Accounting Principles
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Information on why accounting principles are important to credit. Also includes basic accounting principles and financial statements.
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Accounting Principles
- 1. Why Accounting Principles are Important to Credit © Basic Accounting Principles Financial Statements by: Jim Menard, CCE email: sugarpine@charter.net
- 16. Check the Percentage Changes From period To period…
- 18. The Statement of Stockholder’s Equity In a nutshell, it simply explains how each account in the Statement of Stockholder’s Equity got from the balance at the beginning of the period to the balance at the end of the period and describes “events” that caused the balances to change
- 24. Have they made money from their operations?
Editor's Notes
- An important skill that an effective credit professional should have is the ability to understand and analyze financial statements. The standard financial statements, as well as related supporting records, can provide valuable information for making informed credit decisions. In understanding and analyzing financial statements, it is also important to be familiar with standard accounting terms and conventions and the roles of external financial auditors.
- Assets Assets are all the resources owned by a company or a person. Assets are subdivided and listed on the balance sheet in order of liquidity (the ability to be converted into cash): Current assets are expected to be converted into cash within one year or one operating cycle, whichever is longer. The five categories of current assets are: cash, marketable securities, accounts receivable, inventory, and prepayments. Cash is the most liquid. Fixed or long-term assets are permanent investments in tangible properties required for the conduct of the business and not subject to periodic purchase or sale. Liabilities Liabilities are claims against the assets of a company. Current liabilities are obligations maturing within one year. Long-term liabilities are those that are due in a term longer than one year. Equity The stockholders’ equity of a business firm may be called net worth, proprietary interest, partners’ capital, or capital. Corporate net worth or stockholders’ equity is divided into various classes of preferred and common outstanding stock and retained earnings.
- Overview It is also called the Income Statement, the Statement of Earnings, and the Statement of Operations. The income statement is considered to be perhaps the most important financial statement. It provides a summary of income and expenses, and gains and losses for a specific period of time. An income statement should contain information on sales, cost of goods sold, expenses, net operating profit, information on other income and expenses, and profit before and after taxes. Income statements are presented in one of two ways: The single-step method totals all revenues and all expenses, and then subtracts the latter from the former to get net income. The multiple-step method matches revenues and expenses from the earliest calculation of gross profit until it derives net income. Components A detailed list of components is found in Pages 456-459 in the text book.
- The Role of the Auditor The terms of an auditor’s engagement determine the extent of the audit, the number and detail of the schedules produced, and the amount of verification work done. Types of Audits The audit may range from detailed audit with verification of all items and transactions, to a simple book audit concerned only with arithmetic accuracy in transferring ledger figures into the balance sheet and statement of income and retained earnings. Responsibility for Financial Reporting While the auditing firm is liable for its opinion of the financial statement, company management is responsible for the statement’s integrity and objectivity. Change in Auditors When a firm changes auditors, it is required to file a form 8-K with the SEC. When the regular auditor quits an engagement, it is important to determine the underlying reason. Auditor-Client Relationships Auditors prepare financial statement and supporting schedules for clients and not to meet the special needs of creditors. Their work is governed by their intensive training, strict regulation of auditing procedures and conventions, and their accountability to professional societies. They do, however, have a responsibility to clarify items in their audits when questions are raised, and usually give such explanations readily.
- Overview The Auditor’s Report: The letter of transmittal in which the auditor reports the results of the audit to the client is termed the certificate. It is a formal, written statement of the auditor’s opinion concerning the financial statements after a financial audit has been completed. Customary Schedules in Audit Reports Primary exhibits or schedules are the balance sheet, statement of income, statement of retained earnings, and statement of cash flow. The report may also include various supporting and analytical schedules. Compilation Often, the auditor will have done a compilation, which means that the auditor has helped prepare the financial records to produce the financial statements or has helped in preparing the financial statements. Reliability The audit and certification is generally accepted as adequate endorsement of the correctness of a financial statement.