CHAPTER 2

FINANCIAL REPORTING MECHANICS

Thomas R. Robinson, CFA

Jan Hendrik van Greuning, CFA

Karen O'Connor Rubsam, CFA

Elaine Henry, CFA

Michael A. Broihahn, CFA

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;
  • describe the process of recording business transactions using an accounting system based on the accounting equation;
  • describe the need for accruals and other adjustments in preparing financial statements;
  • describe 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;
  • describe 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 the perspective of the user rather than the preparer. Learning the process from this perspective will enable an analyst ...

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