LO1 – Explain the importance of and challenges related to basic financial statement disclosure.
The objective of financial statements is to communicate information to meet the needs of external users. In addition to recording and reporting verifiable financial information, accountants make decisions regarding how to measure transactions. Applying GAAP can present challenges when judgment must be applied as in the case of cost-benefit decisions and materiality.
LO2 – Explain and prepare a classified balance sheet.
A classified balance sheet groups assets and liabilities as follows:
|Current assets||Current liabilities|
||Non-current or long-term liabilities|
Current assets are those that are used within one year or one operating cycle, whichever is longer, and include cash, accounts receivables, and supplies. Non-current assets are used beyond one year or one operating cycle. There are three types of non-current assets: property, plant, and equipment (PPE), long-term investments, and intangible assets. Long-term investments include investments in shares and bonds. Intangible assets are rights held by the owner and do not have a physical substance; they include copyrights, patents, franchises, and trademarks. Current liabilities must be paid within one year or one operating cycle, whichever is longer. Long-term liabilities are paid beyond one year or one operating cycle. Income statements are also classified (discussed in Chapter 5).
LO3 – Explain the purpose and content of notes to financial statements.
In accordance with the GAAP principle of full disclosure, relevant details not contained in the body of financial statements are included in the accompanying notes to financial statements. Notes would include a summary of accounting policies, details regarding property, plant, and equipment assets, and specifics about liabilities such as the interest rates and repayment terms.
LO4 – Explain the purpose and content of the auditor's report.
An audit as it relates to the auditor's report is an external examination of a company's financial statement information and its system of internal controls. Internal controls are the processes instituted by management of a company to direct, monitor, and measure the accomplishment of its objectives including the prevention and detection of fraud and error. The auditor's report provides some assurance that the financial statements are trustworthy. In simple terms, an unqualified auditor's report indicates that the financial statements are truthful and a qualified auditor's report is one that indicates the financial statements are not or may not be truthful.
LO5 – Explain the purpose and content of the report that describes management's responsibility for financial statements.
This report makes a statement describing management's responsibility for the accurate preparation and presentation of financial statements.