Financial Accounting: A User Perspective 6th Canadian Edition

chapter 2

ANALYZING TRANSACTIONS AND THEIR EFFECTS ON FINANCIAL STATEMENTS

USER RELEVANCE

THE BASIC ACCOUNTING EQUATION

TRANSACTION ANALYSIS AND THE BASIC ACCOUNTING EQUATION

Sample Transactions

Transaction Analysis

FINANCIAL STATEMENTS

Statement of Earnings

Statement of Financial Position

Variations in Statement of Financial Position Presentation

USING RATIOS TO ANALYZE FINANCIAL STATEMENTS

Profitability Ratios

Statement of Cash Flows

SUMMARY

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1. Describe the basic accounting equation and each of its components.
2. Analyze simple transactions to determine their effects on the basic accounting equation and the financial statements.
3. Describe the difference between accrual-basis accounting and cash-basis accounting.
4. Explain how inventory is accounted for when it is purchased and when it is sold.
5. Identify operating activities and describe their effects on the financial statements.
6. Explain the basic concepts of revenue recognition and expense matching.
7. Prepare a simple set of financial statements, reflecting a series of business transactions.
8. Explain the basic classification of items on a statement of financial position.
9. Calculate three ratios for assessing a company's profitability.
10. Begin to analyze the information provided by a statement of cash flows.

A Recipe for Success—The Evolution of a Business

Ever since high school, Chris Emery and Larry Finnson had known they wanted to go into business together. Sure enough, ...