Objectives of financial reporting

Objectives of financial reporting

Meet the needs of investors and other external parties

Meet the needs of those unable to acquire information from other sources

Provide comprehensible information to informed and responsible users

Provide information to assess the amount, timing, and uncertainty of cash flows

Provide information about economic resources and claims to those resources

Provide information about periodic earnings

Provide information about management's discharge of responsibility

Qualities of accounting information

Relevance

Feedback value
Predictive value
Timeliness

Reliability

Representational faithfulness
Neutrality
Verifiability

Understandability

Comparability -- comparison across firms

Consistency -- consistent from year to year

Constraints

Cost/benefit trade-offs

Materiality

Elements of financial statements

Assets

probable future economic benefits
the result of past transactions
controlled by the entity

Liabilities

probable future sacrifices of economic benefits
result of past transactions
present obligation of the entity

Equity -- residual interest

Revenues

inflows of assets
from providing goods and services
that constitute the entities ongoing, major, or central operations

Expenses

outflows of assets or incurrence of liabilities
from providing goods and services
that constitute the entities ongoing, major, or central operations

Gains

increases in equity (increases in assets or decreases in liabilities)
from peripheral or incidental transactions or events

Losses

decreases in equity (decreases in assets or increases in liabilities)
from peripheral or incidental transactions or events

Net income -- change in equity from all sources except:

prior period adjustments
transactions with owners

Investments -- increases in equity resulting from receipt of assets in exchange for ownership interests

Distributions -- decreases in equity resulting from transferring assets to owners

Basic concepts of accounting

Entity -- each entity is separate, no commingling of funds

Objectivity -- verifiable (historical cost, amounts verified by exchange transactions)

Going Concern -- absent evidence to the contrary, we assume that the entity will continue in business long enough to fulfill its obligations and use its assets for their intended purpose. Value assets as historical cost, not current replacement cost or market value

Monetary unit -- use the dollar and ignore effects of inflation

Periodicity -- break the life of an entity down into shorter reporting periods -- years or quarters

Disclosure -- must disclose enough information to make sure the statements are not misleading

Conservatism --

given choices for values in assets, accountants report the lowest one
given choices for values of liabilities, accountants report the highest one
recognize all anticipated losses but never recognize anticipated gains

Recognition

the process of recording an item in the financial statements
realization -- revenues
revenues should be recognized (recorded) when

the seller receives cash or the claim to cash, AND
the earnings process is complete

Matching -- expenses should be matched to the revenues that they generate