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The objective of general purpose financial reporting

Report financial information that useful in making decisions about providing resources to the reporting

Financial information

1. Related to the entity economic resources and claims to them ( financial position). That help to
evaluate liquidity , solvency, financial needs and the probability of obtaining financing.

2. Changes in those resources and claims. Arising from

A. the entity's performance ( income statement )

B. other events and transactions, such as issuing debt and equity ( balance sheet).

Information about
performance is useful for

1. understanding the return on economic resource and its components.

2. Evaluating management.

3. Forecasting future return.

- Financial statements are useful to external parties and prepared in conformity with GAAP.
- Managerial accounting helps management decision making , planning and control, management
accounting is directed specific internal users and it not need to follow GAAP.
Users with direct interest such as investors and creditors, management and employees , but there are many users
having indirect interest such as financial advisors , stock market and regulatory authorities.

Users may be external they use financial statements to determine whether doing business with firm will be

Internal users use financial statements to make decision affecting the operations of the business .


deen tekram kcots

deen srotsevnI yrotaluger
deensrotiderC srosivda laicnani f ot noi tamrofni
ot noi tamrofni deen sei tirohtua
ot noi tamorfni ot noi tamrofni deen ot rehtehw etaulave
ot rehtehw ediced ot noi tamrofni
ot rehtehw ediced srotsevni tsissa mri f eht tpecca
esaerced , esaercni mri f eht etualave
dna tiderc dnetxe ci ficeps etaulave ro gni tsil kcots
na niatbo ro htiw ytimrofnoc
mret tshw rednu stnemtsevni s' mri f eht dnepsus
mri f a ni tnemtsevni snoi taluger


Management need s information to

A. assess the financial strenght and weakness Employees need information to negotiate
wages and fringe benefits
B. to evaluate performance results , past decisions
and to plan the future financial goals and steps to
accomplish them

Features of financial statements

1. Primary means of communicating financial information to external parties. additional information is

provided by FS notes, supplementary information ( MD&A).

The notes are the basic part of FS. They explain information recognized in FS, they are
integral part of FS prepared in accordance with GAAP, notes should not be used to
correct improper presentation.
Supplementary information may include details or amounts that present a different
perspective from that adopted in the financial statements. It may be quantifiable information
that is high in relevance but low in reliability. Or it may be information that is helpful but not
essential. One example of supplementary information is the data and schedules provided by
oil and gas companies: Typically they provide information on proven reserves as well as the
related discounted cash flows. Supplementary information may also include managements
explanation of the financial
.information and its discussion of the significance of that information
Financial statements includes 1) financial position 2)income statement 3)statement of comprehensive income
4)statement of changes in equity 5) statement of cash flows.

Objectives of financial statements

(1) useful to those making investment and credit decisions who have

a reasonable understanding of business and economic activities;

(2) helpful to present and potential investors, creditors, and other users in assessing the amounts, timing, and
uncertainty of future cash flows; and

(3) about economic resources, the claims to those resources, and the changes in them.

Qualitative Characteristics of Accounting Information

Primary Qualities

Relevance. To be relevant, accounting information must be capable of making a difference

in a decision. helps users make predictions about the ultimate outcome of past, present, and future events; that is, it
has predictive value.

Relevant information also helps users confirm or correct prior expectations; it has feedback

it must also be available to decision makers before it loses its capacity to influence their
decisions. It has timeliness .

Reliability. Accounting information is reliable to the extent that it is verifiable, is a

faithful representation, and is reasonably free of error and bias.

Verifiability is demonstrated when independent measurers, using the same measurement

methods, obtain similar results.

Representational faithfulness means that the numbers and descriptions represent

what really existed or happened.

Neutrality means that information cannot be selected to favor one set of interested
parties over another.

Secondary Qualities

Comparability. Information that has been measured and reported in a similar manner
for different enterprises is considered comparable.

Consistency. When an entity applies the same accounting treatment to similar events,
from period to period, the entity is considered to be consistent in its use of accounting

Basic Elements

ASSETS. Probable future economic benefits obtained or controlled by a particular

entity as a result of past transactions or events.
LIABILITIES. 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.
EQUITY. Residual interest in the assets of an entity that remains after deducting
its liabilities. In a business enterprise, the equity is the ownership interest.

INVESTMENTS BY OWNERS. Increases in net assets of a particular enterprise

resulting from transfers to it from other entities of something of value to obtain
or increase ownership interests (or equity) in it. Assets are most commonly received
as investments by owners, but that which is received may also include
services or satisfaction or conversion of liabilities of the enterprise.
DISTRIBUTIONS TO OWNERS. Decreases in net assets of a particular enterprise
resulting from transferring assets, rendering services, or incurring liabilities
by the enterprise to owners. Distributions to owners decrease ownership interests
(or equity) in an enterprise.
COMPREHENSIVE INCOME. Change in equity (net assets) of an entity during
a period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners.
REVENUES. Inflows or other enhancements of assets of an entity or settlement
of its liabilities (or a combination of both) during a period from delivering or producing
goods, rendering services, or other activities that constitute the entitys
ongoing major or central operations.
EXPENSES. Outflows or other using up of assets or incurrences of liabilities (or
a combination of both) during a period from delivering or producing goods, rendering
services, or carrying out other activities that constitute the entitys ongoing
major or central operations.
GAINS. Increases in equity (net assets) from peripheral or incidental transactions
of an entity and from all other transactions and other events and circumstances
affecting the entity during a period except those that result from revenues or investments
by owners.
LOSSES. Decreases in equity (net assets) from peripheral or incidental transactions
of an entity and from all other transactions and other events and circumstances
affecting the entity during a period except those that result from expenses
or distributions to owners.

