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@@ -164,12 +164,6 @@ Interpretation: For every dollar of equity, the company has $0.67 of debt. This
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2) **Income Statement**: Revenues, expenses, and resulting profits or losses are reported on the income statement. This affects the retained earnings component of equity on the balance sheet.
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3) **Cash Flow Statement**: While not explicitly mentioned in the provided materials, the cash flow statement is impacted by changes in working capital, capital expenditures, and financing activities.
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4) **Statement of Changes in Equity**: This statement, which shows the changes in a company's equity over time, is affected by net income/loss, dividends, and any direct changes to equity accounts.
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## Questions for Review
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- How does the principle of prudence affect the valuation of assets and liabilities on a balance sheet?
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- Explain the difference between current assets and capital assets, providing examples of each.
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- Why is working capital important, and what does a negative working capital indicate about a company's financial health?
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- How does the debt-to-equity ratio help in assessing a company's financial risk?
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- Walk through the process of calculating annual profit/loss, starting from gross profit.
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## References
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- [Textbook Title](Citation.md)
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@@ -61,12 +61,6 @@ The more liquid an asset is, the easier and more efficient it is to turn it back
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- Income Statement: Shows financial performance over a period.
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- Both statements are interconnected: Net income from the Income Statement affects Retained Earnings on the Balance Sheet.
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## Questions for Review
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1. How does the concept of equilibrium apply to a company's financial and economic aspects?
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2. Explain the relationship between assets, liabilities, and equity in the context of the balance sheet.
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3. How does depreciation affect both the balance sheet and income statement?
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## References
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- Lecture notes, Date: Financial Statements Overview
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---
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course: Accounting
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date: 03-10-2024
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title: Debited and Credited Accounts
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---
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### Tags: [[Opening Balance]], [[Closing Balance]], [[CO]], [[Closing Transactions]], [[Active]], [[Passive]] ,[[Accounting Principles]], [[Bank Account Classification]], [[Cash Flow]], [[Debit/Credit Rules]], [[Equity Accounts]], [[Financial Statement Impact]], [[Liability Accounts]], [[Revenue/Expense Accounts]]
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# Debited and Credited Accounts
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## Summary
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This document outlines the general rules for debiting and crediting accounts based on the Swiss chart of accounts for SMEs, including the unique treatment of bank accounts and the relationship between debits, credits, and cash flow.
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## Definitions and Important Concepts
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- Debit: An entry on the left side of an account.
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- Credit: An entry on the right side of an account.
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- T-Account: A visual representation of an account, shaped like a "T", with debits on the left and credits on the right.
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## Key Accounting Principles
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### General Debit and Credit Rules
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In Swiss accounting, the rules for debiting and crediting accounts follow the basic principles of double-entry bookkeeping. However, the specific application depends on the account type:
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1. Asset Accounts (Class 1):
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- Increase with a debit
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- Decrease with a credit
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2. Liability Accounts (Class 2):
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- Increase with a credit
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- Decrease with a debit
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3. Equity Accounts (Class 2, accounts 28 and 29):
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- Increase with a credit
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- Decrease with a debit
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4. Revenue Accounts (Class 3):
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- Increase with a credit
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- Decrease with a debit
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5. Expense Accounts (Classes 4, 5, 6):
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- Increase with a debit
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- Decrease with a credit
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6. Extraordinary and Non-operational Results (Class 8):
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- Costs increase with a debit
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- Revenues increase with a credit
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### Debits, Credits, and Cash Flow
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It's important to note that in accounting, the concepts of debit and credit differ from their everyday usage:
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- Debited Accounts: These typically record incoming money to the company.
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- Credited Accounts: These typically record outgoing money from the company.
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This principle helps in understanding the flow of cash in and out of the business.
