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Chapter 01 Review - CHAPTER1REVIEW 1 of the financial...

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CHAPTER 1 REVIEW 1. Chapter 1 describes the environment that has influenced both the development and use of the financial accounting process. The chapter traces the development of financial accounting standards, focusing on the groups that have had or currently have the responsibility for developing such standards. Certain groups other than those with direct responsibility for developing financial accounting standards have significantly influenced the standard-setting process. These various pressure groups are also discussed in Chapter 1. Nature of Financial Accounting 2. (S.O. 1) Financial accounting is the process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties. 3. Financial statements are the principal means through which a company communicates its financial information to those outside it. 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. Other means of financial reporting include the president’s letter or supplementary schedules in the corporate annual report, prospectuses, and reports filed with government agencies. 4. (S.O. 2) Accounting is important for markets, free enterprise, and competition because it assists in providing information that leads to capital allocation. The better the information, the more effective the process of capital allocation and then the healthier the economy. 5. (S.O. 3) The challenges facing financial accounting are the following: a. Non-financial measurements such as customer satisfaction indexes, backlog information, and reject rates on goods purchased. b. Forward-looking information. c. Soft assets. d. Timeliness. 6. (S.O. 4) The objectives of financial accounting are to provide information that: a. is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions; b. helps present and potential investors, creditors, and other users assess the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans; and c. clearly portrays the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change its resources and claims to those resources. 1-1
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7. (S.O. 5) The accounting profession has developed a common set of standards and procedures known as generally accepted accounting principles (GAAP). These principles serve as a general guide to the accounting practitioner in accumulating and reporting the financial information of a business enterprise.
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