Category Archive for: Basic Financial Statements


As we learned in Chapter I., many external decision makers use financial statements in making finalcial decisions-that is, in selecting those companies in which they will invest resources or to which they will extend credit. For this reason, financial statements are designed primarily to meet the needs of creditors and investors. Two factors of concern to creditors and investors…

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As our discussion of Overnight Auto Service indicates, the statement of financial position (balance sheet), the income statement, and the statement of cash flows are all bused on the same underlying transaction information, but they present different “views” of the company. They should not be thought of as alternatives to each other; rather, all arc important in terms of…

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Effects of These Business transacttons on the Accountinq Equation

As we learned earlier. the statement of Iinancial position. or balance sheet. is a detailed expression of the accounting equation: Assets = Llahillties + Owner’s E(I’ully Michael McBryan started the business by depositing $80,000 in a company bank account. . . Purchased land for $52,000, paying cash. Purchased a building for $36,000, paying $6,000 in cash and issuing…

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The Stable-Dollat Assumption

A limitation of measuring assets at historical cost is that the value of the ‘monetary unit or dollar is not always stable. Inflation is a term used to describe the situation where the value of the monetary unit decreases, meaning that it will purchase less than it did previously. Deflation, on the other hand, is the oppositesituation in which…

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All three financial statements contain important information, but each includes different information. For that reason, it is important for you to understand all three financial statements and how they relate to each other. The way they relate is sometimes referred to as articulation. a term we will say more about later . A logical starting point for understanding…

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Basic Financial Statements

1. Explain the nature and general purpose of financial statements. 2. Explain certain accounting principles “that are important for an understanding of financial statements and that professional judgment by accountants may affect the application of those principle 3. Demonstrate how certain business transactions affect the elements of the accounting equation: Assets = Liabilities + Owner’s Equity. 4. Explain that the statement of financial position, (Jftan referred to…

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