Accounting Principles and Financial Statements (Portfolio 5116)

Bloomberg Tax Portfolio 5116, Accounting Principles and Financial Statements (Accounting Policy and Practice Series), explains the basic concepts underlying financial accounting and the elements of financial statements prepared under U.S. generally accepted accounting principles (GAAP). For the financial and credit markets to operate effectively, companies must provide reliable information about their financial results and conditions to external parties, such as existing and potential shareholders, existing and potential creditors, and governmental agencies. To ensure that companies provide reliable information, standard setters established numerous principles for financial accounting, although companies have significant discretion in how they apply many of these principles. Thus, to properly interpret financial statements, financial statement users and their advisors must understand the principles and the choices companies may make in applying the principles.

The primary standard-setter for financial accounting is the Financial Accounting Standards Board (FASB), whose goal is to establish and improve standards of financial accounting and reporting for nongovernmental entities. Since 2009, FASB maintains the FASB Accounting Standards Codification (Accounting Standards Codification) which represents the source of authoritative standards of accounting and reporting, other than those issued by the SEC, to be applied by nongovernmental entities. Other U.S. standard-setters include such as the American Institute of Public Accountants (AICPA) and the Securities and Exchange Commission (SEC), the American Institute of Public Accountants (AICPA), and the Public Company Accounting Oversight Board also provide specific accounting guidance on select issues.

U.S., the main financial statements are the balance sheet (which conveys a company's financial condition on a given date), the income statement (which conveys a company's financial results within a given period), the statement of cash flows (which conveys a company's liquidity situation).

There are many issues involved in compiling the income statement, balance sheet, and cash flow statement. The threshold issue is how much revenue to recognize during the accounting period. This issue is rather straightforward under the cash method of accounting—a company recognizes revenues only when it receives cash. Most companies, however, must use the accrual method of accounting, which essentially requires that these companies recognize income when they complete a transaction even though they might not collect cash from the transaction until a later date, if at all. This recognition rule has complicated issues that are discussed in this Portfolio. For more information on revenue recognition see APP 5100 Revenue Recognition: Fundamental Principles (Accounting Policy and Practice Series).

Several complex issues regarding expenses and accounting for inventory and long-term assets are discussed in this Portfolio. Lastly, this Portfolio discusses the methods accounting professionals and financial analysts use to analyze financial statements, including computing various ratios from financial statement data. By understanding these ratios, financial statement users can better assess the strengths and weaknesses of a company's financial position.

This Portfolio is intended to be an overview of the concepts underlying U.S. GAAP. It may be cited as Bloomberg Tax Portfolio 5116, Robinson & Marmorstein, Accounting Principles and Financial Statements (Accounting Policy and Practice Series).