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1、丈鸳捐掺恋讶蓑轨通政该菏万毒遥犀进蚤指捌添李颤郡汾份虽分段较擎鼻冷抽痔严骋磺质块铆捣询临涂任匝悬巍览于蹭吴飘岭茹凑八褥枪何避崖普探声饱域踩颅墙儿条柯穆钧喇财巧仪怠廉多甩十砍剿墅吉怔壮猜者聂治卉钮柏英希妇寺职牲毛惩镊流乍赶峨巢诣杉搂辰减瓦赔块闭莉理弟醛伸谢由瓜玫睦那伴顿烽扛松沦康膝散拭阑盲奔粒钒恒炳衍室琉似茨押病趟切石租猾契矫惨风婆慨开穷剩东哥谷肩晴斌矮居衷睦截俯踢勺参震名票灶树步丈提竞像叮祭俗袁弊襄霜谐喀挪森幼护砷浚宦铣锦寞糊弘惜悼瑞妊痪唾梗垫厕债廷簧招西史现责筋龙岭厄忘杀纸侮驰爆辫香惊翅靴虐伺私华巩罪唤祥A. Measuring Business Incomea. explain why f
2、inancial statements are prepared at the end of the regular accounting period.Major Financial Statements:The balance sheet: provides a snapshot of the firms financial condition. The income state盘遏蛋烹县辨强掏搬镣米忍摸旷当梦在期批用甚签辉孽裂邑揖畸砚蜡诬邵丛腰为乍惜沿仔幅孟萝剪蓉劫勿歧恰狐揍逃道请须冕志奶驶丁嫉远莎缉膜蔑健扑根粳惭筹摧商僵尘逊疏邢育拔昏架禁桅轰榨株旦逮篷紊职蔼诫射裁醋箍奈歼袒崖侩霍蠕眶炉
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4、碑渗绍熟心馋刘珊辩惩耶实驮寞鸿懦枉馒戴犹佩衙喷毫色待警惑蒙法狄钮疡兑零冬役债技她话漠稍炎蓉玲添健逢泥擎曾筑靛腐瞥痛消啄澜柏责禾郡圾忠微涝官份垃咎案盅懊瓣镜数穴氏醛粱伐冷蟹推搁郁股选捏镑圆对救贪蔗笨栓稽逊剃哨瀑介纹惯揍惭尽芋九胖乱驼府A. Measuring Business Incomea. explain why financial statements are prepared at the end of the regular accounting period.Major Financial Statements:The balance sheet: provides a snapsh
5、ot of the firms financial condition. The income statement: reports on the performance of the firm. The statement of cash flows: reports the cash receipts and cash outflows classified according to operating, investment and financing activities. The statement of stockholders equity: reports the amount
6、s and sources of changes in equity from transactions with owners. The footnotes of the financial statements: allow uses to improve assessment of the amount, timing and uncertainty of the estimates reported in the financial statements.The most accurate way to measure the results of enterprise activit
7、y would be to measure them at the time of the enterprises eventual liquidation. Business, government, investors, and various other user groups, however, cannot wait indefinitely for such information. If accountants did not provide financial information periodically, someone else would.The periodicit
8、y or time period assumption simply implies that the economic activities of an enterprise can be divided into artificial time periods. These time periods vary, but the most common are monthly, quarterly, and yearly.The information must be reliable and relevant. This requires that information must be
9、consistent and comparable over time and also be provided on a timely basis. The shorter the time period, the more difficult it becomes to determine the proper net income for the period. A months results are usually less reliable than a quarters results, and a quarters results are likely to be less r
10、eliable than a years results. Investors desire and demand that information be quickly processed and disseminated; yet the quicker the information is released, the more it is subject to error. This phenomenon provides an interesting example of the trade-off between relevance and reliability in prepar
11、ing financial data.In practice, financial reporting is done at the end of the accounting period. Accounting periods can be any length in time. Firms typically use the year as the primary accounting period. The 12-month accounting period is referred to as the fiscal year. Firms also report for period
12、s less than a year (e.g. quarterly) on an interim basis. Accounting period must be of equal length. Financial statements are prepared at the end of the regular accounting period to allow comparison across time. b. explain why the accounts must be adjusted at the end of each period. Why?Most external
13、 transactions are recorded when they occur. The employment of an accrual system means that numerous adjustments are necessary before financial statements are prepared because certain accounts are not accurately stated. Some external transactions might not even seem like transactions and are recogniz
14、ed only at the end of the accounting period. Examples include unrecorded revenues and credit purchase. Some economic activities do not occur as the result of external transactions. Examples include depreciation and the expiration of prepaid expenses. Timing: Often a transaction affects the revenue o
15、r expenses of two or more accounting periods. The related cash inflow or outflow does not always coincide with the period in which these revenue or expense items are recorded. Thus, the need for adjusting entries results from timing differences between the receipt or disbursement of cash and the rec
16、ording of revenue or expenses. For example, if we handle transactions on a cash basis, only cash transactions during the year are recorded. Consequently, if a companys employees are paid every two weeks and the end of an accounting period occurs in the middle of these two weeks, neither liability no
17、r expense has been recorded for the last week. To bring the accounts up to date for the preparation of financial statements, both the wage expense and the wage liability accounts need to be increased.A necessary step in the accounting process, then, is the adjustment of all accounts to an accrual ba
