A. Measuring Business Income
a. explain why financial statements are prepared at the end of the regular accounting period.
Major Financial Statements:
The balance sheet: provides a "snapshot" of the firm's financial condition.
The income statement: reports on the "performance" of the firm.
The statement of cash flows: reports the cash receipts and cash outflows classified according to operating, investment and financing activities.
东北美食The statement of stockholder's equity: reports the amounts and sources of changes in equity from transactions with owners. 运气的英文
The footnotes of the financial statements: allow us to improve asssment of the amount, timing and uncertainty of the estimates reported in the financial statements.
婴儿大便有奶瓣怎么办The most accurate way to measure the results of enterpri activity would be to measure them at the time of the enterpri's eventual liquidation. Business, government, investors, and various other ur groups, however, cannot wait indefinitely for such information. If accountants did not provide financial information periodically, someone el would.
The periodicity or time period assumption simply implies that the economic activities of an enterpri can be divided into artificial time periods. The time periods vary, but the most common are monthly, quarterly, and yearly.
The information must be reliable and relevant. This requires that information must be consistent and comparable over time and also be provided on a timely basis. The shorter the time period, the more difficult it becomes to determine the proper net income for the period. A month's results are usually less reliable than a quarter's results, and a quarter's results are likely to be less reliable than a year's results. Investors desire and demand that information be quickly procesd and disminated; yet the quicker the information is relead, the more it is subject to error. This phenomenon provides an interesting example of the trade-off between relevance and reliability in preparing financial data.
In practice, financial reporting is done at the end of the accounting period. Accounting periods can be any length in time. Firms typically u the year as the primary accounting period. The 12-month accounting period is referred to as the fiscal year. Firms also report for periods less than a year (e.g. quarterly) on an interim basis.
Accounting period must be of equal length. Financial statements are prepared at the end of the regular accounting period to allow comparison across time.
b. explain why the accounts must be adjusted at the end of each period. Why?
Most external transactions are recorded when they occur. The employment of an accrual system means that numerous adjustments are necessary before financial statements are prepared becau certain accounts are not accurately stated.
Some external transactions might not even em like transactions and are recognized only at the end of the accounting period. Examples include unrecorded revenues and credit purcha.
Some economic activities do not occur as the result of external transactions. Examples include depreciation and the expiration of prepaid expens.
Timing: Often a transaction affects the revenue or expens of two or more accounting periods. The related cash inflow or outflow does not always coincide with the period in which the revenue or expen items are recorded. Thus, the need for adjusting entries results from timing differences between the receipt or disburment of cash and the recording of revenue or expens. For example, if we handle transactions on a cash basis, only cash transactions during the year are recorded. Conquently, if a company's employees are paid every two weeks and the end of an accounting period occurs in the middle of the two weeks, neither liability nor expen has been recorded for the last week. To bring the accounts up to date for the preparation of financial statements, both the wage expen and the wage liability accounts need to be incread.
董黯A necessary step in the accounting process, then, is the adjustment of all accounts to an accrual basis and their subquent posting to the general ledger. Adjusting entries are th
erefore necessary to achieve a proper matching of revenues and expens in the determination of net income for the current period and to achieve an accurate statement of the asts and equities existing at the end of the period.
Adjustment principles
都市行The revenue recognition principle
The matching principle
悉尼歌剧院简笔画What to adjust?
蔬菜销售Each adjusting entry affects both a real account (asts, liability, or owner's equity) and a nominal or income statement account (revenue or expen). The four basic types of adjusting entries are:
deferred expens that benefits more than one period: for example, prepaid expens (e.g. prepaid insurance, rent) are expens paid in advance and recorded as asts befo
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re they are ud or consumed. When the asts are consumed, expens should be recognized: a debit to an expen account and a credit to an ast account. Another example is depreciation. The cost of a long-term ast is allocated as an expen over its uful life. At the end of each period depreciation expen is recorded through an adjusting entry: a debit to a depreciation expen account and a credit to an accumulated depreciation account (a contra account ud to total the past depreciation expens on specific long-term asts).
