LO 2-1

Explain the nature and general purposes of financial statements.

LO 2-2

Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.

LO 2-3

Demonstrate how certain business transactions affect the elements of the accounting equation: Assets = Liabilities + Owners' Equity.

LO 2-4

Explain how the statement of financial position, often referred to as the balance sheet, is an expansion of the basic accounting equation.

LO 2-5

Explain how the income statement reports an enterprise's financial performance for a period of time in terms of the relationship of revenues and expenses.

LO 2-6

Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company's operating, investing, and financing activities.

LO 2-7

Explain how the statement of financial position (balance sheet), income statement, and statement of cash flows relate to each other.

LO 2-8

Explain common forms of business ownership—sole proprietorship, partnership, and corporation—and demonstrate how they differ in terms of their statements of financial position.

LO 2-9

Discuss the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements.