General Accounting Principles - Business Finance - ثاني ثانوي

3.1 General Accounting Principles Accounting statements provide financial information concerning an enterprise. Although the emphasis in this text is their application to firms, financial statements may be constructed for governments (such as the Kingdom of Saudi Arabia), nonprofit organizations (such as the MISK Foundation), or individuals. In all cases these statements show the financial condition of the entity and its assets and how they were financed. This information can then be used to aid financial decision making. To be useful in decision making, financial statements must be reliable, understandable, and comparable. Reliability requires the statements to be objective and unbiased. The data included on the statements should be verifiable by independent experts. This does not mean that two accountants working with the same information will construct identical financial statements. Individual opinions and judgments may lead to different financial statements. An example that involves the accountant's judgment is the allowance for doubtful accounts receivable. Two accountants may establish differing amounts that will affect the firm's financial statements. A larger allowance reduces accounts receivable (and total assets) and decreases earnings. However, it should not be concluded that two accountants will construct widely different statements. While the financial statements may differ, the amount of differentiation should be modest. Financial statements should be presented in an orderly manner and be readable by informed laypersons as well as professionals Investors and other individuals who use financial statements need not know all the principles used to construct a financial statement. However, an intelligent individual should be able to read a firm's financial statements and have some idea of the firm's profitability, its assets and liabilities, and its cash flow. Comparability requires that one set of financial statements can be compared to the same financial statements constructed over different accounting periods. The principles used to construct one year's statements should be used for subsequent years. If the principles being applied are changed, the previous years' statements should be restated. If the firm's operations change, the financial statements should also reflect these changes. If, for example, the firm discontinues part of its operations, its sales, expenses and profits for previous years should be restated. If this وزارة التعليم 2021-1649 www.lendula CHAPTER Analysis of Financial Statements 85

. FIGURE 3.1 Compaison of the Recognized Accounting Principles 86 Business Finance adjustment is not made, the users of the financial statements will be unable to compare the firm's financial performance over a period of time for its continuing operations. To better understand the information found within financial statements, you need to know the underlying frameworks that inform an organization's accounting practices. The two primary accounting standards you should be familiar with are Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), as illustrated in Figure 3.1. Accounting principles GLAP LFRS Tammy Mandro Valley GAAP and IFRS share several similarities, but differ in key ways- particularly in how components of the balance sheet, cash flow statement, asset revaluation, and inventory valuation methods are treated. By understanding how these reports are constructed, and what potential differences might exist, you will be able to determine when each is appropriate to use. The Saudi Central Bank (SAMA) and Saudi Organization for Certified Public Accountants (50CPA) require all Saudi companies to follow the framework of the IFRS. The principles of financial accounting, however, are not static. Their conceptual framework changes with the passage of time with changes in the business environment and the needs of the statements users. For example, worldwide increases in foreign investments and fluctuations in the value of foreign currencies have generated a need for better methods of accounting for these foreign investments. This challenge plus others such as inflation, pension liabilities,

and stock options have resulted in changes in international accounting principles as the profession seeks to improve the informational content of financial statements. Exercises Choose the correct answer. 1. To be useful in decision making, financial statements must be reliable, understandable, and comparable. True/False 2. The primary accounting standards used in Gulf Cooperation Council countries, the EU, and around the world is: a. Generally Accepted Accounting Principles (GAAP). b. International Financial Reporting Standards (IFRS). Internationally Accepted Accounting Principles (IAAP). d. CPA Accounting Standards (CAS). وزارة التصليدر CHAPTER 3 Analysis of Financial Statements 87