七 investment tools financial statement analysis basic concepts

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1、七InvestmentTools:FinancialStatementAnalysis:BasicConcepts1.A:PreliminaryReadingMeasuringBusinessIncomea:Explainwhyfinancialstatementsarepreparedattheendoftheregularaccountingperiod,whyaccountsmustbeadjustedattheendofeachperiod,andwhytheaccrualbasisofacc

2、ountingproducesmoreusefulincomestatements&balancesheetsthanthecashbasis.Toberelevant,informationmustbereliable.Thismeansinformationmustbeconsistentandcomparableovertimeandbeprovidedonatimelybasis.Accordingtotherelevancyprinciple,afirmneedstoidentifyitsa

3、ctivitiesinatimelyfashionwithinaspecificperiod,suchasaquarteroryear.Normalaccountingprocedureistorecordduringtheaccountingperiodthoseeconomiceventsthatoccurredastheresultofexternaltransactions.Attheendoftheperiodafteralltheexternaltransactionshavebeenre

4、corded,severaloftheaccountsintheledgerneedtobeupdatedbeforetheirbalancescanbepostedtothefinancialstatements.Theadjustingprocessisconsistentwithtwoimportantaccountingprinciples:1.Therevenuerecognitionprinciple,whichrequiresthatrevenuebereportedintheincom

5、estatementonlywhenitisearned,notbeforeandnotafter.2.Thematchingprinciplereportsexpensesontheincomestatementinthesameaccountingperiodastherevenuesthatwereearnedasaresultoftheexpenses.Accrualbasisaccountingassignsrevenuestotheaccountingperiodinwhichtheyar

6、eearnedandmatchesexpenseswiththerevenuesgeneratedbythoseexpenses.Theobjectiveoftheaccrualbasisistoreporttheeconomiceffectsofrevenuesandexpenseswhentheyareearnedorincurred,notwhencashisreceivedorpaid.Cashbasisaccountingrecognizesrevenueswhencashisreceive

7、dandexpenseswhencashispaid.Underthecashbasisnetincomefortheperiodisthedifferencebetweenrevenuesreceivedincashandexpensespaidwithcash.Accrualaccountinggenerallyprovidesabetterindicationofperformancethaninformationbasedonthereceiptanddisbursementofcash.Ac

8、crualaccountingincreasesthecomparabilityofincomestatementsandbalancesheetsfromoneperiodtoanotherperiod.Theaccrualbasisreflectstheunderstandingthattheeconomiceffectofrevenuegenerallyoccurswhenitisearnedandnotwhencashisreceived.The