1. Accounting for the Nonfinancial Manager Chapter 2: The Financial Statements (Part A)

2. Accounting for Non-Financial Managers, Revised 2 nd 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. 1

3. Accounting for Non-Financial Managers, Revised 2 nd 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. 2

4. Accounting for Non-Financial Managers, Revised 2 nd ed. © Captus Press Inc. All Rights Reserved © Harvard University Division of Continuing Education, 2011 The Accounting Equation: Assets = Liabilities & Owners’ Equity 3

5. Accounting for Non-Financial Managers, Revised 2 nd 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 to shareholders the stock exchange (listed companies) government (for tax and statistical purposes) 4

6. Accounting for Non-Financial Managers, Revised 2 nd 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? 5

7. Accounting for Non-Financial Managers, Revised 2 nd 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 6

8. Accounting for Non-Financial Managers, Revised 2 nd 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. 7