1. FINANCIAL STATEMENTS
BALANCE SHEET

2. GAAP PRINCIPLES THE CONCEPT OF BUSINESS ENTITY
business entity is an economic unit
Separate from its owner

3. ASSETS SHORT TERM cash accounts receivables inventories LONG TERM land
building
machinery

4. WHAT IS AN ASSETS Economic resources
Benefit business in generating cash flows
Directly through selling an asset
Indirectly through utilizing an asset

5. THE COST PRINCIPLE
States that assets should be recorded at their cost or historical value.
The amount may be very different from current market value.
Remember that the dollar amounts are the actual costs.
Balance sheet does not show the business current worth.

6. THE GOING CONCERN CONCEPT
Why not change the values of these assets.
Because they are not for resale purposes (assumption).
Balance sheet prepared on assumption that a business is a going concern.

7. THE OBJECTIVITY PRINCIPLE
Need for definite, factual basis for valuation.
Accountants need objective proof.
Estimation (mkt related) are not objective or factual.
Market values are constantly changing.
The price and market value might be the same on acquisition date but changes with time.

8. STABLE DOLLAR ASSUMPTION
Limitation of measuring asset at a historical cost is that the value of dollar (monetary unit) is not always stable.
Does not recognize time value of money.
Does not recognize inflation.

9. Liabilities and Owners Equity
Liabilities are debts of a business.
Represents negative cash flows or outflows.
When companies purchase merchandize, supplies, or other services on account, they are called to have created account payables.

10. When business borrow money on interest they usually sign a formal note and that creates notes payables.
Creditors claims have priority over those of owners.

11. OWNERS EQUITY
Represents the owners claim to the assets of the business.
Owners equity is the residual amount.
Owners equity in a business comes from two sources.
1 – investments of cash or other assets
by the owner.

12. 2 – earnings from profitable operation of a business.
Decreases in the owners equity
1- withdrawals of cash or other assets by the owner.
2 – losses from unprofitable operation of the business.

13. BALANCE SHEET EQUATION
Assets = liabilities + owners equity OR
Owners equity = assets - liabilities