Basic Principles Revisited: Historical Cost and Conservatism
by Arkady Libman, Matan Feldman
Crash Course in Accounting and Financial Statement Analysis, Second Edition
- Copyright
- About the Authors
- Preface
- Introduction to Accounting
- Basic Accounting Principles
- Financial Reporting
- Reading the Annual Report
- Introduction
- Letter to Stockholders
- Financial Highlights
- Management’s Discussion and Analysis
- Financial Statements
- Notes to Consolidated Statements
- Report of Management’s Responsibilities
- Certification of Financial Statements
- Risk Factors
- Legal Proceedings
- Report of Independent Auditors
- Directors and Officers
- Summary
- Income Statement
- What Is the Income Statement?
- Why Is It Important?
- Revenues
- Not All Income Is Revenue
- Bad Debt Expense
- What Is Bad Debt Expense?
- Revenue Recognition: To Recognize and When?
- Revenue Recognition: Long-Term Projects
- Expense Recognition and Accrual Basis of Accounting
- Basic Principles Revisited: Accrual Basis of Accounting and Matching Principle
- Putting It All Together: The Accrual Basis of Accounting
- Why Use Accrual Accounting?
- Accrual versus Cash Accounting: What’s the Difference?
- Revenue Manipulation
- Cost of Goods Sold
- Gross Profit
- Selling, General and Administrative
- Research and Development
- Stock Options Expense
- Depreciation Expense
- Amortization
- Interest Expense
- Interest Income
- Other Nonoperating Income
- Income Tax Expense
- Equity Income in Affiliates
- Minority Interest
- Net Income
- Shares Outstanding
- Common Dividends
- Preferred Dividends
- Earnings per Share
- Nonrecurring Items
- Earnings before Interest, Taxes, Depreciation, and Amortization
- EBIT
- Summary
- Balance Sheet
- Introduction
- Double-Entry Accounting
- Income Statement Revisited: Links to Balance Sheet
- Retained Earnings: The Link Between Balance Sheet and Income Statement
- Impact of Revenues on the Balance Sheet
- Impact of COGS on the Balance Sheet
- Impact of SG&A on the Balance Sheet
- Impact of Depreciation on the Balance Sheet
- Impact of Interest Expense on the Balance Sheet
- Impact of Tax Expense on the Balance Sheet
- Total Impact of the Year on the Balance Sheet
- Summary
- Order of Liquidity
- Assets
- Cash
- Cash equivalents
- Marketable securities
- Accounts Receivable
- Inventories
- LIFO Reserve: The Link between FIFO and LIFO Inventory Methods
- Writing Down Inventories
- Deferred Taxes
- PP&E, Net of Depreciation
- Reconciliation of PP&E
- Fixed Asset Impairments
- Fixed Asset Retirement and Disposal
- Intercompany Investments
- Consolidation
- Intangible Assets
- Goodwill
- Summary: Intangible Assets and Goodwill
- Summary: Assets
- Liabilities
- Shareholders’ Equity
- Summary
- Cash Flow Statement
- Introduction
- Cash Flow from Operations
- Overview
- Indirect Method
- Getting from Net Income to Cost from Operations
- Depreciation
- Working Capital
- Changes in Accounts Receivable
- Changes in Accounts Receivable and the Lemonade Stand
- Changes in Inventories
- Changes in Inventories and the Lemonade Stand
- Changes in Accounts Payable
- Accounts Payable and the Lemonade Stand
- Changes in Other Current Assets
- Changes in Other Current Liabilities
- Increases/Decreases in Deferred Taxes
- Summary: Cash Flow from Operations
- Cash Flow from Investing Activities
- Cash Flow from Financing Activities
- How the Cash Flow Is Linked to the Balance Sheet
- Summary
- Online Exercise
- Chapter Summary
- Financial Ratio Analysis
- Appendix
Basic Principles Revisited: Historical Cost and Conservatism
Recall that financial statements report company’s resources—including most balance sheet items—at their historical (acquisition) cost.
By not allowing assets to be overstated, the historical cost principle is an example of conservatism.
Governed by the historical cost principle, the balance sheet does not report the true market value of a company, only its resources and funding at their historical cost.
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