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Chapter 1 Notes

Chapter 1 Notes - Chapter 1 Financial Accounting and...

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Chapter 1: Financial Accounting and Accounting Standards Financial Statements and Financial Reporting - Essential characteristics of accounting: o Identification, measurement, and communicate information about economic entities to interested parties - Financial Accounting - process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties - Managerial Accounting - process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, control, and evaluate a company’s operations - Financial statements are the principal means to which a company communicates its financial information to those outside it o Balance Sheet o Income Statement o Statement of Cash Flows o Statement of Owners’ or Stockholders’ Equity Accounting and Capital Allocation - Accountant must measure performance accurately and fairly on a timely basis, so that the right managers and companies are able to attract investment capital The Challenges Facing Financial Accounting - Nonfinancial Measurements - Forward-Looking Information - Soft Assets o Intangibles - Timeliness - Each challenge must be met to provide the type of information needed for an efficient capital allocation process
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Objectives of Financial Reporting - Accounting profession identify a set of objectives of financial reporting by business enterprises; financial reporting should report information that: o Is useful to present and potential investors and creditors and other uses in making rational investment, credit, and similar decisions. The information comprehensible to those who have a reasonable understanding of business and economic activity and are willing to study the information with reasonable diligence. o Helps present and potential investors, creditors and other users assess 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. o Clearly portrays the economic resources of an enterprise, the claims to those resources (obligations of the enterprise to transfer resources to other entities and owners’ equity), and the effects of transactions, events, and circumstances that change its resources and claims to those resources. - In brief, the objectives of financial reporting are to provide information that is: o Useful in investment and credit decisions o Useful in assessing cash flow prospects o About company resources, claims to those resources, and changes in them - Information based on accrual accounting general better indicates a company’s present and continuing ability to generate favorable cash flows - Accrual-Basis Accounting
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Chapter 1 Notes - Chapter 1 Financial Accounting and...

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