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1-1 1 THE ENVIRONMENT OF FINANCIAL REPORTING CHAPTER OBJECTIVES After careful study of this chapter, students will be able to: 1. Understand capital markets and decision making. 2. Know what is included in financial reporting. 3. Explain generally accepted accounting principles (GAAP) and the sources of GAAP. 4. Identify the types of pronouncements issued by the FASB. 5. Understand how the Financial Accounting Standards Board (FASB) operates. 6. Describe the relationship between the Securities and Exchange Commission (SEC) and the FASB. 7. Use ethical models for decision making about ethical dilemmas. 8. Understand creative and critical thinking. 9. Describe the joint convergence project of the FASB and IASB (Appendix).
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1-2 SYNOPSIS Accounting Information 1. Accounting, the "language of business," has been described as the process of identifying, measuring, recording, and communicating economic information to permit informed judgments and decisions by users of information. Accounting provides a link between the economic activities of a company and decision makers who are interested in the company. These decision makers who use accounting information can be divided into two major groups: external users (such as investors) and internal users (the company's management). Because of their different relationships to the company, the two groups have somewhat dissimilar information needs. 2. External users include, for example, actual and potential investors in stocks and bonds, creditors, employees, taxing and regulatory authorities, financial analysts, and the general public. Investors need accounting information on a timely basis for three basic decisions: the buy , hold , and sell decisions. Creditors need timely information for decisions on extending and continuing credit. Published financial statements are a primary source of information for investment and credit decisions, which should be continuously reevaluated. 3. In capital markets , investors exchange capital for the stocks and bonds of companies. Exchanges between investors themselves are made in secondary markets , such as the New York and American Stock Exchanges and NASDAQ. Companies deal directly with investors in primary markets , by borrowing from lending institutions or issuing capital stock or bonds. Primary markets include both public offerings and private placements. Public offerings involve advertising and sales of stocks or bonds to the general public, while in private placements , advertising and sales are directed to a limited number of institutions, such as insurance companies and pension funds, or employees. 4. Internal users are the company's managers. Managers may request any information that the accounting system can provide, in any format, to use in short-term and long-term planning and control.
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