CHAPTER 2

FINANCIAL REPORTING MECHANICS

Thomas R. Robinson, CFA

Charlottesville, VA, U.S.A.

Jan Hendrik van Greuning, CFA

Reston, VA, U.S.A.

Karen O’Connor Rubsam, CFA

Fountain Hills, AZ, U.S.A.

Elaine Henry, CFA

Coral Gables, FL, U.S.A.

Michael A. Broihahn, CFA

Pembroke Pines, FL, U.S.A.

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

  • Explain the relationship of financial statement elements and accounts and classify accounts into the financial statement elements.
  • Explain the accounting equation in its basic and expanded forms.
  • Explain the process of recording business transactions using an accounting system based on the accounting equation.
  • Explain the need for accruals and other adjustments in preparing financial statements.
  • Explain the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners’ equity.
  • Describe the flow of information in an accounting system.
  • Explain the use of the results of the accounting process in security analysis.

1. INTRODUCTION

The financial statements of a company are end-products of a process for recording transactions of the company related to operations, financing, and investment. The structures of financial statements themselves reflect the system of recording and organizing transactions. To be an informed user of financial statements, the analyst must be knowledgeable about the principles of this system. This chapter will supply that essential knowledge, taking ...

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