CHAPTER 1 Financial Accounting Environment

CHAPTER 1 Financial Accounting Environment - Environment...

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Environment and Theoretical Structure of Financial Accounting FINANCIAL ACCOUNTING ENVIRONMENT Financial accounting focuses on external users, primarily investors, creditors and financial intermediaries. Financial reporting is the process of providing relevant financial information to these third-party users. The Economic Environment and Financial Reporting Capital markets are a composite of investors and creditors who use published financial reports to make investment and/or credit decisions. The success of capital markets to a large degree depends on the integrity of the financial reporting process. The primary capital markets are where publicly regulated corporations sell stocks and bonds. Once these securities are in circulation they are traded among investors in secondary markets. Once a corporation sells its securities in the primary market it receives no more revenue from activities in the secondary markets. A Cash Flow Perspective: The Investment-Credit Decision Investors purchase stock based on some anticipated future return. The cash flows as a result of an investment in publicly traded stock come from two sources: Periodic payment of dividends and the gain realized from the eventual sale of the stock. The two variables that are evaluated by investors are the expected rate of return and the uncertainty (risk) associated with ownership of the stock. Financial reports provide information needed in making investment and credit decisions. Based on this information investors and creditors assess the amounts , timing , uncertainty of future cash flows. Financial accounting plays a major role in providing reliable information to third party investors and creditors in making these decisions. Cash Basis Accounting On a cash basis the results of operations are called net operating cash flows . Although helpful information, short-term operating cash flows may not reflect the prospect for future cash flows of the business entity. Accrual Accounting
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CHAPTER 1 Financial Accounting Environment - Environment...

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