Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).
The balance sheet is a statement of financial position that reports dollar amounts for the assets, liabilities, and stockholders' equity at a specific point in time.
The income statement is a statement of operations that reports revenues, expenses, and net income for a stated period of time.
The statement of retained earnings explains changes to the retained earnings balance that occurred during the reporting period.
The statement of cash flows reports inflows and outflows of cash for a specific period of time. The statements are used by investors and creditors to evaluate different aspects of the firm's financial position and performance.
Identify the role of generally accepted accounting principles (GAAP) in determining the content of financial statements.
GAAP are the measurement rules used to develop the information in financial statements. Knowledge of GAAP is necessary for accurate interpretation of the numbers in financial statements.
Distinguish the roles of managers and auditors in the accounting communication process
Management has primary responsibility for the accuracy of a company's financial information. Auditors are responsible for expressing an opinion on the fairness of the financial statement presentations based on their examination of the reports and records of the company.
Appreciate the importance of ethics, reputation, and legal liability in accounting.
Users will have confidence in the accuracy of financial statement numbers only if the people associated with their preparation and audit have reputations for ethical behavior and competence. Management and auditors can also be held legally liable for fraudulent financial statements and malpractice. In this chapter, we studied the basic financial statements that communicate financial information to external users. Chapters 2, 3, and 4 provide a more detailed look at financial statements and examine how to translate data about business transactions into these statements. Learning how to translate back and forth between business transactions and financial statements is the key to using financial statements in planning and decision making. Chapter 2 begins our discussion of the way that the accounting function collects data about business transactions and processes the data to provide periodic financial statements, with emphasis on the balance sheet. To accomplish this purpose, Chapter 2 discusses key accounting concepts, the accounting model, transaction analysis, and analytical tools. We examine typical business activities of an actual service-oriented company to demonstrate the concepts in Chapters 2, 3, and 4.
