Financial Statements

Financial Statements

• Financial statements are prepared by companies to provide stakeholders with financial information about the company's performance and position.
• Four main financial statements:
  1. Balance Sheet: snapshot of the company's financial position at a specific point in time, including assets, liabilities, and equity.
  2. Income Statement: summarizes revenues and expenses over a specific period of time, such as a month, quarter, or year.
  3. Statement of Cash Flows: shows the inflows and outflows of cash over a specific period of time, including operating, investing, and financing activities.
  4. Statement of Changes in Equity: summarizes the changes in a company's equity over a specific period of time.

Revenue Recognition

• Revenue recognition is the process of determining when revenue is earned and reported on the income statement.
• Four steps to recognize revenue:
  1. Identify the contract: determine if a valid contract exists between the company and its customer.
  2. Identify the performance obligations: determine the specific goods or services promised to the customer.
  3. Determine the transaction price: determine the amount of consideration to be received from the customer.
  4. Allocate the transaction price: allocate the transaction price to each performance obligation.
• Revenue recognition criteria:
  • Persuasive evidence of an arrangement exists.
  • Delivery has occurred or services have been rendered.
  • Fees are fixed or determinable.
  • Collectibility is reasonably assured.

Asset Valuation

• Asset valuation is the process of determining the value of a company's assets.
• Asset valuation methods:
  • Cost method: assets are valued at their original cost.
  • Market value method: assets are valued at their current market value.
  • Lower of cost or market value method: assets are valued at the lower of their original cost or current market value.
• Types of assets:
  • Current assets: expected to be converted into cash within one year or within the company's normal operating cycle.
  • Non-current assets: not expected to be converted into cash within one year or within the company's normal operating cycle.

Liability Accounting

• Liability accounting involves recording and reporting a company's debts or obligations.
• Types of liabilities:
  • Current liabilities: expected to be paid within one year or within the company's normal operating cycle.
  • Non-current liabilities: not expected to be paid within one year or within the company's normal operating cycle.
• Liability recognition criteria:
  • The company has a present obligation.
  • The company has a probable outflow of resources.
  • The amount of the obligation can be estimated reliably.
• Liability valuation methods:
  • Amortized cost method: liabilities are valued at their original cost, minus any amortization or discount.
  • Fair value method: liabilities are valued at their current market value.

Financial Statements

• Prepared by companies to provide stakeholders with financial information about the company's performance and position
• Four main financial statements:
  • Balance Sheet: snapshot of the company's financial position at a specific point in time, including assets, liabilities, and equity
  • Income Statement: summarizes revenues and expenses over a specific period of time, such as a month, quarter, or year
  • Statement of Cash Flows: shows the inflows and outflows of cash over a specific period of time, including operating, investing, and financing activities
  • Statement of Changes in Equity: summarizes the changes in a company's equity over a specific period of time

Revenue Recognition

• Process of determining when revenue is earned and reported on the income statement
• Four steps to recognize revenue:
  • Identify the contract: determine if a valid contract exists between the company and its customer
  • Identify the performance obligations: determine the specific goods or services promised to the customer
  • Determine the transaction price: determine the amount of consideration to be received from the customer
  • Allocate the transaction price: allocate the transaction price to each performance obligation
• Revenue recognition criteria:
  • Persuasive evidence of an arrangement exists
  • Delivery has occurred or services have been rendered
  • Fees are fixed or determinable
  • Collectibility is reasonably assured

Asset Valuation

• Process of determining the value of a company's assets
• Asset valuation methods:
  • Cost method: assets are valued at their original cost
  • Market value method: assets are valued at their current market value
  • Lower of cost or market value method: assets are valued at the lower of their original cost or current market value
• Types of assets:
  • Current assets: expected to be converted into cash within one year or within the company's normal operating cycle
  • Non-current assets: not expected to be converted into cash within one year or within the company's normal operating cycle

Liability Accounting

• Involves recording and reporting a company's debts or obligations
• Types of liabilities:
  • Current liabilities: expected to be paid within one year or within the company's normal operating cycle
  • Non-current liabilities: not expected to be paid within one year or within the company's normal operating cycle
• Liability recognition criteria:
  • The company has a present obligation
  • The company has a probable outflow of resources
  • The amount of the obligation can be estimated reliably
• Liability valuation methods:
  • Amortized cost method: liabilities are valued at their original cost, minus any amortization or discount
  • Fair value method: liabilities are valued at their current market value