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CFA Level 1 - Chapter 6: Financial Statements Chapter 6: The Financial Statements
INTRODUCTION
Financial statements are a snapshot of a company's well being at a specific point in time. The length of time (the accounting period) that these financial statements represent varies; they can be annual (fiscal) or quarterly (every three months), among others. Fiscal year-end is normally defined as 12 months of operations. A company's year-end is defined by management and may not concur with the calendar year-end (Dec 31). When comparing the performance of different companies, one must be aware of these timing differences, if any.
The timing and the methodology used to record revenues and expenses may also impact the analysis and comparability of financial statements across companies. Accounting statements are prepared in most cases on the basis of these three basic premises:
1. The company will continue to operate (going-concern assumptions).
2. Revenues are reported as they are earned within the specified accounting period (revenues-recognition principle).
3. Expenses should match generated revenues within the specified accounting period (matching principle).
Basic Accounting Methods:
1. Cash-basis accounting – This method consists of recognizing revenue (income) and expenses when payments are made (checks issued) or cash is received (deposited in the bank).
2. Accrual accounting – This method consists of recognizing revenue in the accounting period in which it is earned (revenue is recognized when the company provides a product or service to a customer, regardless of when the company gets paid). Expenses are recorded when they are incurred instead of when they are paid.
Next: CFA Level 1 - Cash Vs. Accrual Accounting |
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