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Chapter 2 - Financial reporting mechanics. This chapter explain the relationship of financial statement elements and accounts, and classify accounts into the financial statement elements; explain the accounting equation in its basic and expanded forms; describe the process of recording business transactions using an accounting system based on the accounting equation;. | Chapter 2 Financial Reporting mechanics Learning Outcomes Explain the relationship of financial statement elements and accounts, and classify accounts into the financial statement elements. Explain the accounting equation in its basic and expanded forms. Describe the process of recording business transactions using an accounting system based on the accounting equation. Describe the need for accruals and other adjustments in preparing financial statements. Describe the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners’ equity. Describe the flow of information in an accounting system. Describe the use of the results of the accounting process in security analysis. 1 Business activities and financial statement elements Business Activities Operating Sell products or services to generate revenue1 Incur expenses2 while generating revenue Investing Use (longer-term) assets3 to operate the business Financing Borrow from creditors, creating a liability4 Sell ownership interest (equity5) to shareholders Firms use financial reports to communicate about these activities and their results Copyright © 2013 CFA Institute 2 1–5: financial statement elements LOS. Explain the relationship of financial statement elements and accounts, and classify accounts into the financial statement elements. Business activities may be classified into three groups for financial reporting purposes: operating, investing, and financing activities. Operating Activities Activities that are part of the day-to-day business functioning of an entity. Examples include the sale of meals by a restaurant, the sale of services by a consulting firm, the manufacture and sale of ovens by an oven-manufacturing company, and the receipt of deposits and extension of loans by a bank. Investing Activities Activities associated with acquisition and disposal of long-term assets. Examples include the purchase of equipment or sale of surplus equipment (such as an oven) . | Chapter 2 Financial Reporting mechanics Learning Outcomes Explain the relationship of financial statement elements and accounts, and classify accounts into the financial statement elements. Explain the accounting equation in its basic and expanded forms. Describe the process of recording business transactions using an accounting system based on the accounting equation. Describe the need for accruals and other adjustments in preparing financial statements. Describe the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners’ equity. Describe the flow of information in an accounting system. Describe the use of the results of the accounting process in security analysis. 1 Business activities and financial statement elements Business Activities Operating Sell products or services to generate revenue1 Incur expenses2 while generating revenue Investing Use (longer-term) assets3 to operate the business Financing Borrow from creditors, .
