Basic Concepts
of Accounting and
Financial Reporting
Chapter 2
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Learning Objective 1
Describe the objectives of
accounting and useful
accounting information.
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Accounting Objectives
Accounting
data
The raw results of economic
transactions and events.
Information
Data that are put into some
useful form for decision making.
Accounting
information
The product of accountant’s
organization, classification,
and summarization of economic
transactions and events.
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Learning Objective 2
Define the qualitative
characteristics of accounting
information and determine the
effect of each on information.
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Conceptual Framework
of Accounting
Objectives:
To provide stakeholders with information
1. Useful for credit and investment decisions
2. To assess future cash flows
3. About enterprise resources, claims to
resources, and changes in each over time.
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Qualitative Characteristics of
Accounting Information
Primary
characteristics
Secondary
characteristics
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Relevance
Reliability
Comparability
Consistency
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Qualitative Characteristics of
Accounting Information
Relevance
Timeliness
Predictive value
Feedback value
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Qualitative Characteristics of
Accounting Information
Reliability is a characteristic of useful
accounting that requires the information
to be reasonably unbiased and accurate.
Verifiability
Representational
faithfulness
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Neutrality
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Qualitative Characteristics of
Accounting Information
Comparability is the quality of information
that allows users to identify similarities
in and differences between two
sets of accounting information.
Consistency means conformity from
period to period with accounting
policies and procedures.
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Learning Objective 3
Define the elements of
accounting and construct
the accounting equation.
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Accounting Elements
Accountants use an accounting system
to transform accounting data into
useful accounting information
Accounting data
Useful accounting information
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The Balance Sheet
Assets
Liabilities
Equity
Investments
by owners
Earned
equity
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The Accounting Equation
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Learning Objective 4
Recognize a balance sheet,
income statement, statement
of equity, and statement of
cash flows and determine
which accounting elements
comprise each statement.
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Basic Financial Statements
Statement of Cash Flows
Statement of Equity
Income Statement
Balance Sheet
Financial
Statements
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Balance Sheet for a Corporation
Jason’s Furniture Gallery, Inc.
Balance Sheet
December 31, 2004
Assets
Cash
$ 29,000
Investments
75,000
Inventory
200,000
Land
80,000
Building
300,000
Equipment
60,000
Total assets
$744,000
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Liabilities
Accounts payable
Mortgage payable
Total liabilities
$100,000
200,000
Stockholders’ equity
Common stock
$200,000
Retained earnings
244,000
Total stockholders’ equity
Total liabilities and
stockholders’ equity
$300,000
444,000
$744,000
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The Income Statement
Revenues are increases in net assets (equity)
that occur as a result of an entity’s selling
or producing products and performing
services for its customers.
Expenses are sacrifices of the future
value of assets used to generate
revenues from customers.
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The Income Statement
Gains are increases in net assets (equity)
that result from incidental or other
peripheral events that affect the entity.
Losses are decreases in net assets (equity)
that result from incidental or other
peripheral events that affect the entity.
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Income Statement
for a Corporation
Jason’s Furniture Gallery, Inc.
Income Statement
For the Year Ended December 31, 2004
Sales revenues
Cost of goods sold
Gross profit
Operating expenses
Selling expenses
Administrative expenses
Total operating expenses
Operating income
Other revenues and expenses
Gain on the sale of equipment
Loss on investments sold
Income before taxes
Income taxes
Net income
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$455,000
245,000
$210,000
$105,000
60,000
$ 25,000
(8,000)
165,000
$ 45,000
17,000
$ 62,000
21,000
$ 41,000
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Statement of
Stockholders’ Equity
Investments by owners
Comprehensive income
Distributions to owners
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•
•
•
•
Revenues
Gains
Expenses
Losses
Other
comprehensive
income
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Statement of
Stockholders’ Equity
Jason’s Furniture Gallery, Inc.
Statement of Stockholders’ Equity
For the Year Ended December 31, 2004
Total
stockholders’
equity
Common
stock
Retained
earnings
Balance, January 1, 2004
Stock issued
Net income
Dividend distributions
$150,000
50,000
–
–
$233,000
41,000
30,000
$383,000
50,000
41,000
30,000
Balance, Dec. 31, 2004
$200,000
$244,000
$444,000
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Statement of Cash Flows
Jason’s Furniture Gallery, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2004
Operating activities:
Cash received from customers
Cash paid for:
Merchandise
Operating expenses
Income taxes
Cash provided by operating activities
Investing activities:
Purchase of equipment
Purchase of building
Cash used by investing activities
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$ 455,000
$160,000
150,000
21,000
$( 35,000)
(300,000)
331,000
$ 124,000
$(335,000)
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Statement of Cash Flows
Jason’s Furniture Gallery, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2004
Financing activities:
Sale of common stock
Proceeds of mortgage on building
Dividends paid
Cash provided by financing activities
Net change in cash
Cash balance, January 1, 2004
Cash balance, December 31, 2004
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$ 50,000
200,000
(30,000)
$220,000
$
9,000
20,000
$ 29,000
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Articulation
The four financial statements
are intertwined.
The linkage between then
is known as articulation.
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Articulation
Net income is the same on both the income
statement and the statement of equity.
The equity balance on the statement of
equity agrees with the balance sheet.
The cash balance on the balance sheet
agrees with the ending cash amount
on the cash flow statement.
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Learning Objective 5
Name the underlying
assumptions of accounting
and describe how they
affect financial reporting.
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Assumptions
Separate entity
Going concern
Monetary unit
Periodicity
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Learning Objective 6
Define the underlying
principles of accounting
and determine the
appropriate application
of each.
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Principles
Historical cost
Revenue recognition
Matching principle
Full disclosure
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Learning Objective 7
Identify the underlying
constraints of accounting
and describe how they
affect accounting
decisions and reporting.
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Constraints
Materiality
Cost-benefit relationship
Conservatism
Industry practices
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Conceptual Framework of
Accounting Summary
Objectives
Qualitative
characteristics
of accounting
information
Assumptions
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Accounting
elements
Principles
Constraints
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End of Chapter 2
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