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### Bank Account as Asset or Liability
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The bank account can function as either an asset or a liability, depending on its closing balance. The relationship between the closing balance, opening balance, and total debits and credits is expressed as:
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$$ CB = OB + DT - CT $$
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Where:
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- CB = Closing Balance
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- OB = Opening Balance
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- DT = Debit Total
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- CT = Credit Total
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If the closing balance is greater than or equal to 0, it represents an asset:
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$$ \begin{aligned}
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CB &\geq 0 \\
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OB + DT - CT &\geq 0 \\
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DT - CT &\leq -OB \\
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\end{aligned} $$
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If the closing balance is less than 0, it represents a liability:
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$$ \begin{aligned}
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CB &< 0 \\
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OB + DT - CT &< 0 \\
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DT - CT &> -OB \\
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\end{aligned} $$
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This dual nature of the bank account highlights the importance of considering the balance when determining its classification on financial statements.
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## Mermaid Diagram
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```mermaid
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graph TD
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A[Transaction] --> B{Account Type?}
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B -->|Asset| C[Debit to increase<br>Credit to decrease]
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B -->|Liability| D[Credit to increase<br>Debit to decrease]
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B -->|Equity| E[Credit to increase<br>Debit to decrease]
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B -->|Revenue| F[Credit to increase<br>Debit to decrease]
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B -->|Expense| G[Debit to increase<br>Credit to decrease]
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B -->|Extraordinary| H[Costs: Debit to increase<br>Revenues: Credit to increase]
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B -->|Bank Account| I{Closing Balance?}
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I -->|CB ≥ 0| J[Treat as Asset]
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I -->|CB < 0| K[Treat as Liability]
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```
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## Example Applications
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1. Purchasing inventory (commercial goods):
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- Debit: 1200 Inventories of commercial goods (Asset increase)
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- Credit: 1020 Bank or 2000 Accounts payable (Asset decrease or Liability increase)
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2. Recording sales revenue:
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- Debit: 1100 Accounts receivable (Asset increase)
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- Credit: 3200 Revenues from sale of goods (Revenue increase)
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3. Paying salaries:
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- Debit: 5000 Salaries (Expense increase)
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- Credit: 1020 Bank (Asset decrease)
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4. Receiving a bank loan:
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- Debit: 1020 Bank (Asset increase)
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- Credit: 2407 Long-term bank loans (Liability increase)
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5. Depreciating fixed assets:
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- Debit: 6800 Depreciation and value adjustment on fixed assets (Expense increase)
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- Credit: 1509 Adjustment of machinery and equipment value (Asset decrease)
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## Financial Statements Impact
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- Balance Sheet: Assets (Class 1) are presented on the left side, while Liabilities and Equity (Class 2) are on the right side. The bank account's position depends on its closing balance.
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- Income Statement: Revenues (Class 3) increase profit, while Expenses (Classes 4, 5, 6) decrease profit.
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- Cash Flow Statement: The treatment of debits as incoming money and credits as outgoing money is particularly relevant for preparing the cash flow statement.
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## References
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- [[Swiss accounting plan - Simplified version.pdf]]
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- Adapted from: Sterchi, Mattle, Helbling (2014), Sistema dei conti Svizzero PMI, Edizioni FCPC
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@@ -0,0 +1,102 @@
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---
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course: Accounting
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date: 28-09-2024
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title: Swiss Financial Statement Assessment Process
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---
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### Tags: [[Swiss Accounting]], [[Financial Statements]],[[ Balance Sheet]], [[Income Statement]], [[Cash Flow Statement]]
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### Swiss Financial Statement Assessment Process
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```mermaid
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graph TD
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A[Start Assessment] --> B[Review Balance Sheet]
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B --> B1[Verify Asset Classification]
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B --> B2[Check Liability Recognition]
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B --> B3[Analyze Equity Structure]
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B --> B4[Assess Valuation Methods]
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B1 & B2 & B3 & B4 --> B5[Ensure Compliance with Art. 959a CO]
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B5 --> C[Analyze Income Statement]
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C --> C1[Verify Revenue Recognition]
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C --> C2[Examine Expense Classification]
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C --> C3[Analyze Profit Margins]
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C --> C4[Check for Extraordinary Items]
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C1 & C2 & C3 & C4 --> C5[Ensure Compliance with Art. 959b CO]
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C5 --> D[Examine Cash Flow Statement]
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D --> E[Verify Closing of Accounts]
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E --> E1[Check Account Balances]
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E --> E2[Verify Accruals and Deferrals]
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E --> E3[Ensure Consistency with Previous Year]
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E1 & E2 & E3 --> E4[Confirm Compliance with Art. 958c CO]
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E4 --> F[Calculate Financial Ratios]
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F --> G[Liquidity Ratios]
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F --> H[Solvency Ratios]
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G & H --> I[Prepare Assessment Report]
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I --> J[End Assessment]
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```
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## Summary
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This document outlines the process for assessing financial statements in accordance with Swiss regulations and the Swiss Code of Obligations (CO). It covers the review of the balance sheet, income statement, cash flow statement, and the closing of accounts, as well as the calculation of key financial ratios.
