual report.

Sustainability Disclosures

Report on environmental, social, and governance (ESG) issues like greenhouse gas emissions, diversity ratios, and ethical policies.

Auditor's Report

Auditors attest to the fairness of financial statements and internal controls, issuing various types of audit opinions (unqualified, qualified, adverse, disclaimer).

Confirmatory value

Information confirms expectations.

Gain

Increases in equity not resulting from revenues or investments by owners.

Comprehensive income

The change in equity from nonowner transactions.

Neutrality

The absence of bias.

Recognition

The process of admitting information into financial statements.