CHAPTER 2
FINANCIAL REPORTING MECHANICS
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.
SUMMARY OVERVIEW
- Business activities can be classified into three groups: operating activities, investing activities, and financing activities.
- Companies classify transactions into common accounts that are components of the five financial statement elements: assets, liabilities, equity, revenue, and expense.
- The core of the accounting process is the basic accounting equation: Assets=Liabilities+Owners’ equity.
- The expanded accounting equation is Assets=Liabilities+Contributed capital+Beginning retained earnings+Revenue−Expenses−Dividends.
- Business transactions are recorded in an accounting system that is based on the basic and expanded accounting equations.
- The accounting system tracks and summarizes ...
