Copyright 2003 Prentice Hall Publishing1 Statements of Financial Accounting Concepts l Objectives of accounting information l Qualitative characteristics of accounting information l Elements of financial statements l Recognition and measurement in financial statements GAAP

Copyright 2003 Prentice Hall Publishing2 Objectives Qualities l To provide useful information to investors and creditors and others for decision- making. n Relevant: »timely, »Makes a difference »Predictive value »Benefits > Costs

Copyright 2003 Prentice Hall Publishing3 Objectives Qualities l To provide useful information to investors and creditors and others for decision- making. n Reliable: »representational faithfulness »verifiable »unbiased

Copyright 2003 Prentice Hall Publishing4 Objectives Qualities l To provide useful information to investors and creditors and others for decision- making. n Comparable: »across companies for a single year, »to industry averages,

Copyright 2003 Prentice Hall Publishing5 Objectives Qualities l To provide useful information to investors and creditors and others for decision- making. n Consistent: »same rules used each time »from year to year for same company

Copyright 2003 Prentice Hall Publishing6 Elements of Financial Statements Elements of Financial Statements l Assets l Liabilities l Equity l Revenue l Expenses

Copyright 2003 Prentice Hall Publishing7 Some Basic Concepts: l Entity assumption l Unit of measure assumption l Going concern assumption

Copyright 2003 Prentice Hall Publishing8 l Transactions are measured and recorded at COST. l Revenue is recognized--included on the income statement--when it is EARNED. l Expenses are recognized in the period in which the related revenue is recognized: MATCHING CONCEPT. l This is ACCRUAL ACCOUNTING. Recognition and Measurement in Financial Statements

Copyright 2003 Prentice Hall Publishing9 Accruals and Deferrals l ACCRUALS: n Action* first, dollars later n E.g., services are performed, payment to be received later l DEFERRALS: n Dollars first, action* later n E.g., payment is made in advance for insurance or rent, the action of using it comes later *For Revenues the action is the earnings process For Expenses the action is using up the benefits For Expenses the action is using up the benefits

Copyright 2003 Prentice Hall Publishing10 Adjustment for Year-end Financial Statements Date February 28 Prepaid insurance that has been used needs to be recorded as an expense. Only the unused portion remains on the balance sheet as an asset. Assets = Liabilities + CC + RE (25) prepaid insurance (25) insurance expense

Copyright 2003 Prentice Hall Publishing11 Tom’s Wear, Inc. Income Statement For the month ended February 28, 2001 Revenue Sales$1,850

Copyright 2003 Prentice Hall Publishing12 Tom’s Wear, Inc. Income Statement For the month ended February 28, 2001 Revenue Sales$1,850 Expenses Cost of sales $ Total Expenses Net Income

Copyright 2003 Prentice Hall Publishing13 Tom’s Wear, Inc. Income Statement For the month ended February 28, 2001 Revenue Sales$1,850 Expenses Cost of sales $ 740 Other expenses Net income $ 935

Copyright 2003 Prentice Hall Publishing14 Tom’s Wear, Inc. Statement of Changes in Shareholder’s Equity For the month ending 2/28/01 Beginning contributed capital $5,000 Contributions during the year -0- Ending contributed capital 5,000 Beginning retained earnings $ 385 Net Income for the year 935 Dividends (100) Ending Retained earning $1,220 Total shareholders’s equity $6,220

Copyright 2003 Prentice Hall Publishing15 Tom’s Wear, Inc. Balance Sheet At 2/28/01

Copyright 2003 Prentice Hall Publishing16 Tom’s Wear, Inc. Balance Sheet At 2/28/01

Copyright 2003 Prentice Hall Publishing17 Tom’s Wear Statement of Cash Flows For the year ending 2/28/01

Copyright 2003 Prentice Hall Publishing18 Tom’s Wear Statement of Cash Flows For the year ending 2/28/01

Copyright 2003 Prentice Hall Publishing19 Tom’s Wear Statement of Cash Flows For the year ending 2/28/01