Written Assignment 1
Respond to the five questions below. In your response, be sure to demonstrate a thorough understanding or application of the accounting principle, and include at least one outside source cited in APA style.
- Describe the matching principle and explain how it determines the net income of a business.
- What is the purpose of an income statement? What is the purpose of a balance sheet? How do they interrelate?
- Explain the processes that are used to ensure that accounting practices used at Company A are the same as those practices used at Company B.
- Explain the relationship and differences between revenue, income, and equity.
- Corporate officers who knowingly certify false financial statements can go to prison. Conduct independent research to explain the statute, its three main provisions, and the effect it currently has on the GAAP.
Written Assignment 1
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Written Assignment 1
- Describe the matching principle and explain how it determines the net income of a business.
The matching principle is a vital accrual accounting concept dictating that the related expenses incurred and revenues earned must be matched in the same period. As a result, it promotes uniformity in financial statements, for example, an income statement (Weygandt et al., 2019). The matching principle allows accountants to ascertain the net income generated from business by getting the difference between incurred expenses and revenue generated. Therefore, it enables accurate reporting of financial records including net income realized for a given period.
- What is the purpose of an income statement? What is the purpose of a balance sheet? How do they interrelate?
Income statement
It is a financial document that reveals details on a company’s revenue and operating activities expenditures for a specified period. An income statement discloses a company’s financial health in terms of expenses, sales, and revenue (Weygandt et al., 2019). While direct expenses include the cost of sales, indirect expenses encompass depreciation, administrative expenses, salaries, and resources used to facilitate research and development (Weygandt et al., 2019). Consequently, the operating income is obtained by subtracting indirect expenses from the revenue. Profits are earned if the revenue grows faster than expenses. Therefore, an income statement informs investors about a company’s management efficiency, thus, it helps in making vital financial verdicts.
Balance Sheet
It is a financial statement that shows a company’s value at a specific period. A balance sheet reveals a company’s net worth enabling the interested parties to make appropriate investment decisions. The document outlines the company’s shareholders’ equity, liabilities, and assets on a specific date. While assets entail property, inventory, and cash, liabilities comprise a firm’s financial obligations, for instance, accounts payable, wages, and taxes (Weygandt et al., 2019). Equity refers to the initial amount of money invested in a company. Usually, analysts evaluate the balance sheet by equating assets to the sum of equity and liabilities. The value of a company equals the figure obtained after subtracting liabilities from assets. Therefore, a balance sheet enables analysts to confirm the short-term and long-term value of a company.
The interrelationship between an income statement and a balance sheet
An income statement and a balance sheet are interrelated due to the bookkeeping practices. Usually, the accounting equation denotes that assets are equal to the sum of liabilities and equity (Weygandt et al., 2019). The two financial statements show the financial health of a company. An income statement and a balance sheet reveal the current and future status of a company (Weygandt et al., 2019). Therefore, they guide investors and creditors to make appropriate decisions when engaging a company in question.
- Explain the processes that are used to ensure that accounting practices used at Company A are the same as those practices used at Company B.
The generally accepted accounting principles (GAAP) guide accountants when reporting and recording financial records. Governed by the Securities Exchange Act of 1934 and the Securities Act of 1933, the GAAP outlines disclosure and reporting requirements used in companies and other institutions (Weygandt et al., 2019). The Securities and Exchange Commission (SEC) issues accounting guidelines to the Governmental Accounting Standards Board (GASB), thus, harmonizing accounting processes used in companies. Usually, basic principles and assumptions direct accountants when making financial statements. The economic entity assumption outlines the necessity for maintaining financial records for each entity (Weygandt et al., 2019). The monetary unit assumption compels organizations to only record quantifiable transactions. However, the full disclosure principle promotes accountability in financial reporting. A company must publish financial statements depicting its performance. Such records should capture factors affecting the company’s financial status such as pending lawsuits. Therefore, the GAAP harmonizes accounting practices used in Company A and Company B.
- Explain the relationship and differences between revenue, income, and equity.
Financial statements illustrate a company’s financial health. Revenue is the income generated by a company before expenditures are subtracted. However, income is the net profit realized after a company pays all its expenses and liabilities (Weygandt et al., 2019). While revenue is at the top of an income statement, income is located at the bottom of an income statement. Fundamentally, companies pay expenses including salaries, operating costs, and debts to get the profit realized during the specified financial period (Weygandt et al., 2019). Nevertheless, equity refers to the initial investment in a company, and the earnings retained from the initial investment capital. It is obtained by subtracting liabilities from assets in a balance sheet. As a result, equity is listed in a balance sheet whereas revenue and income are captured in an income statement.
- Corporate officers who knowingly certify false financial statements can go to prison. Conduct independent research to explain the statute, its three main provisions, and the effect it currently has on the GAAP.
Accounting malpractices attract legal consequences. Enacted by the U.S. Congress, the Sarbanes-Oxley Act (SOX) of 2002 deter fraudulent financial reporting, consequently, protecting investors (Weygandt et al., 2019). The SOX Act declares penalties for individuals violating accounting practices. Usually, the SOX Act of 2002 has three main provisions. The first one, Section 302, compels senior corporate administrators to certify a company’s financial statements after confirming that they fulfill the issuer’s financial condition and the SEC disclosure requirements (Weygandt et al., 2019). As a result, officers signing inaccurate statements risk criminal penalties. The second one, Section 404, requires auditors and management to enforce internal reporting methods and controls to safeguard financial reporting (Weygandt et al., 2019). However, implementing internal controls consumes resources, thus, reducing profits generated by publicly traded companies. The third provision, Section 802, outlines the three recordkeeping regulations. The first rule encompasses financial records falsification and destruction, the second entails the retention period for keeping records, while the third one declares the particular records that should be stored (Weygandt et al., 2019). The SOX Act reinforces practical applications of the GAAP as certification of inaccurate financial statements attracts criminal penalties.
Reference
Weygandt, J. J., Kieso, D. E., Kimmel, P. D., Trenholm, B., Warren, V., & Novak, L. (2019). Accounting Principles, Volume 2. John Wiley & Sons.