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Chapter 8_ Notes

Chapter 8_ Notes - Chapter 8 Notes 8.1 Overview Financial...

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Chapter 8 Notes 8.1 Overview Financial accounting refers to accounting information that is used by investors, creditors and other parties for analyzing management performance and for decision-making purposes. Standard setters do not fully agree with the above dichotomy. According to SFAC 1, the first objective of financial reporting is to provide useful information to present and potential investors for rational decision making. IASB regards reporting on stewardship as part of its broader objective of providing useful information but states that “to make stewardship as separate objective might exaggerate what is feasible for financial reporting to accomplish.” Standard setters may feel that it is not possible to separate the effects of manger stewardship from random state realization when reporting on firm performance. Regardless of the standard setter’s position, it is necessary that accountants understand and appreciate management’s interests in financial reporting due both to the extensive interaction of accountants and managers and to our thesis that reporting on manager performance is equally important to society as reporting to investors. Economic consequences – despite the implications of efficient market securities theory, accounting policy choice can affect firm value. Essentially, the notion of economic consequences is that firms’ accounting policies, and changes in policies, matter. Accounting policies matter to investors who own the firm in addition to managers, because a manager may well change the actual operation of their firms due to changes in accounting policies (e.g., managers may cut maintenance and R&D to compensate for a new accounting policy that lowers the bottom line). Accounting policy refers to any accounting policy, not just those that affect a firm’s cash flows. The suggestion that accounting policies matter is consistent with accountants’ experience because much of financial accounting is devoted to discussion about which accounting policies should be used in various circumstances, and many debates over financial statement presentation involve accounting policy choice.
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Chapter 8 Notes 8.2 The Rise of Economic Consequences Zeff (1978): Accounting reports can affect the real decisions made by managers and others rather than simply reflecting the results of these decisions. Economic consequences complicate the setting of accounting standards. According to Zeff, to retain credibility with accountants, accounting policies must be set in accordance with the financial accounting model and its traditional concepts of matching and realization. Yet, such historical cost-based concepts seldom lead to a unique accounting policy choice because net income does not exist as a well-defined economic construct under non-ideal conditions. There is no theory that clearly prescribes what accounting policies should be used, other than a vague requirement that some tradeoff between relevance and
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Chapter 8_ Notes - Chapter 8 Notes 8.1 Overview Financial...

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