FRA.docx - Financial Reporting and Accounting Chapter One...

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Financial Reporting and Accounting Chapter One: Financial Accounting and Accounting Standards- I. Financial Statements and Financial Reporting A. Major Financial Statements and Reporting 1. Financial Statements - Provides company history quantified in money terms. Most frequently provided a. Balance Sheet (Alive) b. Income Statement (Dead) c. Statement of Cash Flows d. Statement of Owners Equity B. Objective of Financial Reporting 1. General-Purpose Financial Statements- Financial reporting information to a wide variety of users a. Provide at the least cost, the most useful information possible 2. Equity Investors and Creditors (Primary users) 3. Entity Perspective-Companies are viewed as separate and distinct from their owners (present shareholders) a. Proprietary Perspective- Financial reporting should be focused on only the needs of the shareholders (Not appropriate). 4. Decision-Usefulness- Provides information that is useful for making decision. Investors are interested in assessing a. Company’s ability to generate net cash inflows b. Management’s ability to protect and enhance the capital providers’ investment c. Accrual-Basis Accounting -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 C. Accounting Standards 1. Generally Accepted Accounting Principles (GAAP)- a. Authoritative accounting rule-making body has established a principle of reporting in a given area or that over time given practice has been accepted as appropriate because of its universal application II. Parties Involved in Standard-Setting A. Three organizations are instruments in the development of financial accounting standards (GAAP) 1. Securities and Exchange Commission (SEC)- a. Help develop and standardize financial information presented to stockholders, administers the Securities Exchange Act of 1934
b. Broad powers to prescribe, in whatever detail it desires, the accounting practices and standards to be employed by companies that fall within its jurisdiction c. Enforcement- 1. Deficiency letter - Accounting or disclosure irregularity exists regarding the form or content of the financial statements 2. Stop Order - Prevents the registrant from issuing or trading securities on the exchange 2. American Institute of Certified Public Accountants (AICPA) a. National professional organization of practicing CPA b. Committee on Accounting Procedures(CAP) 1. Issues 51 Accounting Research Bulletins i. Problem-by-problem approach failed to provide structured body c. Accounting Principles Board (APB): 1. Major Purpose: i. Advance written expression of accounting principles ii. Determine appropriate practices iii. Narrow areas of difference and inconsistency in practice 2. Mission: i. Develop an overall conceptual frame work to assist in the resolution of problems as they became evident ii. Substantively research individual issues before the AICPA issued pronouncements 3. APB Opinions- Official pronouncement i. Based mainly on research studies and supported

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