Balance Sheet: Statement of Financial Position Essay

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2) Balance Sheet- “Statement of Financial Position”
List of Assets, Liabilities, and Owner’s Equity at ONE POINT IN TIME
Summarizes resources (assets), obligations (liabilities), and owner’s claims (owner equity)
Two sections: 1- Assets, 2- Liabilities and Owner’s Equity
ASSETS = LIABILITIES + OWNER’S EQUITY
Owner’s Equity= assets – liabilities
Purpose: to give a snapshot of an organization’s financial position at one point in time
Income Statement- “Profit and Loss Statement”
Tracks sales over one period of time
Takes revenues and subtracts the expenses incurred
Gains and Losses are also reported
Result from non-operating activities
Results for a period of time (monthly, quarterly, and annually)
Transactions that affect the income statement will also affect the balance sheet
Income Statement is a link between the Balance sheet at the beginning and end of the year
Net Income for a period of time
Purpose: to ask the question “Did the entity operate at a Profit for the period?”
Cash Flows
Accomplished by reporting the changes in all of the other balance sheet items
Cash flows from operating activities
Uses net income from the Income Statement
Cash Flows from Investing Activities
Shows cash used to buy long lived assets
Cash Flows from Financial Activities
Amounts raised from sales of long term debt
Purpose: To identify the sources and uses of cash during the year

3) Cash vs. Accrual Accounting
Cash Accounting
Recognizes revenues or expenses only when cash is actually received/paid
Has to exchange hands before it can be recorded
You can accept non-cash items (products or services received instead of cash)
Strengths: Simple to use, taxation issues
Weaknesses: No revenue or expense matching can hide profitability, and poor source for management decisions
Accrued Accounting
Recognizes revenues/expenses when they are earned/incurred with the purpose of matching expenses to associated revenues within the accounting period.
Best measurement of profitability, it does revenue and expense matching right to the period
Inventory monitoring is needed
Accounting when the activity occurs
Strengths: revenue and expense matching leads to accurate estimates of profitability, and good source for management decisions
Weaknesses: requires more knowledge of accounting, more record keeping, and less tax flexibility
Revenue and Expense Matching
All expenses incurred to generate that period’s revenues be deducted from revenues earned
By recognizing costs in the period as they incurred, an entity can see how much was spent to generate revenue
Reduces the timing mismatch between when costs are incurred to when revenue is realized
Revenue is not earned without effort, and expenses are the measure of the economic effort exerted to generate revenues
Necessary if the results of the firm’s operations are to reflect accurately upon it’s economic activities during the period

4) Accounting System Options:
Fiscal Year vs. calendar year:
Annual period used for reporting to owners, government, and other
Calendar year- January 1st to December 31st
Fiscal year- any 12 month period that begins differently than the calendar
Choose a fiscal year end when production activity or inventory is relatively low
Taxation does occur fiscally, due the 15th of the fourth month after the fiscal year end
Cash vs. Accrual
Cash- recognizes revenues or expenses only when cash is actually paid/received. When it “changes hands”
Can accept non-cash payments.
Very simple
Accrual- recognizes revenues and expenses immediately as the activity occurs, within the accounting period
Purpose is to match revenues with expenses
Manual vs. Automated
Manual- uses paper ledger for each part of the accounting system, consolidate ledger into one general ledger with the balance provided for each smaller ledger
Easy to review, in systematic order
Automated- completely computerized; enter data into spreadsheets with algorithms. Creates trending analysis with reports
Much quicker process, errors are
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