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Free Online Financial Ratios Analysis
Compare your company's financial position with industry standards and competition, visit online ratios analysis developed by: Salvador Soto Jr, MSA


What are Financial Statements?
Financial statements are reports that communicate financial information of an organization to external users. There are four basic financial statements. These include the balance sheet, the income statement, the statement of cash flows, and the statement of shareholders' equity. The following is a brief overview of each statement:

- Balance sheet: presents assets, liabilities, and shareholders' equity as of a specific date
- Income statement: presents revenues and expenses over a period of time
- Statement of cash flows: summarizes cash inflows and outflows by operating, investing, and financing activities over a period of time
- Statement of shareholders' equity: rolls forward the shareholders' equity accounts from prior-year and current-year activity in stock and retained earnings


Cash Versus Accrual Accounting
Cash Method
This method follows when cash is received and expensed. It only recognizes and reports revenue when it is received in cash, and the recognization and reported expenses are only when the cash is spent. Therefore, if cash is not part of the transaction, it will not be part of the current financial statements.

Accrual Method
This method will recognize and report revenues when it has been earned, and expenses are reported when they too have been incurred. This means that it is not required to get or spend cash, but that there needs to be reasonable assurance that this will happen in the future.


Differences Between U.S. GAAP and IFRS
One of the significant differences between the two methods includes the fact that the U.S. GAAP model is rule-based and IFRS is based on broad principles. As a result, IFRS's rules application is more interpretive by management than that of U.S. GAAP. Also, U.S. GAAP uses historical cost for asset valuation for most assets, especially in the area of long-term assets, whereas IFRS allows for fair value for most assets. In addition, when an asset is written down under U.S. GAAP, it cannot be artificially written up. Under IFRS, however, it can be in many cases. Since fair value is very subjective as it applies to asset valuation, this is a major contrast between the two different accounting standards. Many accountants believe that fair value could be arbitrarily applied in order to unduly enhance the financial statements. In other words, assets could be overstated at the directive of a corporation's unethical management team under IFRS. Nonetheless, the FASB and the IASB have been closely working on one set of standards through a process referred to as convergence.

 

 

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