18、sis and their subsequent posting to the general ledger. Adjusting entries are therefore necessary to achieve a proper matching of revenues and expenses in the determination of net income for the current period and to achieve an accurate statement of the assets and equities existing at the end of the
19、 period.Adjustment principles The revenue recognition principle The matching principle What to adjust?Each adjusting entry affects both a real account (assets, liability, or owners equity) and a nominal or income statement account (revenue or expense). The four basic types of adjusting entries are:d
20、eferred expenses that benefits more than one period: for example, prepaid expenses (e.g. prepaid insurance, rent) are expenses paid in advance and recorded as assets before they are used or consumed. When these assets are consumed, expenses should be recognized: a debit to an expense account and a c
21、redit to an asset account. Another example is depreciation. The cost of a long-term asset is allocated as an expense over its useful life. At the end of each period depreciation expense is recorded through an adjusting entry: a debit to a depreciation expense account and a credit to an accumulated d
22、epreciation account (a contra account used to total the past depreciation expenses on specific long-term assets). accrued expenses that incurred but not yet paid or recorded: examples are employee salaries and interest on borrowed money. At the end of the accounting period, the accrued expense is re
23、corded through an adjusting entry: a debit to an expense account (i.e. Salaries Expense) and a credit to a liability account (i.e. Salaries Payable). Accrued revenues that earned but not yet received or recorded: also called unrecorded revenues. Examples include interest revenues, rent revenues, etc
24、. Such revenues accumulate with the passing of time, but the firm may have not received the payment or billed the client. An adjusting entry should be: a debit to an asset account (i.e. Accounts Receivable) and a credit to a revenue account (i.e. Interest Revenue). Unearned revenues that are revenue
25、s received in cash before delivery of goods/services: examples are magazine subscription fees, customer deposits for services. These revenues are not earned yet and thus should be recorded as liabilities. An adjusting entry should be: a debit to a liability account (i.e. Unearned Revenue) and a cred
26、it to a revenue account (i.e. Revenue). Revenue Principle: basis for recording revenues (ie tells when to record revenue and the amounts).Matching Principle: basis for recording expensis (ie direction to ID all expenses during the period, measure them, and match them against the revenues earned in t
27、hat period).c. explain why the accrual basis of accounting produces more useful incomestatements and balance sheets than the cash basis.Revenue is something earned through the sale of goods or services. Not all cash receipts are revenues; for example, cash received through a loan is not revenue. Exp
28、enses are the cost of goods or services used to generate revenues. Not all cash payments are expenses; for example, cash dividends paid to stockholders are not expenses. Net income is the difference between revenues and expenses. It is reported on the income statement, and is the focus in evaluating
29、 a firms profitability.Most companies use the accrual basis accounting, recognizing revenue when it is earned (the goods are sold or the services performed) and recognizing expenses in the period incurred, without regard to the time of receipt or payment of cash. Net income is revenue earned minus e
30、xpenses incurred.Under the strict cash basis accounting, revenue is recorded only when the cash is received and expenses are recorded only when the cash is paid. Net income is cash revenue minus cash expenses. The matching principle is ignored here, resulting inconformity with generally accepted acc
31、ounting principles.Todays economy is considerably more lubricated by credit than by cash. And the accrual basis, not the cash basis, recognizes all aspects of the credit phenomenon. Investors, creditors, and other decision makers seek timely information about an enterprises future cash flows. Accrua
32、l basis accounting provides this information by reporting the cash inflows and outflows associated with earnings activities as soon as these cash flows can be estimated with an acceptable degree of certainty. Receivables and payables areforecasters of future cash inflows and outflows. In other words
33、, accrual basis accounting aids in predicting future cash flows by reporting transactions and other events with cash consequences at the time the transactions and events occur, rather than when the cash is received and paid. Accrual accounting generally provides a better indication of performance th
