The first three chapters introduced the reader to the accounting cycle, the Balance Sheet, and the Income Statement as well as established that accounting provides a picture of an organization but within limits and that there is no truth in accounting. The Balance Sheet provides a starting point to understand a firm’s resources and how it financed them at a point in time. The Income Statement is meant to show not only whether a firm made money (or not) but also how it generated the profit (or loss). The Income Statement is also used as the first step in forecasting a firm’s future cash flows.
This chapter illustrates the accrual method of accounting, which is what most organizations use, where revenue is recognized ...
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