In these readings, we introduce the different types of organisations that operate in business, their structure and how they are managed. We describe also some of the basic financial statements prepared by the accountant, the assumptions made in preparing these statements and the effects of transactions on the preparation of financial statements.

Task

Read Chapter 2 Financial statements for decision making - Section 2.3 - 2.5 in your textbook.

Learning Outcome

After reading this chapter, you should be able to:

• outline the basic financial statements used in business to report to users for decision-making purposes
• explain the main assumptions made and the characteristics of information to be used in the preparation of financial statements
• analyse the effects of business transactions on the accounting equation and on financial statements

Due

Early in Week 1 after reading chapter 1 and prior to learning tasks 1.5 and 1.6.

Suggested Procedure

1. Read the chapter.
2. After reading, check your understanding by seeing if you can answer the following:
   • What are the major financial statements prepared by an accountant? How do they relate to each other?
   • What does the following equation represent A - L = E? What is its purpose?
   • What is the nature of the elements: Assets, Liabilities, Equity, Income and Expenses?
   • Can you explain and apply the following terms: entity, historic cost, going concern, period, reliability and realisation?
   • What are the assumptions made by accountants in the preparation of financial statements?
3. If you can’t, skim the relevant sections of the chapter to obtain the answers.