Accounting for the Nonfinancial Manager

Chapter 2: The Financial Statements (Part A)

Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved

© Harvard University Division of Continuing Education, 2011

Learning Objectives:

After studying chapter 2 you should be able to describe:

1: the objectives of financial reporting;

2: the accounting equation;

3: the four main financial statements;

4: the characteristics of accounting information;

5: the main accounting concepts.

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Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved

© Harvard University Division of Continuing Education, 2011

The objectives of financial reporting:

Financial statements are prepared annually and are distributed to shareholders and other interested parties.

They are:

prepared for the use of actual and potential investors and creditors;

for use when making investing and lending decisions;

to help predict future cash flows.

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Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved

© Harvard University Division of Continuing Education, 2011

The Accounting Equation:

Assets = Liabilities & Owners’ Equity

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Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved

© Harvard University Division of Continuing Education, 2011

The Financial Statements:

The balance sheet:assets, liabilities and owners’ equity at the year end.

The income statement:revenues, expenses and net income for a year.

The statement of retained earnings:income, distribution of dividends and retained earnings.

The cash flow statement:sources and uses of cash and cash balances

All the above are sent toshareholdersthe stock exchange (listed companies)government (for tax and statistical purposes)

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Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved

© Harvard University Division of Continuing Education, 2011

Assessing Profitability:

Return on assets:Operating income/total assets$100,000/$500,000 = 20%How well did the company use the assets under its control?

Return on investment:Net income/shareholders’ equity$65,000/$260,000 = 25%How good an investment was this for shareholders?

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Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved

© Harvard University Division of Continuing Education, 2011

Characteristics of Accounting Information:

Relevance:To be relevant, information must be able to influence a decision or a belief. It must pertain to the situation and be available in a timely manner.

Reliability:Reliable information is:

verifiable;representationally faithful:neutral;comparable;consistent

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Accounting for Non-Financial Managers, Revised 2nd ed.© Captus Press Inc. All Rights Reserved

© Harvard University Division of Continuing Education, 2011

Accounting Concepts:(Generally Accepted Accounting Principles, or GAAP):

1.Business entity;2.Historic cost;3.Going concern;4.Periodicity;5.Disclosure;6.Conservatism;7.Recognition;8.Matching;9.Materiality.

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