Financial Statements and Accounting Concepts/Principles

 

Financial statements are the product of the financial accounting process. They are the means of communicating economic information about the entity to individuals who want to make decisions and informed judgments about the entity. Although each of the four principal financial statements has a unique purpose, they are interre­lated and all must be considered in order to get a complete financial picture of the reporting entity.

Users cannot make meaningful interpretations of financial state­ment data without understanding the concepts and principles that relate to the entire financial accounting process. It is also important for users to understand that these concepts and principles are broad in nature; they do not constitute a fixed set of rules, but instead serve as guidelines for the development of sound financial re­porting practices.

 

LEARNING OBJECTIVES

 

After studying this chapter you should understand:

•           What transactions are and the meaning and usefulness of the account­ing equation.

 

•           The kind of information reported on each financial statement and the way financial statements are related to each other.

 

•           The meaning of each of the captions on the financial statements illus­trated in this chapter.

 

•           The broad, generally accepted concepts and principles that apply to the accounting process.

 

•           Several limitations of financial statements.

 

•           What a corporation's annual report is and why it is issued.

 

•           Business procedures related to organizing a business, fiscal year, par value, and parent-subsidiary corporations.