Question

1)Explain the accrual basis of accounting and when it’s used.

2)Explain the matching principle and how it relates tot he financial statements.

3)Explain what an asset is and how the accounting for some assists affects the income statement over time.

Illustrates #3 above by providing a specific example is an asset and how it affects several accounting periods.

Answer 1

1. (Under the cash basis of accounting, revenues are reported on the income statement when the cash is received.) Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid.

2. The matching principle is one of the basic underlying guidelines in accounting. The matching principle directs a company to report an expense on its income statement in the same period as the related revenues. ... However, not all costs and expenses have a cause and effect relationship with sales or revenues.

3. Asset is a useful or valuable thing or person; an item of property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

Financial Statement Analysis is a method of reviewing and analyzing a company’s accounting reports (financial statements) in order to gauge its past, present or projected future performance. This process of reviewing the financial statements allows for better economic decision making.

Globally, publicly listed companies are required by law to file their financial statements with the relevant authorities. For example, publicly listed firms in America are required to submit their financial statements to the Securities and Exchange Commission (SEC). Firms are also obligated to provide their financial statements in the annual report that they share with their stakeholders. As financial statements are prepared in order to meet requirements, the second step in the process is to analyze them effectively so that future profitability and cash flows can be forecasted.

Therefore, the main purpose of financial statement analysis is to utilize information about the past performance of the company in order to predict how it will fare in the future. Another important purpose of the analysis of financial statements is to identify potential problem areas and troubleshoot those.