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CHAPTER

1

FINANGIAL ACCOUNTING AND ACCOUNTING STANDARDS
OVERVIEW
Accounting is the language of business. As such, accountants collect and communicate economic information about business enterprises or other entities to a wide variety of persons. To be useful, financial statements must be clearly understandable and comparable so that users may compare the performance of one business with the performance of the same business for a prior period or with the performance of another similar business. Therefore, all general purpose financial statements should be prepared in accordance with the same uniform guidelines. In this chapter, we will examine the history and sources of current financial accounting standards (generally accepted accounting principles).

SUMMARY OF LEARNING OBJECTIVES

1.

ldentify the major financial statements and other means of financial reporting. Companies most frequently provide (1) the balance sheet, (2) the income statement, (3) the statement of cash flows, and (4) the statement of owners' or stockholders' equity. Financial reporting other than financial statements may take various forms. Examples include the president's letter and supplementary schedules in the corporate annual report, prospectuses, reports filed with government agencies, news releases, management's forecasts, and descriptions of an enterprise's social or environmental impact.

2.

Explain how accounting assists in the efficient use of scarce resources. Accounting provides reliable, relevant, and timely information to managers, investors, and creditors so that resources are allocated to the most efficient enterprises. Accounting also provides measurements of efficiency (profitability) and financial soundness.

3.

ldentify some of the challenges facing accounting. Financial reports fail to provide ('t) some key performance measures widely used by management, (2)fonruard-looking information needed by investors and creditors, (3) sufficient information about a company's soft assets (intangibles) and (4) realtime financial information.

4.

ldentify the objectives of financial reporting. The objectives of financial reporting are to provide (1) information that is useful in investment and credit decisions, (2) information that is useful in assessing cash flow prospects, and (3) information about enterprise resources, claims to those resources, and changes in the resources and claims to resources.

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5.

Problem solving survival Guide for Intermediate Accounting,l3th Edition

Explain the need for accounting standards. The accounting profession has attempted to develop a set of standards that is generally accepted and universally practiced. Without this set of standards, each company would have to develop its own standards. Readers of financial statements would have to familiarize themselves with every company's peculiar accounting and reporting practices. As a result, it would be almost impossible to prepare statements that could be compared with the statements of other companies. ldentify the major policy-setting bodies and their role in the standard-setting process. The Securities and Exchange Commission (SEC) is an agency of the federal goveinment that has the broad powers to prescribe, in whatever detail it desires, the accounting standards to be employed by companies that fall within its jurisdiction. The American Institute of Certified Public Accountants (AICPA) issued standards through its Committee on Accounting procedure and Accounting Principles Board (APB). The Financial Accounting Standards Boird (FASB) establishes and improves standards of financial accounting and reporting for the guidance and education of the public, which includes issuers, auditors, and users of financial information.

6.

7.

Explain the meaning of generally accepted accounting principles. Generally accepted accounting principles (GAAP) are those principles that have substantial authoritative support, such as FASB...
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