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Lecture notes - The Financial Reporting Environment Accounting information particularly financial statements are prepared by managers for use by

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The Financial Reporting Environment
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information, particularly, financial statements are prepared by managers for use by • Investors, • Lenders, • Suppliers, • Employees, • Regulators, • and …
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Why do these individuals care about financial statements? How do they use them?
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Basic objectives of financial reporting To provide information: about economic resources, the claims on  those resources and changes in them. that is useful to those making investment and  credit decisions. that is useful to present and future investors,  creditors in assessing future cash flows. to individuals who reasonably understand  business and economic activities.
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Before the statements can be distributed an independent external auditor must attest to them. • The auditor must verify that the statements are prepared in accordance with GAAP.
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The Development of Accounting Standards • GAAP stands for Generally Accepted Accounting Principles.
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Parties involved in the standard setting process Securities and Exchange Commission (SEC) Financial Accounting Standards Board  (FASB)  International Accounting Standards Board  (IASB) American Institute of Certified Public  Accountants (AICPA) Governmental Accounting Standards Board  (GASB)
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boards that preceded it have written accounting principles. • Self-interested individuals have promulgated these principles. • The principles are the result of lobbying and compromises. • Thus 'accounting standards are as much a product of political action as they are of careful logic or empirical
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process argues for accounting standards that will maximize his/her utility function. Examples : • Auditor wants accounting standards that will make- work. • Manager wants accounting standards that will increase reported income.
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Challenges facing accounting Non-financial measurements   need to be  developed and reported. More information needs to be provided  regarding   soft assets   (intangibles). Forward-looking information , in addition to  historical information, must be provided. Statements may have to be prepared on a   real-time basis   (and not just periodically).
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Expectations GAP An  expectations gap   exists between the public’s perception  of the profession’s  accountability and  profession’s  perception  of its accountability to the  public.
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Objective! • The
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This note was uploaded on 05/19/2008 for the course ACCT 3511 taught by Professor Balsam during the Spring '07 term at Temple.

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Lecture notes - The Financial Reporting Environment Accounting information particularly financial statements are prepared by managers for use by

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