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, its resources.
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
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.