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Financial Statement Preparation And Analysis: A Comprehensive Case Study

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    Financial Statement Preparation and Analysis: A Comprehensive Case Study Blueprint Problem: Preparing financial statements Accounting information Should we buy stock in a company? Should we extend a line of credit to a company? Should we continue with current operations or change how we do business? These are the types of questions stakeholders ask themselves. Stakeholders require useful accounting information in order to make accurate financial decisions. In accordance with agenerally accepted accounting principles (GAAP), a company's financial statement must contain accurate accounting information and is used in financial reporting. How do you know whether accounting information is useful? Review each of the accounting concepts below that describe the qualitative characteristics of accounting information. The Qualitative Characteristics of Accounting Information Comparability Conservatism Consistency Materiality Relevance Reliability Understandability In each of the following scenarios, which accounting concept is being violated? 1. A major explosion at a company's main production facility caused a two - month stoppage of operations during a busy time of year. It went unreported because the accountant said its dollar effect was too low. Comparability Comparability 2. A completely separate company from the one with which you are concerned may not make it through the year. This information was included in your company's financial statements. Conservatism Conservatism 3. Your company has decided to change its method of accounting for depreciation of some equipment used in the production process in the current period. This seems odd, as it was just changed last year. It is becoming difficult to compare numbers associated with depreciation from one year to the Consistency next. Consistency 4. The accountants at your company have decided to create the financial statements in Italian because the owner of the company came from Italy. Materiality Materiality 5. A potential investor wishes to determine whether to invest in your company or in a competitor's. On the surface, it appears that your company has less depreciation expense, yet your accountants forgot to disclose the company's accounting policy for depreciation. Relevance Relevance 6. Your company is looking to expand through acquisition into the business of microprocessors. The CFO claims that his mother's privately held company would be a perfect fit for the acquisition. Unfortunately, there is no paper trail of her company's performance, and it is possible that the company doesn't even make microprocessors. Reliability Select

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    7. Because of recent technological breakthroughs in microprocessor development, your company's current inventory could be purchased on the market for significantly less than the value at which you are holding it on your books. However, the accountants have decided not to write down the value of the inventory on the books. Understandability Understandability The financial statements Financial statements are the primary source of a company's accounting information. Open each financial statement for more information, and decide which statement would work best for each of the given scenarios. Types of Financial Statements Income statement Statement of owner's equity Balance sheet Statement of cash flows Desired Action Financial Statement 1. Compare revenues with expenses and analyze profitability Income Statement Income Statement 2. Assess how the company finances its assets Balance Sheet Balance Sheet 3. Analyze how much cash was spent on investing activities Statement of cash flows Statement of Cash Flow s 4. Compare the owner's equity at the beginning of the period with those at the end of it Statement of owner's equity Statement of Ow ner's Equity 5. See a snapshot of a company's financial position at a given point in time Balance Sheet Select APPLY THE CONCEPTS: Construct the income statement When constructing the income statement, it is important to understand that the income statement reports the revenues and expenses for a period of time, based on the matching concept. This concept is applied by matching the expenses with the revenue generated during a period by those expenses. The excess of the revenue over the expenses is called net income or net profit. Jackson Co. has compiled the following account balances from its general ledger on August 31, 2012 (the last day of its fiscal year). + Trial Balance Use the information given to create Jackson Co.'s annual financial statements. Construct Jackson's income statement for 2012. Enter all amounts as positive numbers.

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