Chapter 1 - Chapter 1 The Economic and Institutional...

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Chapter 1 The Economic and Institutional Setting for Financial Reporting Learning Objectives: What is accounting? Why financial statements are important? Who are the users of financial statements? How do these users use financial statements? What is GAAP? What is the standard setting process? What are some qualitative characteristics of accounting information? What are some major concepts and assumptions underlying accounting principles? 1
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What is Accounting ? An information system to account for all business transactions and translate these transactions into accounting/financial terms to be reported in financial statements. 2
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Why Financial Statements Are Important  ? Assess the risks (i.e., credit risk, asset risk) Provide a comprehensive economic history of a business entity Thus, financial statement can be used for various purposes (p3 of the textbook): As an analytical tool. As a management report card. As an early warning signal. As a basis for prediction. As a measure of accountability. 3
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Financial Information Accounting? Identifies and Measures and Communicates Financial Information Accounting? Identifies and Measures and Communicates Balance Sheet Income Statement Statement of Cash Flows Statement of Owners’ or Stockholders’ Equity Note Disclosures Balance Sheet Income Statement Statement of Cash Flows Statement of Owners’ or Stockholders’ Equity Note Disclosures President’s letter Prospectuses, SEC Reporting News releases Forecasts Environmental Reports Etc. President’s letter Prospectuses, SEC Reporting News releases Forecasts Environmental Reports Etc. GAAP GAAP Not GAAP Not GAAP Financial Statements Financial Statements Additional Information Additional Information Economic Entity Economic Entity Financial Statements and Financial Reporting 4
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Learning Objective : Describe the demand and supply for financial statements 5
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Who are the users of Financial Statements ? Why do they demand financial Statements?   Shareholders and investors 1. Investment decisions/stewardship function 2. Proxy contests Lenders and suppliers 1. Lending decisions 2. Covenant compliance Customers 1. Supplier’s health 2. Repeat purchases 3. Warranties & supports Managers and employees 1. Performance assessment 2. Compensation contracts 3. Company-sponsored pension plans Government and regulatory agencies 1. Mandatory reporting 2. Taxing authorities 3. Regulated industries 6
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Supply  of financial information Relevant financial information is provided primarily through financial statements and related disclosure notes. Major Financial statements: Balance Sheet, Income Statement, Statement of Stockholders Equity and Statement of Cash Flows.
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This note was uploaded on 11/11/2011 for the course ACCT 303 taught by Professor Staff during the Summer '11 term at S.F. State.

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Chapter 1 - Chapter 1 The Economic and Institutional...

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