Four Basic Concepts Of Financial Reporting

Concepts Understanding

1) Define the general purposes of financial reporting.

a. Financial reporting provides financial information that is used internally to make important decisions regarding credit, cash flow prospects and investment strategies. Financial reporting is also used to communicate important financial information to those that are external to the entity.

2) List the four basic components of a complete set of financial statements.

a. A complete set of financial statements includes:

i. A balance sheet is a snapshot of a businesses assets and liabilities on a particular date. ii. Income statements provide a summary of the losses, revenues, net income and net losses for an organization over a particular period of time. iii. The

a. Company management is responsible for the preparation and presentation of financial statements.

6) List and describe the types of opinions an auditor might give on financial statements.

a. An auditor might provide the following type of opinions in regard to a financial statement:

i. An unqualified opinion means that all documents were available, in order and met the needed requirements. This is the most desirable type of opinion. ii. A qualified opinion is given when most all the needed documentation was found to be in order. There may have been a single issue or so with an account or transaction. iii. An adverse opinion states that the company’s financial statements are not in sync with the company’s actual financial condition. Financial operations or cash flows may not conform to generally accepted accounting principles. iv. A disclaimer of opinion occurs when the auditor does not express an opinion because they generally feel that the company did not provide sufficient information.

7) What is the purpose of the Sarbanes Oxley

The balance sheet would provide a general understanding of what assets are available for utilization as well as what liabilities are present and the amount of stockholder equity. This information would be important in understanding where to begin in developing strategies for the future. The statement of income would be essential to determining the company’s financial situation over the course of the defined period. This is critical because the strategy for future operations would be much different if the company is losing money rather than gaining it. The cash flow statement would also help to determine how well investing and financing activities are aligning with actual cash flows. There could be a need for financing revision in regard to this area if there is a lack of synchronization. Lastly, the statement of changes in owners or stockholders equity would be significant in determining methods for ensuring continued support from external sources. A drastic drop in stockholder equity could be a warning sign that company operations need to be