【正文】 七 Investment Tools: Financial Statement Analysis: Basic Concepts : Preliminary Reading Measuring Business Ine a: Explain why financial statements are prepared at the end of the regular accounting period, why accounts must be adjusted at the end of each period, and why the accrual basis of accounting produces more useful ine statements amp。 balance sheets than the cash basis. To be relevant, information must be reliable. This means information must be consistent and parable over time and be provided on a timely basis. According to the relevancy principle, a firm needs to identify its activities in a timely fashion within a specific period, such as a quarter or year. Normal accounting procedure is to record during the accounting period those economic events that occurred as the result of external transactions. At the end of the period after all the external transactions have been recorded, several of the accounts in the ledger need to be updated before their balances can be posted to the financial statements. The adjusting process is consistent with two important accounting principles: 1. The revenue recognition principle, which requires that revenue be reported in the ine statement only when it is earned, not before and not after. 2. The matching principle reports expenses on the ine statement in the same accounting period as the revenues that were earned as a result of the expenses. Accrual basis accounting assigns revenues to the accounting period in which they are earned and matches expenses with the revenues generated by those expenses. The objective of the accrual basis is to report the economic effects of revenues and expenses when they are earned or incurred, not when cash is received or paid. Cash basis accounting recognizes revenues when cash is received and expenses when cash is paid. Under the cash basis ine for the period is the difference between revenues received in cash and expenses paid with cash. Accrual accounting generally provides a better indication of performance than information based on the receipt and disbursement of cash. Accrual accounting increases the parability of ine statements and balance sheets from one period to another period. The accrual basis reflects the understanding that the economic effect of revenue generally occurs when it is earned and not when cash is received. The revenue recognition principle is the basis for making adjusting entries that pertain to unearned and accrued revenues. Adjusting entries are necessary to better match revenues and expenses that occurred during the accounting period. Adjusting entries are used to record the effects of internal economic events. : Preliminary Reading Financial Reporting and Analysis a: Define each asset and liability category on the balance sheet and prepare a classified balance sheet. Assets category on the balance sheet Current assets are assets which will be sold, collected, or consumed within one year or the firm’s operating cycle, whichever is longer. The operating cycle is the average time between paying for inventory or the employees who perform services and receiving cash payment back from the firm’s customers. 1. Cash is currency or demand deposits. 2. Shortterm investments are debt or equity investments for which a ready market exists and management intends to sell within one year or operating cycle. 3. Accounts receivable are amounts owed to the firm by its customers for goods and services delivered. 4. Notes receivable are amounts owed, usually by customers, which will not be collected within the typical collection period. 5. Inventory represents products that will be sold in the normal course of business. 6. Prepaid expenses (., rent) are services paid for but not yet used. Investments are land, debt securities, or equity securities which management does not intend to sell within the year. 1. Property, plant, and equipment: Land is the real estate upon which the firm’s buildings sit. 2. Intangible assets are economic resources lacking tangible existence such as patents, copyrights, trademarks, and goodwill. Liability categories on the balance sheet Liabilities are responsibilities (amounts owed) which must be met in the future, usually by the payment of cash. Current liabilities are those liabilities that will be paid within one year or operating cycle. 1. Accounts payable are the amounts owed to suppliers for goods or services received but not yet paid for. 2. Wages, rent, etc. payables are the amounts owed to employees, landlord, etc. for services used but not yet paid for. 3. Notes payable are the amounts owed creditors usually with explicit interest expense. 4. Dividends payable are owed to owners for dividends declared but not yet paid. 5. Current portion of longterm debt is that portion of longterm debt that will be paid within the year. Longterm liabilities are the amounts owed creditors that will not be paid within one year. Stockholders’ equity is the owners39。 investment and the total earnings retained from the beginning of the business. Contributed capital (paidincapital) is the amount of the stockholders39。 investment in the firm’s equity securities. Common stock is the portion of stockholders39。 investment valued at par. Other paidincapital is the excess of the shareholders’ investment over the stock’s par value. Retained earnings is the total ine less the amount distributed to the owners as dividends from the beginning of business. A classified balance sheet A balance sheet can be presented in many different ways. A classified balance sheet is one in which the accounts are ordered in some logical manner, such as by liquidity or maturity. In a typical classified balance sheet: 1. Assets are listed in order of liquidity, from most liquid to least liquid. 2. Liabilities are lis