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Unit 11: Introduction to Financial Reporting Framework

Self Assessment Notes

Fill in the blanks:
4. The accounting system generates accounting information in the form of ……………..
5. ………… users are the individuals who are directly involved in managing and operating
the organisation.
6. The internal role of accounting is to provide information to help improve the efficiency
and ……………. of their organisation in delivering products or services.

7. …….. is the function concerning use of raw material and other activities to produce products
and services.
8. ………………is aimed at creating or improving a company’s products or services.

11.3 Capital Market Requirements for Preparing Financial Statements

Financial statements provide information of value to company officials as well as to various
outsiders, such as investors and lenders of funds. Publicly owned companies are required to
periodically publish general-purpose financial statements that include a balance sheet, an income
statement, and a statement of cash flows. Some companies also issue a statement of stockholders’
equity and a statement of comprehensive income, which provide additional detail on changes in
the equity section of the balance sheet.

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Caution Financial statements issued for external distribution are prepared according to
Generally Accepted Accounting Principles (GAAP), which are the guidelines for the content
and format of the statements.
In the United States, the Securities and Exchange Commission (SEC) has the legal responsibility
for establishing the content of financial statements, but it generally defers to an independent
body, the Financial Accounting Standards Board (FASB), to determine and promote accepted
principles.
These statements provide an overview of organizations’ financial condition in both short and
long-term. Through financial statements all the relevant financial information of a business
enterprise are presented in a structured manner and in a form easy to understand. There are four
basic financial statements:

1. Balance sheet: Statement of financial position or condition. The balance sheet consists of
three major sections: assets, the resources of the firm; liabilities, the debts of the firm; and
stockholders’ equity, the owners’ interest in the firm. At any point in time, the total assets
amount must equal the total amount of the contributions of the creditors and owners. This
is expressed in the accounting equation:
Assets = Liabilities + Stockholders’ Equity
2. Income statement or Profit and Loss statement: These statements include reports on a
company’s income, expenses, and profits over a period of time. These include sale, the
various types of operating and non-operating expenses and income, incurred during the
processing state. It summarizes the results of operations for a particular period of time.
Net income is included in retained earnings in the stockholders’ equity section of the
balance sheet.

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