1ACCOUNTING-Novella.docVIP

2 BASIC FINANCIAL STATEMENTS Chapter Summary Financial statements are the primary means of communicating financial information to users. Chapter 2 covers the income statement, balance sheet, and statement of cash flows. Chapter 1 set forth the objectives of the financial reporting process, and offered the observation that these objectives are met in large part by a set of financial statements. In this chapter, we take up the task of introducing the balance sheet, income statement, and the statement of cash flows. The presentation is organized around the accounting equation. The equation serves as the basis for elementary transaction analysis. A continuing illustration examines the impact of a number of simple transactions upon the balance sheet of a simple service business. Revenue and expense transactions have been included so that we might introduce the income statement and statement of cash flows at an elementary level. This in turn has provided the opportunity to discuss and illustrate statement articulation. Before closing, the chapter emphasizes the importance of adequate disclosure regarding both financial and nonfinancial information, thereby reinforcing the Chapter 1 theme that the financial reporting process is broader than the financial statements. The chapter also covers accounting principles dealing with asset valuation, as well as an introduction to forms of business organization. Learning Objectives 1. Explain the nature and general purpose of financial statements. Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles. Demonstrate how certain business transactions affect the elements of the accounting equation: Assets = Liabilities + Equity. Explain how the statement of financial position, often referred to as the balance sheet, is an expansion of the basic accounting equation. Explain how the income st