Constraint 2: Materiality
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
Constraint 2: Materiality
Inclusion and disclosure of financial transactions in financial statements hinge on their size and effect on the company performing them. Note that materiality varies across different entities; a material transaction (taking out a $1,000 loan) for a local lemonade stand is likely immaterial for General Electric, whose financial information is reported in billions of dollars.
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