1.

1 Concepts of Financial Accounting

The objective of General Purpose Financial reporting is to report financial information useful in
making decisions.
General-purpose financial statements must be prepared using GAAP (used with external
parties)
There are two types of users: Users with Direct Interest, Users with Indirect Interest

 Users with Direct Interest: Investors, management, employees and suppliers.

 Users with Indirect Interest: Financial Advisors, Stock Market, Regulatory authority
There are two groups of users: External Users, Internal Users

 External Users: Use the financial statements to determine if doing business with the
company is worth it.
Ex. Competitors, Creditors, Banks.

 Internal Users: Use the financial statements in decision making within the firm.
Ex. Management, Board of Directors, Employees
Financial Statements Primary goal is to provide information to external parties.
Additional information is key to understanding financial statements.
The financial statements include:
1. Statement of Financial Position (Balance Sheet)
2. Income Statement
3. Comprehensive Income Statement
4. Statement of Changes in Equity
5. Statement of Cash Flows

Information in financial statements need to be comparable.

Financial Statements are prepared using the going-concern assumption, which is when the
company assumes that it will be running indefinitely. An example of it would be if “company A”
had many credit sales coming in after 3 months. The going concern assumption is assuming that
the company will not liquidate within the 3 months thus not reducing the credit sales to
liquidate and instead move ahead as if the company is going to run smoothly (Liquidation
values are not important).
Financial Statements Complete each other, for Example.

 Net income or loss, (Income Statement) would show in the retained earnings account
(Statement of changes in equity)
 Cash in Current Assets (Balance Sheet) is in the Cash flow as well
 Items of equity (Balance Sheet), is in Statement of changes in equity
 Ending Inventory in the COGS (Income Statement), is in the current asset (Balance
Sheet)
 Amortization and depreciation in the income statement is in the asset and liability
(Balance Sheet)
Financial Statements are prepared using the accrual accounting records:
Revenues are recognized when earned.
Expenses are recognized when incurred.
Cash Basis is when you record revenue or expense when cash is paid or received (NOT USED IN
GAAP)