The third level

Basic Assumptions

The economic entity assumption means that economic activity can be identified with
a particular unit of accountability,the activity of a business enterprise can be kept separate and distinct from its
owners and any other business unit.

going concern assumptionthat the business enterprise will have a long life.
The monetary unit assumption means that money is the common denominator of economic
activity and provides an appropriate basis for accounting measurement and
The periodicity (or time period) assumption implies that the economic activities
of an enterprise can be divided into artificial time periods.

Basic Principles of Accounting

Historical Cost Principle
GAAP requires that most assets and liabilities be accounted for and reported on the
basis of acquisition price.
Revenue Recognition Principle
is generally recognized (1) when realized or realizable and (2) when earned. This
approach has often been referred to as the revenue recognition principle. Revenues
are realized when products (goods or services), merchandise, or other assets are exchanged
for cash or claims to cash. Revenues are realizable when assets received or
held are readily convertible into cash or claims to cash. Assets are readily convertible
when they are salable or interchangeable in an active market at readily determinable
prices without significant additional cost.
In addition to the first test (realized or realizable), revenues are not recognized until
earned. Revenues are considered earned when the entity has substantially accomplished
what it must do to be entitled to the benefits represented by the revenues.
Matching Principle
In recognizing expenses, the approach followed is, Let the expense follow the revenues.
Expenses are recognized not when wages are paid, or when the work is performed,
or when a product is produced, but when the work (service) or the product
actually makes its contribution to revenue.

Full Disclosure Principle

the general practice of providing information
that is of sufficient importance to influence the judgment and decisions of an informed
user is followed. Often referred to as the full disclosure principle, it recognizes that
the nature and amount of information included in financial reports reflects a series of
judgmental trade-offs. These trade-offs strive for (1) sufficient detail to disclose matters
that make a difference to users, yet (2) sufficient condensation to make the information
understandable, keeping in mind costs of preparing and using it.
Information about financial position, income, cash flows, and investments can be
found in one of three places: (1) within the main body of financial statements, (2) in
the notes to those statements, or (3) as supplementary information.

Cost-Benefit Relationship
The costs of providing the information must be weighed against the benefits that can be
derived from using the information.
The constraint of materiality relates to an items impact on a firms overall financial
An item is material if its inclusion or omission would influence or change the
judgment of a reasonable person.
Industry Practices
industry practices. The peculiar nature of some industries and business concerns
sometimes requires departure from basic theory. In the public utility industry, noncurrent
assets are reported first on the balance sheet to highlight the industrys capital-intensive
Conservatism means when in doubt choose the solution that will be least likely to
overstate assets and income
Cash flow statement

Provide information about cash inflow ( cash receipts ) and cash outflow ( cash
disbursement )from an entity activities ( operating , investing and financing ) to
assess the firm liquidity through evaluate ability to generate positive future net cash flow , and to assess
solvency through evaluate the firm ability to meet its obligations and financial flexibility .

Liquidity -----positive future net cash flow

Solvency ------- the firm ability to meet obligations
Financial flexibility.

CF statement explain the change in cash and cash equivalent, it reconcile beginning balance of cash with
ending balance

- Operating activities

Cash derived from the principal revenue producing activities , they result from transactions and other
event s that enered into deteemnation of net income .

- Investing activities

Expenditures have been made for resources intended to generate future income and cash flow

A. Cash payment to purchase or cash receipts from sale of P&P&E , intangible and long lived assets
B. Cash payment to purchase or cash receipts from sale and maturity of equity (stock ) or debt ( bonds )of
other firms for investing purposes.
C. Cash advances and loan made to other parties

- Financing activities
Cash transactions that related to the issuance , settlement or reacquisition of equity debt and equity instruments
A. Cash inflow
Cash proceeds from issuing equities and shares
Cash proceeds from obtaining loans and issuing debt such as bonds and other short term and long term liabilities.

B. Cash outflows
Cash repayments of amount borrowed
Payment of cash dividends
Cash payment for acquire or redeem the firm stocks
Cash payment by a lesee for reduction of lease liability

Reconciliation of the net income

Adjusting the net income for the effect of the following

A. Non cash revenues and expenses such as
Depreciation and amortization expenses,
impairment losses
undistributed profits of equity investing method
amortization of discount and premium on bonds

B. Items whose effects related to investing and financing activities

Gain or losses on sale P,P&E
Gain or losses on extinguishment debt
C. All deferrals of past operating cash flow
Changes during the period in inventory
Deferred income
D. All accruals of expecting future operating cash flow
Changes during the period in accounts receivable and account payable
Disclosures of cash flow staenment
Must disclose all major classes of reconcile items
Changes in A/R and A/P related to activities
Changes in inventories