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•The overall objective of accountingis to provide information that can be used in making economic decisions.•“Accountingis a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions—in making reasoned choices among alternative courses of action.” Statement of the Accounting Principles Board No. 4, par. 40.Accounting
•Accounting information is used in making decisions about how to allocate scarce resources.•Although accountants place much emphasis on reporting what has already occurred, this past information is intended to be useful in making economic decisions about the future.Key features in this definition of accounting:Definition of Accounting
USERS OF ACCOUNTING INFORMATION•Stakeholders are all parties interested in the financial health of a company.•Internal usersare stakeholders who make decisions that directly affect the internal operations of the enterprise.•External usersare stakeholders who make decisions concerning their relationship to the enterprise.
Users of Accounting Information1.Management accountingis concerned primarily with financial reporting for internal users, especially management.2.Financial accountingfocuses on the development and communication of financial information for external users.•Helps users in determining whether a company’s operations are profitable enough to justify additional funding.•Helps users in determining how risky a company’s operations are in order to determine what rate of return is necessary to compensate capital providers for the investment risk.
FINANCIAL VS. MANAGERIAL ACCOUNTINGFinancial AccountingManagerial AccountingUsersExternal and InternalInternalAccounting StandardsUS GAAP or IFRSFlexibleType of informationGeneral, overall health of the companyProduct costing, project management, decision makingFrequencyAnnual and quarterlyAs needed
information about the Creditorsneed information about the profitability and stability of the company to decide whether to lend money to the company and, if so, what interest rate to charge.Investors(both existing stockholders and potential investors) need information concerning the safety and profitability of their investment.External Investors
What is the difference between stockholders and stakeholders? Do their interests align well? Whose interests are more important?Moment of Reflection: Definitions
Global Accounting StandardsU.S. CongressIRSSECPCAOBFAFFASBU.S. GAAPGASBAICPAAAAIASBIFRSConverge?
The FASB•The Financial Accounting StandardsBoard (FASB)is the private sector body that sets accounting standards in the United States (commonly referred to as generally accepted accounting principles (GAAP)).