Financial Statement Preparation And Analysis: A Comprehensive Case Study

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Financial Statement Preparation and Analysis: A Comprehensive Case StudyBlueprint Problem: Preparing financial statementsAccounting informationShould we buy stock in a company? Should we extend a line of credit to a company? Should wecontinue with current operations or change how we do business? These are the types of questionsstakeholders ask themselves. Stakeholders require useful accounting information in order to makeaccurate financial decisions. In accordance with agenerally accepted accounting principles (GAAP),acompany's financial statement must contain accurate accounting information and is used in financialreporting.How do you know whether accounting information is useful? Review each of the accounting conceptsbelow that describe the qualitative characteristics of accounting information.The Qualitative Characteristics of Accounting InformationComparabilityConservatismConsistencyMaterialityRelevanceReliabilityUnderstandabilityIn each of the following scenarios, which accounting concept is being violated?1.A major explosion at a company's main production facilitycaused a two-month stoppage ofoperations during a busy time of year. It went unreported because the accountant said its dollar effectwas too low.ComparabilityComparability2.A completely separate company from the one with which you are concerned may not make itthrough the year. This information was included in your company's financial statements.ConservatismConservatism3.Your company has decided to change its method of accounting for depreciation of some equipmentused in the production process in the current period. This seems odd, as it was just changed last year.It is becoming difficult to compare numbers associated with depreciation from one year to theConsistencynext.Consistency4.The accountants at your company have decided to create the financial statements in Italianbecause the owner of the company came from Italy.MaterialityMateriality5.A potential investorwishes to determine whether to invest in your company or in a competitor's.On the surface, it appears that your company has less depreciation expense, yet your accountantsforgot to disclose the company's accounting policy for depreciation.RelevanceRelevance6.Your company is looking to expand through acquisition into the business of microprocessors. TheCFO claims that his mother's privately held company would be a perfect fit for the acquisition.Unfortunately, there is no paper trail of her company's performance, and it is possible that thecompany doesn't even make microprocessors.ReliabilitySelect

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7.Because of recent technological breakthroughs in microprocessor development, your company'scurrent inventory could be purchased on the market forsignificantly less than the value at which youare holding it on your books. However, the accountants have decided not to write down the value ofthe inventory on the books.UnderstandabilityUnderstandabilityThe financial statementsFinancial statements are theprimary source of a company's accounting information. Open eachfinancial statement for more information, and decide which statement would work best for each of thegiven scenarios.Types of Financial StatementsIncome statementStatement ofowner's equityBalance sheetStatement of cash flowsDesired ActionFinancial Statement1.Compare revenues with expenses and analyze profitabilityIncomeStatementIncome Statement2.Assess how the company finances its assetsBalance SheetBalance Sheet3.Analyze how much cash was spent on investing activitiesStatement ofcash flowsStatement of Cash Flow s4.Compare the owner's equity at the beginning of the period with those atthe end of itStatement of owner's equityStatement of Ow ner's Equity5.See a snapshot of a company'sfinancial position at a given point in timeBalance SheetSelectAPPLY THE CONCEPTS: Construct the income statementWhen constructing the income statement, it is important to understand that the income statementreports the revenues and expenses for a period of time, based on the matching concept. This conceptis applied by matching the expenses with the revenue generated during a period by those expenses.The excess of the revenue over the expenses is called net income or net profit.Jackson Co. has compiled the following account balances from its general ledger on August 31, 2012(the last day of its fiscal year).+Trial BalanceUse the information given to create Jackson Co.'s annual financial statements. Construct Jackson'sincome statement for2012.Enter all amounts as positive numbers.

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