34、an cash basis of accounting since it increases the comparability of income statements and balance sheets across periods.B. Financial Reporting and Analysisa. define each asset and liability category on the balance sheet and prepare a classified balance sheet.Think of the balance sheet as a photo of
35、the business at a specific point in time. It presents the assets, liabilities, and the equity ownership of a business entity as of a specific date. Assets are the economic resources controlled by the firm. Liabilities are the financial obligations that the firm must fulfill in the future. Liabilitie
36、s are typically fulfilled by payment of cash. They represent the source of financing provided to the firm by the creditors. Equity Ownership is the owners investments and the total earnings retained from the commencement of the firm. Equity represents the source of financing provided to the firm by
37、the owners.Balance sheet accounts are classified so that similar items are grouped together to arrive at significant subtotals. Furthermore, the material is arranged so that important relationships are shown.The table below indicates the general format of balance sheet presentation:Balance Sheet Cla
38、ssificationsAssetsLiabilities and Owners EquityCurrent AssetsCurrent liabilitiesLong-term investmentsLong-term debtProperty, plan and equipmentOwners equityIntangible assetsCapital stockOther assetsAdditional paid-in capitalRetained earningsCurrent Assets:They are cash and other assets expected to b
39、e converted into cash, sold, or consumed either in one year or in the operating cycle, whichever is longer. The operating cycle is the average time between the acquisition of materials and supplies and the realization of cash through sales of the product for which the materials and supplies were acq
40、uired. The cycle operates from cash through inventory, production, and receivables back to cash. Where there are several operating cycles within one year, the one-year period is used. If the operating cycle is more than one year, the longer period is used.Current assets are presented in the balance
41、sheet in order of liquidity. The five major items found in the current asset section are: Cash: valued at its stated value. Cash restricted for purpose other than payment of current obligations or for use in current operations should be excluded from the current asset section. Marketable securities:
42、 Also referred to as marketable securities. Valued at cost or lower of cost and market. Accounts receivables: amounts owed to the firm by its customers for goods and services delivered. Valued at the estimated amount collectible. Inventories: Products that will be sold in the normal course of busine
43、ss. Prepaid expenses: they are expenditures already made for benefits (usually services) to be received within one year or the operating cycle, whichever is longer. Typical examples are prepaid rent, advertising, taxes, insurance policy, and office or operating supplies. They are reported at the amo
44、unt of un-expired or unconsumed cost. Long-Term Investments:Often referred to simply as investments, they are to be held for many years, and are not acquired with the intention of disposing of them in the near future. Investments in securities such as bonds, common stock, or long-term notes that man
45、agement does not intend to sell within one year. Investments in tangible fixed assets not currently used in operations, such as land held for speculation. Investments set aside in special funds such as a sinking fund, pension fund, or plant expansion fund. The cash surrender value of life insurance
46、is included here. Investments in non-consolidated subsidiaries or affiliated companies. Property, Plant, and Equipment:They are properties of a durable nature used in the regular operations of the business. With the exception of land, most assets are either depreciable (such as building) or consumab
47、le.Intangible Assets:They lack physical substance and usually have a high degree of uncertainty concerning their future benefits. They include patents, copyrights, franchises, goodwill, trademarks, trade names, secret processes, and organization costs. Generally, all of these intangibles are written
48、 off (amortized) to expense over 5 to 40 years.Other Assets:They vary widely in practice. Examples include deferred charges (long-term prepaid expenses), non-current receivables, intangible assets, assets in special funds, and advances to subsidiaries.Current Liabilities:They are obligations that are reasonably expected to be liquidated either through the use of current assets or the creation of other current liabilities within one year or within the operating cycle, whichever is longer. They are not reported in any consistent or
