Chapter 2 - Investing and financing decisions and the balance sheet. After studying this chapter, you should be able to: Define the objective of financial reporting, the elements of the balance sheet, and the related key accounting assumptions and principles; identify what constitutes a business transaction and recognize common balance sheet account titles used in business; Apply transaction analysis to simple business transactions in terms of the accounting model;. | Investing and Financing Decisions and the Balance Sheet Chapter 2 Chapter 2: Investing and Financing Decisions and the Balance Sheet Understanding the Business To understand amounts appearing on a company’s balance sheet we need to answer these questions: What business activities cause changes in the balance sheet? How do specific activities affect each balance? How do companies keep track of balance sheet amounts? Before we can adequately prepare a balance sheet, we must know what activities caused changes in it. Additionally, we have to know how specific activities affect each balance. Finally, we need to know how the company tracks balance sheet amounts. The Conceptual Framework Qualitative Characteristics Relevancy Reliability Comparability Consistency Elements of Statements Asset Liability Stockholders’ Equity Revenue Expense Gain Loss Objective of Financial Reporting To provide useful economic information to external users for decision making and for assessing future cash flows. The objective of financial reporting is to provide useful economic information to external users for decision-making, and for assessing future cash flows of the company. For economic information to be useful, it must be relevant, reliable, comparable and consistent. The elements of our four basic financial statements include assets, liabilities, stockholders’ equity, revenues, expenses, gains and losses. Qualitative Characteristics Relevancy Reliability Comparability Consistency Elements of Statements Asset Liability Stockholders’ Equity Revenue Expense Gain Loss Objective of Financial Reporting To provide useful economic information to external users for decision making and for assessing future cash flows. Elements of Statements Asset Liability Stockholders’ Equity Revenue Expense Gain Loss The Conceptual Framework Primary Characteristics Relevancy: predictive value, feedback value, and timeliness. Reliability: verifiability, representational faithfulness, and neutrality. | Investing and Financing Decisions and the Balance Sheet Chapter 2 Chapter 2: Investing and Financing Decisions and the Balance Sheet Understanding the Business To understand amounts appearing on a company’s balance sheet we need to answer these questions: What business activities cause changes in the balance sheet? How do specific activities affect each balance? How do companies keep track of balance sheet amounts? Before we can adequately prepare a balance sheet, we must know what activities caused changes in it. Additionally, we have to know how specific activities affect each balance. Finally, we need to know how the company tracks balance sheet amounts. The Conceptual Framework Qualitative Characteristics Relevancy Reliability Comparability Consistency Elements of Statements Asset Liability Stockholders’ Equity Revenue Expense Gain Loss Objective of Financial Reporting To provide useful economic information to external users for decision making and for assessing future .
