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    Accounting Concepts and the Relation to Financial Statements

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    Part I
    Discuss each of the following terms. Explain why this concept is important to financial statements.
    A. Generally Accepted Accounting Principles
    B. Historical Cost
    C. Accrual Basis versus Cash Basis Accounting
    D. Current Assets and Liabilities versus Non-Current Items

    Part II
    1. Refer to the following three sets of financial statements.
    Amazon (http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsAnnual)
    Dell (http://www.dell.com/content/topics/global.aspx/corp/investor/en/annual?c=us&l=en&s=corp)
    Toyota (http://www.toyota.co.jp/en/ir/index.html)

    2.Locate the following on each of the statements:
    The Balance Sheet
    The Income Statement
    The Statement of Cash Flows

    3. Describe the general organization of each of the three sets of financial statements. Which is more useful in your opinion for each of the three companies: Net Income or Cash from Operating Activities?

    4. Make one prediction about each company from that company's financial statements. Reach one additional conclusion about each company from the additional information you find in the annual report.

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    Solution Preview

    Part 1
    A. Generally Accepted Accounting Principles (GAAP) is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.

    One key aspect of GAAP is an emphasis of "general" as a conceptual realization of variables in method. Far from suggesting that all accounting exercises employ the same method and generate the same results, GAAP accommodates variation in applied accounting methods as long as the methods generally adhere to this set of principles, which are more broad than specific.

    Financial accounting information must be assembled and reported objectively. Third-parties who must rely on such information have a right to be assured that the data are free from bias and inconsistency, whether deliberate or not. For this reason, financial accounting relies on certain standards or guides that are called "Generally Accepted Accounting Principles" (GAAP).

    B. Historical cost accounting is an approach to accounting using asset values based on the actual amount on money paid for assets with no inflation adjustment. This approach is said to use the accounting principle of historical cost. It contrasts with approaches such as current cost accounting. The main advantages of using historical costs is simplicity and certainty. The biggest disadvantage is that book values may be based on badly out of date costs. This becomes more of a problem during periods of high inflation.

    C. In accrual basis accounting, income is reported in the fiscal period it is earned, regardless of when it is received, and expenses are deducted in the fiscal period they are ...

    Solution Summary

    This solution discusses accounting concepts such as accrual basis, historical cost, liabilities, net income, balance sheets...etc.