| LO2 – Explain and prepare a classified balance sheet. |
The accounting cycle and double-entry accounting have been the focus of the preceding chapters. This chapter focuses on the presentation of financial statements, including how financial information is classified(the way accounts are grouped) and what is disclosed.
A common order for the presentation of financial statements is:
- Income statement
- Statement of changes in equity
- Balance sheet
- Statement of cash flows
- Notes to the financial statements
In addition, the financial statements are often accompanied by an auditor’s report and a statement entitled “Management’s Responsibility for Financial Statements.” Each of these items will be discussed below. Financial statement information must be disclosed for the most recent year as well as the prior year for comparison purposes.
Because external users of financial statements have no access to the entity’s accounting records, it is important that financial statements be organized in a manner that is easy to understand. Thus, financial data are usually grouped into useful, similar categories within classified financial statements, as discussed below.
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