ENVIRONMENT AND THEORETICAL STRUCTURE OF FINANCIAL ACCOUNTING
The primary function of financial accounting is to provide useful financial information to users external to the business enterprise. The focus of financial accounting is on the information needs of investors and creditors. These users make critical resource allocation decisions that affect the nation’s economy. The primary means of conveying financial information to investors, creditors, and other external users is through financial statements and related notes.
In this chapter you explore important topics such as the FASB’s conceptual framework that serve as a foundation for a more detailed study of ...view middle of the document...
S. GAAP and IFRS with respect to the development of accounting standards and the conceptual framework underlying accounting standards.
Part A: Financial Accounting Environment
I. The Function and Primary Purpose of Financial Accounting
A. There are a number of financial information supplier groups as well as several external user groups. (T1-1)
B. The primary focus of financial accounting is on the information needs of investors and creditors.
C. Financial statements convey financial information to external users. (T1-2)
1. Balance sheet or statement of financial position
2. Income statement or statement of operations
3. Statement of cash flows
4. Statement of shareholders' equity
5. Starting in 2012, either
a) a statement of other comprehensive income immediately following the income statement, or
b) a statement of comprehensive income (including information on the income statement as well as on the statement of other comprehensive income).
II. The Economic Environment and Financial Reporting
A. The capital markets provide a mechanism to help our economy allocate resources efficiently.
B. Corporations, the dominant form of business organization in the United States in terms of the ownership of productive resources, acquire capital from investors in exchange for ownership interest and by borrowing from creditors.
C. The investment-credit decision—A cash flow perspective
1. A company will be able to provide a return to investors and creditors only if it can generate cash receipts from selling a product or service that exceed the cash disbursements necessary to provide that product or service.
2. The objective of financial accounting is to provide information to investors and creditors to help them predict future cash flows.
D. Cash versus accrual accounting
1. Over short periods of time, operating cash flow may not be an accurate predictor of future operating cash flows.
2. The accrual accounting model provides a measure of periodic performance called net income.
3. Net income is considered a better indicator of future operating cash flows than is current net operating cash flows. (T1-3)
III. The Development of Financial Accounting and Reporting Standards
A. Historical perspective and U.S. standards (T1-4)
1. Generally accepted accounting principles (GAAP) are a set of guidelines companies follow in measuring and reporting financial information.
2. The Securities and Exchange Commission (SEC) has the authority to set accounting standards for companies, but always has delegated the task to the accounting profession.
3. The Financial Accounting Standards Board (FASB) currently sets accounting standards.
4. The FASB Accounting Standards Codification became effective on July 1, 2009, and now represents the single source of authoritative nongovernmental U.S. GAAP, except for rules and interpretive release of the SEC, which remain also as sources of authoritative GAAP.