Financial Accounting: In an Economic Context

SUMMARY OF KEY POINTS

The key points of this chapter are summarized as follows.

The economic role of financial accounting statements.

Investors and creditors demand that management provide financial accounting information for two fundamental economic reasons. First, they need financial numbers to monitor and enforce the debt and compensation contracts written with management. Second, they need financial information to decide where to invest their funds. Companies incur the costs of providing the statements and having them audited because they need to attract capital from investors and creditors, and managers want to maintain their levels of compensation. Management hires auditors who must act independently because they face high levels of legal liability and must follow professional ethical standards.

The four financial statements and the information each provides.

The four financial statements are (1) the balance sheet, (2) the income statement, (3) the statement of shareholders' equity, and (4) the statement of cash flows. The balance sheet lists the assets, liabilities, and shareholders' equity of a company at a given point in time. The income statement contains the revenues earned and expenses incurred by a company over a period of time. Revenues less expenses equals net income. ...