Enterprise for use by both internal and external parties
financial accounting
·
The process that
culminates the preparation of financial reports on the enterprise for use by
both internal and external parties.
essential
characteristics of accounting:
·
the identification,
measurement, and communication of financial information about (2) economic
entities to (3) interested parties.
managerial accounting
·
Process of
identifying, measuring, analyzing, and communicating financial information
needed by management to plan, control, and evaluate a company's operations.
financial statements.
- Principal means through which a company
communicates its financial information to those outside it
- provide a company's history quantified in money terms
- Financial statements most frequently provided: (1) balance sheet, (2) income
statement, (3) statement of cash flows, and (4) owners'/stockholders' equity
statement
- Note disclosures are an integral part of a company's financial statements.
financial reporting
·
Reporting of financial
information other than in formal financial statements. Examples include the
president's letter or supplementary schedules in the corporate annual report,
prospectuses, reports filed with government agencies, news releases,
management's forecasts, and social or environmental impact statements.
Explain how accounting
assists in the efficient use of scarce resources.
·
Accounting provides
reliable, relevant, and timely information to managers, investors, and
creditors to allow resource allocation to the most efficient enterprises.
Accounting also provides measurements of efficiency (profitability) and
financial soundness.
What is the objective
(purpose) of financial reporting?.
·
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
- provide the most useful information possible at the least cost
- The objective of financial reporting identifies investors and creditors as
the primary users for general-purpose financial statements
entity perspective
·
Companies are viewed
as separate and distinct from their owners (present shareholders) using this
perspective.
decision-usefulness
- Investors are interested in financial
reporting because it provides information that is useful for making decisions
(referred to as the decision-usefulness)
- Investors are interested in assessing (1) the company's ability to generate
net cash inflows and (20 management's ability to protect and enhance the
capital providers' investments
accrual-basis
accounting
- Accounting approach that 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.
- (Using the accrual basis to determine net income means that a company
recognizes revenues when it provides the goods or services, rather than when it
receives cash. Similarly, it recognizes expenses when it incurs them rather
than when it pays them.)
Explain the need for
developing accounting standards.
·
The accounting
profession has attempted to develop a set of standards that is generally
accepted and universally practiced. Otherwise, each enterprise 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.
(GAAP) Generally
Accepted Accounting Principles
- Common set of standards and procedures.
- "Generally accepted" means either that an authoritative accounting
rule-making body has established a principle of reporting in a given area or
that over time a given practice has been accepted as appropriate because of its
universal application.
Identify the (3) major
policy-setting bodies/ organizations that are instrumental in the development
of financial accounting standards (GAAP).
·
(SEC) Securities and
Exchange Commission
2. (AICPA) American Institute of Certified Public Accountants
3. (FASB) Financial Accounting Standards Board
(SEC) Securities and
Exchange Commission
·
The "Securities
and Exchange Commission" is an agency of the federal government that has
the broad powers to prescribe, in whatever detail it desires, the accounting
standards to employed by companies that fall within its jurisdiction.
(AICPA) American
Institute of Certified Public Accountants
- The "American Institute of Certified
Public Accountants" issued standers through its Committee on Accounting
Procedure and Accounting Principles Board (APB).
- Important contributor to the development of GAAP
(FASB) FInancial
Accounting Standards Board
- The "Financial Accounting Standards
Board" establishes and improves standards of financial accounting a
reporting for the guidance and education of the public, which includes issuers,
auditors, and users of financial information.
- Standards issued by the FASB are considered generally accepted accounting
principles (GAAP).
Committee on
Accounting Procedure (CAP)
·
Committee established
by the AICPA in 1939 at the urging of the SEC to deal with accounting problems.
The CAP issued 51 Accounting Research Bulletins and was replaced by the
Accounting Principles Board in 1959.
Accounting Research
Bulletins
·
The Committee on
Accounting Procedure (CAP) issued 51 Accounting Research Bulletins (1939-1959).
These bulletins dealt with a variety of accounting problems, but this
problem-by-problem approach failed to provide the needed structured body of
accounting principles. (1959 -> AICPA created the Accounting Principles
Board (APB) in response.)
(APB) Accounting
Principles Board
- The major principles of the APB were to (1)
advance the written expression of accounting principles, (2) determine
appropriate practices, and (3) narrow the areas of difference and inconsistency
in practice.
- To achieve these objectives, the APB's mission was: to develop an overall
conceptual framework to assist in the resolution of problems as they became
evident and to substantively research individual issues before the AICPA issued
pronouncements.
- Board's official pronouncements = APB Opinions
APB Opinions
·
The official
pronouncements of the Accounting Principles Board, intended to be based mainly
on research studies and be supported by reasons and analysis. Between its
inception in 1959 and its dissolution in 1973, the APB issued 31 opinions.
Wheat Committee
·
The Study Group on
Establishment of Accounting Principles, chaired by Francis Wheat, that examined
the organization and operation of the Accounting Principles Board and
determined the changes needed to attain better productivity and more timely
correction of accounting abuses. The Study Group submitted its recommendations
to the AICPA Council in the spring of 1972, which adopted the recommendations
in total and implemented them by early 1973.
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