Financial Accounting and Accounting Standards
SOLUTIONS TO CONCEPTS FOR ANALYSIS
Financial accounting is the process that culminates in the preparation of financial reports relative to
the enterprise as a whole for use by parties both internal and external to the enterprise. In contrast,
managerial accounting is the process of identification, measurement, accumulation, analysis, prepa-
ration, interpretation, and communication of financial information used by the management to plan,
evaluate, and control within an organization and to assure appropriate use of, and accountability for,
The financial statements most frequently provided are the balance sheet, the income statement,
the statement of cash flows, and the statement of changes in owners’ or stockholders’ equity.
Financial statements are the principal means through which financial information is communicated to
those outside an enterprise. As indicated in (b), there are four major financial statements. However,
some financial information is better provided, or can be provided only, by means of financial
reporting other than formal financial statements. Financial reporting (other than financial statements
and related notes) may take various forms. Examples include the company president’s letter or
supplementary schedules in the corporate annual reports, prospectuses, reports filed with govern-
ment agencies, news releases, management’s forecasts, and descriptions of an enterprise’s social
or environmental impact.
In accordance with
Statement of Financial Accounting Concepts No. 1,
“Objectives of Financial
Reporting by Business Enterprises,” the objectives of financial reporting are to provide information to
investors, creditors, and others
that is useful to present and potential investors and creditors and other users in making rational
investment, credit, and similar decisions. The information should be comprehensible to those
who have a reasonable understanding of business and economic activities and are willing to
study the information with reasonable diligence.
to help present and potential investors and creditors and other users in assessing 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. Since investors’ and creditors’ cash
flows are related to enterprise cash flows, financial reporting should provide information to help
investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net
cash inflows to the related enterprise.