Reading 22: Financial Reporting Mechanics (Financial Statement Elements…
Reading 22: Financial Reporting Mechanics
Business Activity Classification
If they are part of firm's ordinary business.
If they involve buying/ disposing of long-term assets
If they are to issue / repay debt, stocks or cash dividend
Financial Statement Elements
The firm's economic resource
Creditor's claims on the firm's resources
Paid-in capital, retained earnings, and cumulative other comprehensive income
Sales, investment income, and gains
Cost of goods sold, selling and admin expense, depreciation, interest, taxes and losses
Asset = Liabilities + Owner's equity
Expanded form 1
Assets = Liabilities + Contributed Capital + Ending Retained Earnings.
Expanded form 2
Assets = Liabilities + Contributed Capital + Beginning Retained Earnings + Revenue - Expenses -dividends
A transaction is recorded in at least 2 accounts.
Accruals and Valuation Adjustments
Revenues (expenses) are recognized when earned (incurred)
Are required when the timing of cash payments made and received does not match the timing of the revenue/expense recognition on the financial statement.
Flows of information in accounting system
Information enters as journals entries, which are stored by account into a general ledger. Trial balances are formed at the end of an accounting period. Accounts are then adjusted and presented in financial statement.
Uses of the accounting process results
Analyst must understand the process used to produce the financial statement in order to understand the business and the period result.
Analyst must be alert to the use of accruals, changes in valuations, and other notable changes that may indicate incorrect or manipulating management judgement.