Primary Objective of Financial Reporting Provide information for decision making Extend credit $$?? Borrow $$?? Invest?? Loan $$?? Start new business?? Sell stocks or bonds?? LO1 2 2

Secondary Objectives of Financial Reporting Reflect prospective cash receipts to investors and creditors A FEDERAL RESERVE NOTE THE UNITED STATES OF AMERICA L70744629F 12 ONE DOLLAR WASHINGTON, D.C. THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE SERIES 1985 H 293 Reflect prospective cash flows to the company A FEDERAL RESERVE NOTE THE UNITED STATES OF AMERICA L70744629F 12 ONE DOLLAR WASHINGTON, D.C. THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE SERIES 1985 H 293 Assets = Liabilities + OE Reflect the company’s resources and claims to its resources 2 2

Qualitative Characteristics Understandability – Relevance – Reliability – To those willing to take the time to understand it Has capacity to make a difference Represents what it purports to LO2 3 3 3

Qualitative Characteristics between companies Comparability from one period to the next Consistency 3 4 4

Qualitative Characteristics Will it make a difference to the decision maker? Materiality Conservatism All else equal, choose least optimistic estimate 3 5 5

Basic Structure of a Classified Balance Sheet Current assets + Noncurrent (long-term) assets Total assets Current liabilities + Noncurrent (long-term) liabilities + Stockholders’ equity Total liabilities and stockholders’ equity 5 7 7

Analysis of Liquidity Ability of company to pay debts as they Of particular interest to bankers and other creditors Ability of company to pay debts as they become due Working Capital Current Ratio LO4 7 8 8

Other Elements of an Annual Report Letter to stockholders Description of company’s products and markets Financial statements Notes to financial statements Report of independent accountants Management discussion and analysis Summary of significant accounting policies 21 21

End of Chapter 2