七
Investment
Tools: Financial Statement Analysis: Basic Concepts
1.A: Preliminary Reading Measuring Business Income
a: Explain why financial statements are prepared at the end of the regular accounting period, why
accounts must be adjusted at the end of each period, and why the accrual basis of accounting
produces more useful income statements & balance sheets than the cash basis.
To be relevant, information must be reliable. This means information must be
consistent and comparable over time and be provided on a timely basis. According to the
relevancy principle, a firm needs to identify its activities in a timely fashion within a specific
period, such as a quarter or year.
Normal accounting procedure is to record during the accounting period those economic
events that occurred as the result of external transactions. At the end of the period after all
the external transactions have been recorded, several of the accounts in the ledger need to
be updated before their balances can be posted to the financial statements.
The adjusting process is consistent with two important accounting principles:
1.
The revenue recognition principle, which requires that revenue be reported in the
income statement only when it is earned, not before and not after.
2.
The matching principle reports expenses on the income statement in the same
accounting period as the revenues that were earned as a result of the expenses.
Accrual basis accounting assigns revenues to the accounting period in which they are
earned and matches expenses with the revenues generated by those expenses. The
objective of the accrual basis is to report the economic effects of revenues and expenses
when they are earned or incurred, not when cash is received or paid.
Cash basis accounting recognizes revenues when cash is received and expenses when
cash is paid. Under the cash basis net income for the period is the difference between
revenues received in cash and expenses paid with cash.
Accrual accounting generally provides a better indication of performance than information
based on the receipt and disbursement of cash. Accrual accounting increases the
comparability of income statements and balance sheets from one period to another period.
The accrual basis reflects the understanding that the economic effect of revenue generally
occurs when it is earned and not when cash is received. The revenue recognition principle is
the basis for making adjusting entries that pertain to unearned and accrued revenues.
Adjusting entries are necessary to better match revenues and expenses that occurred during
the accounting period. Adjusting entries are used to record the effects of internal economic
events.
1.B: Preliminary Reading Financial Reporting and Analysis
a: Define each asset and liability category on the balance sheet and prepare a classified balance
找金融资料，就到一览金融文库