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CHAPTER 1 Study Guide


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CHAPTER 1 ENVIRONMENT AND THEORETICAL STRUCTURE OF FINANCIAL ACCOUNTING Overview The primary function of financial accounting is to provide relevant and reliable financial information to users external to the business enterprise. The focus of financial accounting is on the information needs of investors and creditors. These users make critical resource allocation decisions that affect the nation’s economy. The primary means of conveying financial information to investors, creditors, and other external users is through financial statements and related notes. In this chapter you explore important topics such as the FASB’s Conceptual Framework that serve as a foundation for a more detailed study of financial statements, the way the elements of these statements are measured, and the concepts underlying these measurements and related disclosures. Learning Objectives 1. Describe the function and primary focus of financial accounting. 2. Explain the difference between cash and accrual accounting. 3. Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards. 4. Explain why the establishment of accounting standards is characterized as a political process. 5. Explain the purpose of the FASB’s conceptual framework. 6. Identify the objectives of financial reporting, the qualitative characteristics of accounting information, and the elements of financial statements. 7. Describe the four basic assumptions underlying GAAP. 8. Describe the four broad accounting principles that guide accounting practice. Part A: Financial Accounting Environment I. The Function and Primary Purpose of Financial Accounting A. There are a number of financial information supplier groups as well as several external user groups. (T1-1) B. The primary focus of financial accounting is on the information needs of investors and creditors. C. Financial statements convey financial information to external users. (T1-2) 1. Balance sheet or statement of financial position 2. Income statement or statement of operations 3. Statement of cash flows 4. Statement of shareholders' equity
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II. The Economic Environment and Financial Reporting A. The capital markets provide a mechanism to help our economy allocate resources efficiently. B. Corporations, the dominant form of business organization in the United States in terms of the ownership of productive resources, acquire capital from investors in exchange for ownership interest and by borrowing from creditors. C. The investment-credit decision—A cash flow perspective 1. A company will be able to provide a return to investors and creditors only if it can generate cash receipts from selling a product or service that exceed the cash disbursements necessary to provide that product or service.
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