Task Team of FUNDaMENTAL ACCOUNTING School of Business. Sun Yat-sen University Stock resoures and obligations at a point in time: Balance sheet Flow/activity over a period of time: Income statement, Statement of cash flows The instructor might facilitate some discussion on the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements How Are Financial Statements Prepared? The first step in understanding financial statements is to determine whether they were prepared on a cash, accrual, or modified cash accounting basis. Why? Financial statements vary greatly depending on the accounting method. The reader must know which accounting method was used in order to accurately read the statement The three methods are defined as follows. Cash Basis. Cash basis accounting is similar to a personal checkbook. Financial records track when cash is received or paid out. Income is recorded when a deposit is made to the bank. Expenses are recorded when a check is written to pay a bill Cash basis financial statements are easy to understand and to prepare. The disadvantage, however, is they don't give a full picture of the financial condition. The records omit information on unpaid bills or uncollected as Accrual basis accounting tracks any and all transactions, even if cash is not received or paid out. For example, income is recorded when the dues are assessed, not necessarily when they are collected. The same is true for expenses. Expenses are recorded when they are incurred. For example, if the association buys new equipment, the purchase is recorded even if the bill has not been paid. Because it tracks all income and expenses, accrual basis accounting more accurately records the financial activity of a particular time period Modified Cash Basis. Most associations use modified cash basis accounting for their record keeping It is a compromise between the cash basis and accrual basis. With this method, most transactions are recorded on the cash basis, but some are logged on an accrual basis. For example, accounts receivable (amounts owners owe the association) and income commonly are recorded as they are billed (accrual basis Expenses are recorded as the bills are paid(cash basis). Other accrual adjustments, such as prepaid expenses and income tax accruals, are not mad Modified cash basis is less complex than accrual basis financial statements. During the annual review audit, however, a Cpa often must convert the financial statements to accrual basis What Are the functions of Financial Statements Accounting information is conveyed through a standardized set of reports. The four fundamental financial statements are the income statement, statement of retained earnings, balance sheet, and statement Useful for investment decisions. (Allfinancial statements) Comprehensible. (Allfinancial statements) About economic resources and claims on resoures Balance SheetTask Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Stock/ resources and obligations at a point in time: Balance sheet. Flow/activity over a period of time: Income statement, Statement of cash flows. The instructor might facilitate some discussion on the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements. How Are Financial Statements Prepared? The first step in understanding financial statements is to determine whether they were prepared on a cash, accrual, or modified cash accounting basis. Why? Financial statements vary greatly depending on the accounting method. The reader must know which accounting method was used in order to accurately read the statement. The three methods are defined as follows: Cash Basis. Cash basis accounting is similar to a personal checkbook. Financial records track when cash is received or paid out. Income is recorded when a deposit is made to the bank. Expenses are recorded when a check is written to pay a bill. Cash basis financial statements are easy to understand and to prepare. The disadvantage, however, is they don’t give a full picture of the financial condition. The records omit information on unpaid bills or uncollected assessments. Accrual Basis. Accrual basis accounting tracks any and all transactions, even if cash is not received or paid out. For example, income is recorded when the dues are assessed, not necessarily when they are collected. The same is true for expenses. Expenses are recorded when they are incurred. For example, if the association buys new equipment, the purchase is recorded even if the bill has not been paid. Because it tracks all income and expenses, accrual basis accounting more accurately records the financial activity of a particular time period. Modified Cash Basis. Most associations use modified cash basis accounting for their record keeping. It is a compromise between the cash basis and accrual basis. With this method, most transactions are recorded on the cash basis, but some are logged on an accrual basis. For example, accounts receivable (amounts owners owe the association) and income commonly are recorded as they are billed (accrual basis). Expenses are recorded as the bills are paid (cash basis). Other accrual adjustments, such as prepaid expenses and income tax accruals, are not made. Modified cash basis is less complex than accrual basis financial statements. During the annual review or audit, however, a CPA often must convert the financial statements to accrual basis. What Are the Functions of Financial Statements? Accounting information is conveyed through a standardized set of reports. The four fundamental financial statements are the income statement, statement of retained earnings, balance sheet, and statement of cash flows. Useful for investment decisions. (All financial statements) Comprehensible. (All financial statements) About economic resources and claims on resources (Balance Sheet)