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## Definitions and Important Concepts
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- Balance Sheet: A financial statement that provides a snapshot of a company's financial position at a specific point in time, showing assets, liabilities, and equity (Art. 959a CO).
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- Income Statement: A financial statement that shows a company's financial performance over a specific period, detailing revenues, expenses, and profit or loss (Art. 959b CO).
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- Cash Flow Statement: A financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents.
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- Closing of Accounts: The process of finalizing financial records at the end of an accounting period (Art. 958c CO).
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- Liquidity Ratios: Financial metrics that measure a company's ability to meet short-term obligations.
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- Solvency Ratios: Financial metrics that assess a company's ability to meet long-term debts and obligations.
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## Key Accounting Principles
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- Principle of Prudence (Art. 958c para. 1 no. 5 CO): Requires conservative valuations and estimates to avoid overstatement of assets and understatement of liabilities.
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- Going Concern Principle (Art. 958a CO): Assumes that the company will continue its operations for the foreseeable future.
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- Materiality Principle (Art. 958c para. 1 no. 4 CO): Focuses on items that could influence the decisions of financial statement users.
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- Consistency Principle (Art. 958c para. 3 CO): Requires consistent application of valuation principles and presentation methods.
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- Accrual Principle (Art. 958b CO): Requires recording of transactions when they occur, not when cash is exchanged.
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## Financial Statements Impact
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### Balance Sheet Assessment:
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1. Verify Asset Classification:
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- Impacts: Current vs. non-current asset ratios, liquidity ratios
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2. Check Liability Recognition:
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- Impacts: Debt ratios, solvency ratios
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3. Analyze Equity Structure:
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- Impacts: Owner's equity, retained earnings
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4. Assess Valuation Methods:
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- Impacts: Asset values, depreciation/amortization expenses
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### Income Statement Assessment:
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1. Verify Revenue Recognition:
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- Impacts: Total revenue, profit margins
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2. Examine Expense Classification:
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- Impacts: Gross profit, operating profit
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3. Analyze Profit Margins:
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- Impacts: Profitability ratios
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4. Check for Extraordinary Items:
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- Impacts: Net income, comparability between periods
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### Cash Flow Statement Examination:
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- Impacts: Cash position, liquidity, and ability to generate cash
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### Closing of Accounts Verification:
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1. Check Account Balances:
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- Impacts: Accuracy of all financial statements
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2. Verify Accruals and Deferrals:
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- Impacts: Timing of revenue and expense recognition
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3. Ensure Consistency with Previous Year:
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- Impacts: Comparability of financial statements over time
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### Financial Ratios Calculation:
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- Liquidity Ratios (e.g., Current Ratio, Quick Ratio):
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- Impact: Assessment of short-term financial health
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- Solvency Ratios (e.g., Debt-to-Equity Ratio, Interest Coverage Ratio):
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- Impact: Evaluation of long-term financial stability
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The assessment process ensures compliance with Swiss regulations while providing a comprehensive view of a company's financial position, performance, and cash flows. It helps identify potential issues, ensures accurate reporting, and provides insights for decision-making by stakeholders.
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## References
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- [[Swiss Code of Obligations]] (CO), Articles 957-963
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- Course material: [[PrinciplesOfAccounting_03_Theory.pdf]], [[PrinciplesOfAccounting_04_Theory.pdf]]
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