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Report financial information that useful in making decisions about providing resources to the reporting
entity.
Financial information
1. Related to the entity economic resources and claims to them ( financial position). That help to
evaluate liquidity , solvency, financial needs and the probability of obtaining financing.
B. other events and transactions, such as issuing debt and equity ( balance sheet).
Information about
performance is useful for
2. Evaluating management.
- Financial statements are useful to external parties and prepared in conformity with GAAP.
- Managerial accounting helps management decision making , planning and control, management
accounting is directed specific internal users and it not need to follow GAAP.
Users with direct interest such as investors and creditors, management and employees , but there are many users
having indirect interest such as financial advisors , stock market and regulatory authorities.
Users may be external they use financial statements to determine whether doing business with firm will be
beneficial.
Internal users use financial statements to make decision affecting the operations of the business .
External
Internal
The notes are the basic part of FS. They explain information recognized in FS, they are
integral part of FS prepared in accordance with GAAP, notes should not be used to
correct improper presentation.
Supplementary information may include details or amounts that present a different
perspective from that adopted in the financial statements. It may be quantifiable information
that is high in relevance but low in reliability. Or it may be information that is helpful but not
essential. One example of supplementary information is the data and schedules provided by
oil and gas companies: Typically they provide information on proven reserves as well as the
related discounted cash flows. Supplementary information may also include managements
explanation of the financial
.information and its discussion of the significance of that information
Financial statements includes 1) financial position 2)income statement 3)statement of comprehensive income
4)statement of changes in equity 5) statement of cash flows.
(1) useful to those making investment and credit decisions who have
(2) helpful to present and potential investors, creditors, and other users in assessing the amounts, timing, and
uncertainty of future cash flows; and
(3) about economic resources, the claims to those resources, and the changes in them.
Primary Qualities
Relevant information also helps users confirm or correct prior expectations; it has feedback
value.
it must also be available to decision makers before it loses its capacity to influence their
decisions. It has timeliness .
Neutrality means that information cannot be selected to favor one set of interested
parties over another.
Secondary Qualities
Comparability. Information that has been measured and reported in a similar manner
for different enterprises is considered comparable.
Consistency. When an entity applies the same accounting treatment to similar events,
from period to period, the entity is considered to be consistent in its use of accounting
standards.
Basic Elements
Basic Assumptions
The economic entity assumption means that economic activity can be identified with
a particular unit of accountability,the activity of a business enterprise can be kept separate and distinct from its
owners and any other business unit.
going concern assumptionthat the business enterprise will have a long life.
The monetary unit assumption means that money is the common denominator of economic
activity and provides an appropriate basis for accounting measurement and
analysis.
The periodicity (or time period) assumption implies that the economic activities
of an enterprise can be divided into artificial time periods.
Constraints
Cost-Benefit Relationship
The costs of providing the information must be weighed against the benefits that can be
derived from using the information.
Materiality
The constraint of materiality relates to an items impact on a firms overall financial
operations.
An item is material if its inclusion or omission would influence or change the
judgment of a reasonable person.
Industry Practices
industry practices. The peculiar nature of some industries and business concerns
sometimes requires departure from basic theory. In the public utility industry, noncurrent
assets are reported first on the balance sheet to highlight the industrys capital-intensive
nature.
Conservatism
Conservatism means when in doubt choose the solution that will be least likely to
overstate assets and income
Cash flow statement
Provide information about cash inflow ( cash receipts ) and cash outflow ( cash
disbursement )from an entity activities ( operating , investing and financing ) to
assess the firm liquidity through evaluate ability to generate positive future net cash flow , and to assess
solvency through evaluate the firm ability to meet its obligations and financial flexibility .
CF statement explain the change in cash and cash equivalent, it reconcile beginning balance of cash with
ending balance
- Operating activities
Cash derived from the principal revenue producing activities , they result from transactions and other
event s that enered into deteemnation of net income .
- Investing activities
Expenditures have been made for resources intended to generate future income and cash flow
A. Cash payment to purchase or cash receipts from sale of P&P&E , intangible and long lived assets
B. Cash payment to purchase or cash receipts from sale and maturity of equity (stock ) or debt ( bonds )of
other firms for investing purposes.
C. Cash advances and loan made to other parties
- Financing activities
Cash transactions that related to the issuance , settlement or reacquisition of equity debt and equity instruments
A. Cash inflow
Cash proceeds from issuing equities and shares
Cash proceeds from obtaining loans and issuing debt such as bonds and other short term and long term liabilities.
B. Cash outflows
Cash repayments of amount borrowed
Payment of cash dividends
Cash payment for acquire or redeem the firm stocks
Cash payment by a lesee for reduction of lease liability