Chapter 4 - Adjustments, financial statements, and the quality of earnings. After studying this chapter, you should be able to: Explain the purpose of a trial balance; explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and income statement accounts; present an income statement with earnings per share, statement of stockholders' equity, balance sheet, and statement of cash flows; compute and interpret the net profit margin, explain the closing process. | Adjustments, Financial Statements, and the Quality of Earnings Chapter 4 Chapter 4: Adjustments, financial statements, and the quality of earnings. Managers of most companies understand the need to present financial information fairly so as not to mislead users. However, since end-of-period adjustments are the most complex portion of the annual recordkeeping process, they are prone to error. External auditors examine the company’s records on a test, or sample, basis. To maximize the chance of detecting any errors significant enough to affect users’ decisions, CPAs allocate more of their testing to transactions most likely to be in error. Understanding the Business Management is responsible for preparing . . . . . . useful to investors and creditors. High Quality = Relevance + Reliability Financial Statements Management bears the ultimate responsibility for the preparation of financial statements. High quality financial statements are those that are considered relevant and reliable to the user. Accounting Cycle Prepare financial statements. Disseminate statements to users. Close revenues, gains, expenses, and losses to Retained Earnings. During the period: Analyze transactions. Record journal entries. Post amounts to general ledger. Start of Period At the end of the period: Adjust revenues and expenses. Here is another look at the accounting cycle that we previewed in the last chapter. In this chapter, we will devote a significant amount of time learning about adjusting entries. Unadjusted Trial Balance A listing of individual accounts, usually in financial statement order. Ending debit or credit balances are listed in two separate columns. Total debit account balances should equal total credit account balances. The trial balance is a listing of all of the account balances in our general ledger. The total of all debit balance accounts should equal the total of all credit balance accounts. When this occurs we can say that the books are in balance. . | Adjustments, Financial Statements, and the Quality of Earnings Chapter 4 Chapter 4: Adjustments, financial statements, and the quality of earnings. Managers of most companies understand the need to present financial information fairly so as not to mislead users. However, since end-of-period adjustments are the most complex portion of the annual recordkeeping process, they are prone to error. External auditors examine the company’s records on a test, or sample, basis. To maximize the chance of detecting any errors significant enough to affect users’ decisions, CPAs allocate more of their testing to transactions most likely to be in error. Understanding the Business Management is responsible for preparing . . . . . . useful to investors and creditors. High Quality = Relevance + Reliability Financial Statements Management bears the ultimate responsibility for the preparation of financial statements. High quality financial statements are those that are considered relevant and .
