The balance sheet reports the firm’s financial position at a point in time and consists of three elements: assets, liabilities, and equity.
Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
A form that a company must file with the SEC to report significant events such as acquisitions, disposals of major assets, or changes in management.
A primary standard-setting body in the United States that sets forth Generally Accepted Accounting Principles (U.S. GAAP).
The income statement reports the revenues and expenses of a firm for a specific period, providing insights into its operational performance.
Faithful representation means that the information is complete, neutral (free from bias), and free from error.
Financing cash flows are those resulting from issuance or retirement of debt and equity securities and dividends paid to stockholders.
Financial statement notes (footnotes) include disclosures that offer further detail about the information summarized in the financial statements.
An organization that most national regulatory authorities belong to, seeking uniform financial regulations across countries.
Under the Sarbanes-Oxley Act, management is required to provide a report on the company’s internal control system.
Reports that update the major financial statements and footnotes of a company, typically not audited.
Professional organizations of accountants and auditors that establish financial reporting standards.
Information provided by management to analysts about expected future earnings before the release of financial statements.
Guidelines that ensure financial statements are useful and comparable, helping to narrow the range of management's estimates and assumptions.
Understandability means that users with basic business knowledge should be able to comprehend the financial statements.
The going concern assumption refers to the expectation that the firm will continue to operate in the foreseeable future, which is a critical consideration in financial reporting.
A structured approach consisting of six steps: state the objective and context, gather data, process the data, analyze and interpret the data, report conclusions or recommendations, and update the analysis.
An audit is an independent review of an entity’s financial statements conducted by public accountants to provide an opinion on the fairness and reliability of the financial reports.
An unqualified opinion indicates that the auditor believes the financial statements are free from material omissions and errors.
A qualified opinion is issued by the auditor when there are exceptions to Generally Accepted Accounting Principles (GAAP), which are explained in the audit report.
Materiality means that financial statements should be free of misstatements or significant omissions.
Expenses are outflows from delivering or producing goods or services that constitute the entity’s ongoing major or central operations.
Assets are probable current and future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.
Verifiability means that independent observers, using the same methods, obtain similar results.
The objective of an audit is to enable the auditor to provide an opinion on the fairness and reliability of the financial reports.
Fair presentation refers to faithfully representing the effects of the entity’s transactions and events in financial statements.
Transparency refers to full disclosure and fair presentation that reveal the underlying economics of the company to users.
Gains and losses are increases (decreases) in equity or net assets from peripheral or incidental transactions.
The three approaches to standard setting are: a principles-based approach that relies on a broad framework, a rules-based approach that provides specific guidance for classifying transactions, and an objectives-oriented approach that blends the other two.
Timeliness refers to the availability of information to decision makers before it becomes stale, ensuring its relevance.
The accrual basis requires that revenue be recognized when earned and expenses recognized when incurred, regardless of when cash is actually paid.
The going concern assumption presumes that the company will continue to operate for the foreseeable future.
Consistency refers to maintaining the same presentation and classification of items between periods.
Relevance refers to the quality of financial information that can influence economic decisions or affect evaluations of past events or forecasts of future events.
Comparability is the characteristic that financial statement presentation should be consistent among firms and across time periods.
The effort to develop one universally accepted set of accounting standards.
Management’s commentary, or management’s discussion and analysis (MD&A), provides an assessment of the financial performance and condition of a company from the perspective of its management.
The required financial statements include the balance sheet, statement of comprehensive income, cash flow statement, statement of changes in owners’ equity, and explanatory notes.
No offsetting means that assets cannot be offset against liabilities or income against expenses unless specifically permitted by a standard.
Valuation refers to the different measurement bases for valuing assets and liabilities, involving a trade-off between relevance and reliability, where bases like historical cost are more reliable but less relevant compared to fair value, which requires more judgment.
The asset/liability approach focuses on balance sheet valuation, while the revenue/expense approach emphasizes the valuation of changes over time, as reflected in the income statement.
An adverse opinion is issued when the auditor believes the financial statements are not presented fairly or are materially nonconforming with GAAP.
Reporting frequency must be at least annually for financial statements.
Documents issued to shareholders that require a vote, providing information about board member elections, compensation, and management qualifications.
Government agencies that have the legal authority to enforce compliance with financial reporting standards.
Operating cash flows include the cash effects of transactions that involve the normal business of the firm.
A primary standard-setting body outside the United States that establishes International Financial Reporting Standards (IFRS).
Revenues are inflows from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
Owners’ equity is the residual interest in the assets of an entity that remains after deducting its liabilities.
The cash flow statement reports the company’s cash receipts and outflows.
Investing cash flows are those resulting from acquisition or sale of property, plant, and equipment, of a subsidiary or segment, and purchase or sale of investments in other firms.
Footnotes and Management's Discussion and Analysis (MD&A) provide disclosures about financial standards, policies, estimates, and any changes since the prior period, helping analysts evaluate the relevance and reliability of the financial statements.
A disclaimer of opinion is issued when the auditor is unable to express an opinion on the financial statements.
Comparative information for prior periods should be included unless a specific standard states otherwise.
To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
They should observe high professional standards, have adequate authority and resources, maintain clear processes, operate independently, and make decisions in the public interest.
Going concern basis assumes that the firm will continue to exist unless its management intends to liquidate it.
Barriers include issues related to valuation, standard setting, and measurement.
The statement of changes in owners’ equity reports the amounts and sources of changes in equity investors’ investment in the firm.
Aggregation is the process of combining similar items and separating dissimilar items in financial statements.
Internal controls are the processes by which a company ensures that it presents accurate financial statements, and they are the responsibility of the firm's management.
A reconciliation statement shows what a company's financial results would have been under an alternative reporting system.
Accrual basis of accounting is used to prepare financial statements other than the statement of cash flows.
A coherent financial reporting framework is one that fits together logically, being transparent, comprehensive, and consistent.
Comprehensiveness means including all types of transactions with financial implications, including new kinds that emerge.
<p>To provide information about a firm’s performance and financial position. </p>
<ul class="tight" data-tight="true"><li><p>Balance Sheet </p></li><li><p>Income Statement </p></li><li><p>Cash Flow Statement</p></li><li><p>Statement of Changes in Equity</p></li></ul><p></p>
<ul class="tight" data-tight="true"><li><p>Unqualified/Unmodified/Clean Opinion</p></li><li><p>Qualified Opinion</p></li><li><p>Adverse Opinion</p></li></ul><p></p>
<p>To use financial reports in combination with other sources of information to decide whether to invest in a firm.</p>
<ul class="tight" data-tight="true"><li><p>Interim Reports</p></li><li><p>Proxy Statements</p></li><li><p>Press releases, conference calls, websites</p></li><li><p>External sources</p></li></ul><p></p>
