Presented by: Mr. Raziq Chapter 2 Accounting Concepts and Elements Slide 2.1

Presented by: Mr. Raziq Chapter 2 Learning Objectives Define the three financial reporting objectives of business entities. Describe the nature, purpose, and content of each of the four financial statements. Identify and define the key attributes or characteristics that accounting information should possess. Identify and define the fundamental concepts that underlie accounting rules and practices. Slide 2.2

Presented by: Mr. Raziq Helpful Hints for Chapter 2 This chapter provides a comprehensive introduction to key accounting terms. The purpose here is to acquaint you with these terms--don’t try to memorize these terms at this point. You will find this chapter a useful reference source for the remainder of this course. The glossary at the end of this chapter will be a particularly useful reference source for you. Slide 2.3

Presented by: Mr. Raziq FASB’s Conceptual Framework SFAC No. 1: Objectives of Financial Reporting by Business Enterprises SFAC No. 2: Qualitative Characteristics of Accounting Information SFAC No. 3: Elements of Financial Statements of Business Enterprises* SFAC No. 4: Objectives of Financial Reporting by Nonbusiness Organizations SFAC No. 5: Recognition and Measurement in Financial Statements of Business Enterprises SFAC No. 6: Elements of Financial Statements *Superseded by SFAC No. 6 Slide 2.4

Presented by: Mr. Raziq Objectives of Financial Reporting Provide information useful to economic decision makers Allow decision makers to predict businesses’ future cash flows (and cash flows they will receive from these businesses) Provide information concerning businesses’ assets and liabilities and related transactions and events Slide 2.5

Presented by: Mr. Raziq A Quick Trip through the Four Financial Statements Balance Sheet Income Statement Statement of Stockholders’ Equity Statement of Cash Flows Slide 2.6

Presented by: Mr. Raziq The Balance Sheet A financial snapshot of a company at one point in time. Slide 2.7

Presented by: Mr. Raziq The accounting or “balance sheet” equation Assets = Liabilities + Owners’ Equity Or Assets - Liabilities = Owners’ Equity Slide 2.8

Presented by: Mr. Raziq Questions Answered by a Balance Sheet... Among Others How much cash does a firm have on hand? Does a company have sufficient cash to pay off its debts that are coming due in the next few months? Does a firm have more long- term debt than its major competitor? Slide 2.9

Presented by: Mr. Raziq Assets... defined Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Or Things a company owns. Slide 2.10

Presented by: Mr. Raziq Types of Assets Current Assets: Cash, Short-Term Investments, Accounts Receivable, Inventory, and Prepaid Expenses Property, Plant & Equipment Long-Term Investments Intangible Assets Other Assets Slide 2.11

Presented by: Mr. Raziq Liabilities... defined Generally... amounts by businesses to third parties. Slide 2.12 TYPES Current: Accounts Payable, Accrued Liabilities, Notes Payable Long-Term: Long-Term Notes Payable, Mortgages Payable, Long-Term Accrued Liabilities

Presented by: Mr. Raziq Stockholders’ Equity Common Stock Additional Paid-In Capital Retained Earnings Slide 2.13

Presented by: Mr. Raziq The Income Statement Basic Format: Revenues - Expenses = Net Income Revenues: Increases in assets and decreases in liabilities resulting from an entity’s profit- oriented activities. Expenses: Decreases in assets and increases in liabilities resulting from an entity’s profit- oriented activities. Slide 2.14

Presented by: Mr. Raziq Key Income Statement Items Gross Profit Operating Expenses Operating Income Earnings per Share Slide 2.15

Presented by: Mr. Raziq Questions Answered by a Company’s Income Statement... Among Others ]Did the company earn a profit during its most recent fiscal year? ]What was the firm’s gross profit percentage? ]What is the firm’s principal source of revenue? Slide 2.16

Presented by: Mr. Raziq Statement of Stockholders’ Equity... A Few Notes Essentially, this financial statement is a supporting schedule to the balance sheet. Reconciles the beginning-of-the-year and end-of- the-year dollar amounts of individual stockholders’ equity items. Question answered: What events or transactions accounted for the changes in a company’s stockholders’ equity over the previous year? Slide 2.17

Presented by: Mr. Raziq Statement of Cash Flows 4Reveals how a business generated and used cash during an accounting period. Four Sections : Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Reconciliation of a business’s cash balances at the beginning and end of a year Slide 2.18

Presented by: Mr. Raziq Questions Answered by a Statement of Cash Flows... Among Others How does a firm’s cash flows from its operating (profit- oriented) activities compare to its net income? What was the major source of the company’s cash inflows during its most recent year? During the past year, what was the firm’s major cash outflow? Slide 2.19

Presented by: Mr. Raziq Key Attributes of Accounting Information Understandability Relevance Reliability Decision Usefulness Slide 2.20

Presented by: Mr. Raziq Other Important Characteristics of Accounting Information Materiality: Refers to the relative importance of specific items of accounting information Comparability: The degree to which a firm’s accounting data can be compared with similar data reported by the firm in prior periods and with similar data reported by other firms. Slide 2.21

Presented by: Mr. Raziq Fundamental Accounting Concepts Entity Concept Accounting Period Concept Going Concern Assumption Unit-of-Measurement Concept Historical Cost Principle Revenue and Expense Recognition Rules Full Disclosure Principle Slide 2.22