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1、七InvestmentTools:FinancialStatementAnalysis:BasicConcepts1.A:PreliminaryReadingMeasuringBusinessIncomea:Explainwhyfinancialstatementsarepreparedattheendoftheregularaccountingperiod,whyaccountsmustbeadjustedattheendofeachperiod,andwhytheaccrualbasisofacc
2、ountingproducesmoreusefulincomestatements&balancesheetsthanthecashbasis.Toberelevant,informationmustbereliable.Thismeansinformationmustbeconsistentandcomparableovertimeandbeprovidedonatimelybasis.Accordingtotherelevancyprinciple,afirmneedstoidentifyitsa
3、ctivitiesinatimelyfashionwithinaspecificperiod,suchasaquarteroryear.Normalaccountingprocedureistorecordduringtheaccountingperiodthoseeconomiceventsthatoccurredastheresultofexternaltransactions.Attheendoftheperiodafteralltheexternaltransactionshavebeenre
4、corded,severaloftheaccountsintheledgerneedtobeupdatedbeforetheirbalancescanbepostedtothefinancialstatements.Theadjustingprocessisconsistentwithtwoimportantaccountingprinciples:1.Therevenuerecognitionprinciple,whichrequiresthatrevenuebereportedintheincom
5、estatementonlywhenitisearned,notbeforeandnotafter.2.Thematchingprinciplereportsexpensesontheincomestatementinthesameaccountingperiodastherevenuesthatwereearnedasaresultoftheexpenses.Accrualbasisaccountingassignsrevenuestotheaccountingperiodinwhichtheyar
6、eearnedandmatchesexpenseswiththerevenuesgeneratedbythoseexpenses.Theobjectiveoftheaccrualbasisistoreporttheeconomiceffectsofrevenuesandexpenseswhentheyareearnedorincurred,notwhencashisreceivedorpaid.Cashbasisaccountingrecognizesrevenueswhencashisreceive
7、dandexpenseswhencashispaid.Underthecashbasisnetincomefortheperiodisthedifferencebetweenrevenuesreceivedincashandexpensespaidwithcash.Accrualaccountinggenerallyprovidesabetterindicationofperformancethaninformationbasedonthereceiptanddisbursementofcash.Ac
8、crualaccountingincreasesthecomparabilityofincomestatementsandbalancesheetsfromoneperiodtoanotherperiod.Theaccrualbasisreflectstheunderstandingthattheeconomiceffectofrevenuegenerallyoccurswhenitisearnedandnotwhencashisreceived.The
