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= Liabilities + Stockholders’ Equity. (In the case of sole proprietorships and partnerships, stockholders’ equity is called owners’ equity.) Business transactions affect financial position by decreasing or increasing assets, liabilities, and stockholders’ (or owners’) equity in such a way that the accounting equation is always in balance.

LO6Identify the four basic financial statements.

The four basic financial statements are the income statement, the statement of retained earnings, the balance sheet, and the statement of cash flows. They are the primary means by which accountants communicate the financial condition and activities of a business to those who have an interest in the business.

LO7Explain how generally accepted accounting principles (GAAP) relate to financial statements and the independent CPA’s report, and identify the organizations that influence GAAP.

Acceptable accounting practice consists of the conventions, rules, and procedures that make up generally accepted accounting principles at a particular time. GAAP are essential to the preparation and interpretation of financial statements and the independent CPA’s report.

All accountants are required to follow a code of professional ethics, the foundation of which is responsibility to the public. Accountants must act with integrity, objectivity, and independence, and they must exercise due care in all their activities.

Among the organizations that influence the formulation of GAAP are the Public Corporation Accounting Oversight Board, the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Securities and Exchange Commission, and the Internal Revenue Service.

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