Financial Accounting: In an Economic Context

CHAPTER 4

The Mechanics of Financial Accounting

KEY POINTS

The following key points are emphasized in this chapter:

• Two criteria necessary for economic events to be reflected in the financial statements.
• The accounting equation and how it relates to the balance sheet, income statement, statement of shareholders’ equity, and statement of cash flows.
• Journal entries (and T-accounts) and how they express the effect of economic events on the basic accounting equation and the financial statements.
• Why managers need to understand how economic events affect the financial statements.
• Why the financial statements are adjusted periodically to reflect certain economic events.

The U.S. General Accounting Office (GAO) periodically reports to Congress on the performance and accountability of various U.S. government agencies. In its report on the Small Business Administration (SBA), established to help small U.S. businesses, the GAO concluded:

The SBA continues to have difficulties producing complete, accurate, and timely financial statements. It incorrectly calculated the accounting losses on loan sales and did not perform key analyses to determine the overall financial impact of the sales. These errors and lack of key analyses also mean that congressional decision-makers are not receiving accurate financial data to make informed decisions about the SBA's budget and appropriations.

This quote reflects a problem confronting many large and well-known U.S. companies, not just governmental agencies—a ...