Financial Statements - Essay Example

? ACCT CASE 2: Financial ments October 14, Part I. • Generally Accepted Accounting Principles (US GAAP); Generally Accepted Accounting Principles are basically rules and concepts. The principles ensure that companies prepare their financial statements by complying with relevance, reliability, comparability and other related generally accepted accounting principles. The principles increase communication of financial data from the makers to the users of the financial statements within the United States (Wild, Shaw, Chiappetta, 2011). • International Accounting Standards (IFRS); The International Accounting Standards (IFRS) present globally preferred accounting principles. The principles are issues by the International Accounting Standard Board. The board is located in the United Kingdom. Steps are currently on the way to harmonize the United States Generally Accepted Accounting Principles (GAAP) and the International Accounting Standards (IFRS). The principles increase communication of financial data from the makers to the users of the financial statements within the global business community, including the United States (Wild, Shaw, Chiappetta, 2011). • Securities and Exchange Commission (SEC); The Securities and Exchange Commission is a government agency tasked with monitoring the financial activities of companies within the United States jurisdiction. The commission oversees the proper implementation of the generally accepted accounting principles. The commission focuses on the fair presentation of the publicly listed companies who offer their stocks to the general public. The SEC monitors and punishes companies that do not comply with SEC’s business policies (Wild, Shaw, Chiappetta, 2011). • Annual report; and The annual report is composed to three financial statements. The balance sheet shows the assets, liabilities, and capital of the business. The income statement shows the revenues, cost of revenues, operating expenses, net income or net loss amounts. The statement of cash flows shows the sources of cash inflows and the sources of cash outflows. The annual report is used by different users for their decision making activities (Wild, Shaw, Chiappetta, 2011). • 10-K The 10-K is the Securities and Exchange version of the company’s financial statements (Nikolai, 2009). Companies are required file their 10-K annual financial report to the Securities and Exchange Commission. The 10-K is filed within 60 days from the end of the company’s accounting period. The 10-K is the SEC’s standard blank form used by companies for submitting their financial reports. Interested parties can acquire the 10-K Securities and Exchange Commission reports for use in enhancing their investment or divestment decisions (Wild, Shaw, Chiappetta, 2011). Part II: The accounting equation is shown as: Assets = Liabilities + Capital. The assets represent all the resources of the company (Wild, Shaw, Chiappetta, 2011). Example: Assets = Liabilities + Capital $ 250,000 = $ 20,000 + $ 200,000 Assets = $50,000, Accts Receivable $ 50,000. Building $200,000. Liabilities = Accounts payable $ 5,000, Notes payable $ 15,000 Capital = Bush, Capital $ 230,000, Bush, drawing $ 30,000 The company owns the resources. Cash is one of the company’s assets (Wild, Shaw, Chiappetta, 2011). Cash includes the coins and paper money. Cash also includes the checks that are paid by the company’s customers. The assets include accounts receivable. Accounts receivable asset represents the amounts owed by the creditors. Sometimes companies sell their product on account. This means the company delivers their products to the customers. In turn, the customers promise to pay their debts after several days or months. The debt amount is recorded as accounts receivable in the company’s books of accounts. The inventory represents items that are being sold in the company’s stores. The inventory also includes unused office supplies, unused cleaning supplies, and other unused items that are owned by the company. The building account is another company asset. Since the company owns the building, the building is included in the assets account. The office equipment is part of the company’s asset account. The office equipment includes the computers, typewriters, calculators, and adding machines. The company has some liabilities to pay (Wild, Shaw, Chiappetta, 2011). The liabilities represent what the company owes its creditors. Similarly, the suppliers may offer the company credit terms when the company buys goods from its suppliers. In exchange for purchased items, the company promises to pay its debts in a few days or months. When this occurs, the company records an accounts payable amount. Further, when company is required to sign a note promising that they will pay the debt within a few days or months, the company records a notes payable amount in its books of accounts. When the company applies or a ten year bank loan, the company records a long term loan amount. In addition, the company may give the customer a two year warranty plan for buying the company’s products and paying for its services. The company records a warranties payable amount in its accounting records. When the company issues a statement that it will release cash dividends to stockholders on record as of a given date, the company records a dividends payable amount to update its accounting books. The company records its capital accounts to complete the accounting equation (Wild, Shaw, Chiappetta, 2011). The capital accounts include the retained earnings. The capital account also includes the current accounting period’s net income amount. The company records owner’s capital account for record the owners’ investment (for example: Mr. Obama, Capital). The company also records owner’s drawing account to record the owner’s withdrawal of investments from the company (example: Mr. Romney, drawing). The company records a net loss account if the company does not generate enough sales to pay for the company’s operating expenses and costs of revenues. Part III. There are several primary intended audiences of the financial statements. They use the financial statement to enhance their decision making activities, in relation to company mentioned in the financial statements. A net profit financial statement encourages the parties to invest in the company. A net loss scares the parties away from investing in the bankrupt company (Wild, Shaw, Chiappetta, 2011). The stockholders use the financial statements as basis for deciding whether to invest more funds in the company (Wild, Shaw, Chiappetta, 2011). The managers use the financial statements to determine if they generated the required sales outputs. The creditors use the financial statements to determine if they will extent loans to the company. The customers use the financial statements to determine if the company will stay long enough to supply the current and prospective customers’ needs, wants, and even caprices. The suppliers will use the financial statements to determine if they will be able to continue supplying the company’s needs for many more years. The employees use the financial statements to determine if the company can afford to grant the employees’ pending salary increase requests. The government tax agencies us the financial statements as basis for tax collection estimates. The employment agencies use the financial statements to determine whether the company is complying with the employee wage laws. The residents will use the financial statement to know if they can apply for work in the company. The environmental protection companies use the financial statements to determine if the company violated any pollution and other waste management policies. There are other groups interested in the financial statements (Wild, Shaw, Chiappetta, 2011). The students of accounting use the financial statements to practice what they learned in class. The teachers use the financial statements to clarify classroom accounting theories. The competitors use the financial statements to keep abreast of the competitions. REFERENCES: J Wild, K Shaw, B Chiappetta. (2011). Fundamental Accounting Principles. New York: McGrawHill. Nikolai, L. (2009). Intermediate Accounting. New York: Cengage Learning Press. Read More