FINANCIAL STATEMENTS AND FINANCIAL REPORTING
* Accounting and capital allocation
* Need to develop standard
PARTIES INVOLVED IN STANDARD-SETTING
* Securities and Exchange
* American Institute of CPAs
* Financial Accounting
* Standards Board
* Changing role of the AICPA
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
* FASB Codification
ISSUES IN FINANCIAL REPORTING
* Political environment
* Expectations gap
* Financial reporting
* International accounting
The essential characteristics of accounting are
(1) The identification, measurement, and communication of financial information about (2) Economic entities to
(3) Interested parties.
Financial accounting is the process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties. Users of these financial reports include investors, creditors, managers, unions, and government agencies.
Managerial accounting is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, control, and evaluates a company’s operations.
The financial statements most frequently provided are:
(1) The balance sheet,
(2) The income statement,
(3) The statement of cash flows, and
(4) The statement of owners’ or stockholders’ equity.
Capital Allocation Process:
Financial Reporting- The financial information a company provides to help users with capital allocation decisions about the company Users (present and potential- Investors and creditors use financial reports to make their capital allocation decisions Capital Allocation -The process of determining how and at what cost money is allocated among competing interests.
The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity.
General-purpose financial statements provide financial reporting information to a wide variety of users
Entity Perspective- As part of the objective of general-purpose financial reporting, an entity perspective is adopted. Companies are viewed as separate and distinct from their owners (present Shareholders) using this perspective.
A perspective that financial reporting should be focused only on the needs of shareholders—often referred to as the proprietary perspective—is not considered appropriate.
Decision-Usefulness - Investors are interested in financial reporting because it provides information that is useful for making decisions (referred to as the decision-usefulness approach).
The objective of accrual-basis accounting: It ensures that a company records events that change its financial statements in the periods in which the events occur, rather than only in the periods in which it receives or pays cash.
General purpose financial statements. Are expected to present fairly, clearly, and completely the company’s financial operations.
PARTIES INVOLVED IN STANDARD-SETTING
Three organizations are instrumental in the development of financial accounting standards (GAAP) in the United States: 1. Securities and Exchange Commission (SEC)
2. American Institute of Certified Public Accountants (AICPA) 3. Financial Accounting Standards Board (FASB)
The federal government established the Securities and Exchange Commission (SEC) to help develop and standardize financial information presented to stockholders. The SEC is a federal agency and relies on the FASB to develop accounting standard.
The American Institute of Certified Public Accountants (AICPA), which is the national professional organization of practicing Certified Public Accountants (CPAs), has been an important contributor to the development of GAAP....