Financial Statements Overview

Financial Statements

• Financial statements are documents used by companies to report their activities to various parties like managers, investors, creditors, and regulatory agencies.
• Basic financial statements include the income statement, statement of retained earnings, balance sheet, and statement of cash flows.
• Net in accounting refers to an amount after a subtraction.
• Net income (profit) is the excess of revenues, also called net sales, over expenses.
• The Walt Disney Company's net sales for the year ended October 1, 2016, were $55,632 million and $52,465 million for the year ended October 3, 2015, found on the income statement.
• Accounting is an information system that measures and communicates business activities, processes data into financial statements, and reports results to decision-makers.
• The accounting cycle is the process of preparing financial statements.
• Bookkeeping is a mechanical part of accounting, while accounting includes more than just mechanical processes.
• Accounting information is used by individuals, investors, creditors, and regulatory bodies.

Accounting Concepts, Assumptions, and Principles

• Two important professional frameworks for accounting are Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
• The financial accounting standards board (FASB) and the international accounting standards board (IASB) formulate standards for GAAP and IFRS, respectively.
• Relevance in accounting information refers to its ability to influence a decision, and faithful representation means the information accurately reflects the reality.
• The four enhancing qualitative characteristics of accounting information are comparability, verifiability, timeliness, and understandability.
• Key accounting assumptions/principles include the entity assumption (keeping business and personal affairs separate), continuity (going concern assumption - the business will stay in operation), historical cost (record assets at original purchase price), and the stable monetary unit assumption (ignoring inflation).

Applying Accounting Equation to Business Organizations

• Assets represent a company's resources, liabilities represent its debts, and owners' equity represents the owners' ownership interest.
• Assets equate to the sum of liabilities and owners' equity (Assets = Liabilities + Owners' Equity).
• Cash equivalents are assets readily convertible to cash, such as certificates of deposit and treasury bills.
• Liabilities are categorized as short-term (payable within one year) or long-term (payable in more than one year).
• Stockholders' equity consists of paid-in capital and retained earnings.

Constructing Financial Statements and Relationships

• A company's fiscal year is usually from January 1st to December 31st.
• Income statements list revenues and expenses.
• Net income is the most significant item on financial statements.
• The statement of retained earnings shows how net income impacts the company's retained earnings over the years.

Evaluating Business Decisions Ethically

• Ethics guide business decisions and are influenced by economic, legal, and ethical factors.
• A good decision framework involves considering the issue, stakeholders, alternatives, consequences, and whether the action is legal.
• Ethical principles include responsibilities, public interest, integrity, objectivity and independence, due care, and the scope and nature of services.