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Statements
Introduction to Financial Statements and Other
Financial Reporting Topics
Forms of Business
Entities
A sole proprietorship, a business owned by one
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A partnership is a business owned by two or
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In the United States, a business corporation is a legal
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In simplistic form, the stockholders equity of a
=$250,000
This
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STATEMENT OF STOCKHOLDERS
EQUITY (RECONCILIATION OF
STOCKHOLDERS EQUITY ACCOUNTS)
Firms are required to present reconciliations of
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Stockholders Equity
Capital stock 50,000
Retained earnings 35,000
Total stockholders equity 85,000
Total liabilities 25,000
Total liabilities and stockholders equity =
$110,000
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INCOME STATEMENT (STATEMENT OF
EARNINGS)
The
income
statement
summarizes
revenues and expenses and gains and
losses,
ending
with
net
income.
It
summarizes the results of operations for a
particular period of time. Net income is included
in retained earnings in the stockholders equity
section of the balance sheet. (This is necessary
for the balance sheet to balance.)
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STATEMENT OF CASH FLOWS (STATEMENT OF
INFLOWS AND OUTFLOWS OF CASH)
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NOTES
The notes to the financial statements are used
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Notes Continued
Contingent liabilities are dependent upon the
occurrence or nonoccurrence of one or more
future events to confirm the liability. The
settlement of litigation or the ruling of a tax
court would be examples of the confirmation of
a contingent liability. Signing as guarantor on a
loan creates another type of contingent liability.
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RECORDING TRANSACTIONS
A transaction is an event that causes a change
in
a
companys
assets,
liabilities,
or
stockholders equity, thus changing the
companys financial position. Transactions may
be external or internal to the company. External
transactions involve outside parties, while
internal transactions are confined within the
company. For example, sales is an external
transaction, whereas the use of equipment is
internal.
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RECORDING ADJUSTING ENTRIES
Earlier, a distinction was made between the
accrual basis of accounting and the cash basis. It
was indicated that the accrual basis requires that
revenue be recognized when realized (realization
con- cept) and expenses recognized when incurred
(matching concept). The point of cash receipt for
reve- nue and cash disbursement for expenses is
not important under the accrual basis when
determining income. Usually, a company must use
the accrual basis to achieve a reasonable result for
the balance sheet and the income statement
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PREPARING THE FINANCIAL STATEMENTS
The accountant uses the accounts after the
adjustments have been made to prepare the
financial
statements.
These
statements
represent the output of the accounting system.
Two of the principal financial statements, the
income statement and the balance sheet, can
be prepared directly from the adjusted
accounts. Preparation of the statement of cash
flows requires further analysis of the accounts.
Auditors Opinion
An auditor (certified public accountant) conducts an
independent examination of the accounting information presented by the business and issues a
report thereon. An auditors report is the formal
statement of the auditors opinion of the financial
statements after conducting an audit. Audit
opinions are classified as follows:
1. UNQUALIFIED OPINION. This opinion states
that the financial statements present fairly, in all
material respects, the financial position, results of
operations, and cash flows of the entity, in conformity
with generally accepted accounting principles.
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QUALIFIED OPINION. A qualified opinion states that, except
Proxy
The proxy, the solicitation sent to stockholders for the
Ethics
Ethics and morals are synonymous. While ethics is derived from
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Ten essential values can be considered central to
Harmonization of International
Accounting Standards
The motivation for changes in accounting practice has
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Difficulties