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Unformatted text preview: 1 Financial Accounting and Accounting Standards LEARNING OBJECTIVES After studying this chapter, you should be able to: Identify the major financial statements and other means of financial reporting. Explain how accounting assists in the efficient use of scarce resources. Identify some of the challenges facing accounting. Identify the objectives of financial reporting. Explain the need for accounting standards. Identify the major policy- setting bodies and their role in the standards- setting process. Explain the meaning of generally accepted accounting principles. Describe the impact of user groups on the standards-setting process. Understand issues related to ethics and financial accounting. T he Size of the New York City Phone Book . . . Enron , Global Crossing , Kmart , WorldCom , Williams Co. , and Xerox are examples of companies that have come under the scrutiny of the Securities and Exchange Commission recently because of accounting issues. Share prices of all these companies have declined substantially, as investors punish any company whose quality of earnings is in doubt. The unfortunate part of accounting scandals is that we all pay. Enron, for example, at one time had a market capitalization of $80 billion before disclosure of its accounting irregularities. Today it is bankrupt. Employees have lost their pension money, investors have lost their savings, and the entire stock market has become caught up in Enronitis, which has led to substantial declines in the overall stock market. At one point, there were at least 10 congressional committees involved in inquiries regarding corporate governance issues, and over 30 Enron-related bills have addressed matters such as regulation of derivative securities, auditor-client conflicts, and development of an oversight body to regulate the accounting profession. As a result of the many concerns expressed by investors about the completeness and the reliability of the accounting numbers, many companies have expanded their financial disclosures in their annual reports. For example, General Electric s CEO Jeffery Immelt stated, I want people to think about GE as we think of GEas a transparent company. He noted that GEs annual report will be the size of New York Citys phone book, if necessary to provide the information necessary to help investors and creditors make the proper investing decisions. It is our hope that meaningful reform will come out of these recent investigations into sloppy or fraudulent accounting. Although the U.S. is still considered to have the finest reporting system in the world, we must do better. As former chair of the FASB Ed Jenkins recently remarked, If anything positive results . . . it may be that [these accounting issues] serve as an indelible reminder to all that transparent financial reporting does matter and that lack of transparency imposes significant costs on all who participate [in our markets]. C H A P T E R 1 C H A P T E R 1 8658d_c01.qxd 10/24/02 10:05 AM Page 1 mac76 mac76:385_reb: As the opening story indicates, relevant and reliable financial information must be pro-...
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This note was uploaded on 12/06/2010 for the course ECON 136A taught by Professor Anderson during the Fall '08 term at UCSB.
- Fall '08