accounting for the nonfinancial manager chapter 2: the financial statements (part a)
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Accounting for the Nonfinancial Manager
Chapter 2: The Financial Statements (Part A)
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Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved
© Harvard University Division of Continuing Education, 2011
Learning Objectives:
After studying chapter 2 you should be able to describe:
1: the objectives of financial reporting;
2: the accounting equation;
3: the four main financial statements;
4: the characteristics of accounting information;
5: the main accounting concepts.
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Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved
© Harvard University Division of Continuing Education, 2011
The objectives of financial reporting:
Financial statements are prepared annually and are distributed to shareholders and other interested parties.
They are:
prepared for the use of actual and potential investors and creditors;
for use when making investing and lending decisions;
to help predict future cash flows.
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Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved
© Harvard University Division of Continuing Education, 2011
The Accounting Equation:
Assets = Liabilities & Owners’ Equity
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Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved
© Harvard University Division of Continuing Education, 2011
The Financial Statements:
The balance sheet:assets, liabilities and owners’ equity at the year end.
The income statement:revenues, expenses and net income for a year.
The statement of retained earnings:income, distribution of dividends and retained earnings.
The cash flow statement:sources and uses of cash and cash balances
All the above are sent toshareholdersthe stock exchange (listed companies)government (for tax and statistical purposes)
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Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved
© Harvard University Division of Continuing Education, 2011
Assessing Profitability:
Return on assets:Operating income/total assets$100,000/$500,000 = 20%How well did the company use the assets under its control?
Return on investment:Net income/shareholders’ equity$65,000/$260,000 = 25%How good an investment was this for shareholders?
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Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved
© Harvard University Division of Continuing Education, 2011
Characteristics of Accounting Information:
Relevance:To be relevant, information must be able to influence a decision or a belief. It must pertain to the situation and be available in a timely manner.
Reliability:Reliable information is:
verifiable;representationally faithful:neutral;comparable;consistent
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Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved
© Harvard University Division of Continuing Education, 2011
Accounting Concepts:(Generally Accepted Accounting Principles, or GAAP):
1.Business entity;2.Historic cost;3.Going concern;4.Periodicity;5.Disclosure;6.Conservatism;7.Recognition;8.Matching;9.Materiality.
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