PREVIEW OF CHAPTER

1-1

What is accounting?

Bookkeeping?

Accounting

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Financial Statements and Reporting

Essential characteristics of accounting are:
(1) the identification, measurement, and communication
of financial information about
(2) economic entities to
(3) interested parties

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Accounting and Photography

Bookkeeping

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Financial Statements and Other Means of Financial Reporting

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Major financial statements include:

Balance Sheet

Income Statement

Statement of Cash Flows

Statement of Shareholders (Owners) Equity

[Note Disclosures]

Other forms of financial reporting include:

News releases

Management forecasts, etc.

Financial Reporting Aids Capital Allocation

1-6

Quarterly reports from IBM and Goldman

Sachs sent stocks tumbling.

Google share price rises on better than

expected earnings

Whats the role for

accounting?
Measure performance and prepare
financial statement (accountant)
Validate (auditor)
Analyze (analysts, both credit and equity)

Financial Statements and Reporting

Objectives of Financial Reporting
Provide financial information about the reporting entity that is
useful to

present and potential equity investors,

lenders, and

other creditors

in making decisions in their capacity as capital providers.

Provide useful information to assist capital allocation

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Objective of Financial Accounting

Decision-Usefulness (i.e., what do investors care
about?)
Investors are interested in assessing the companys
1. ability to generate net cash inflows and
2. managements ability to protect and enhance the capital
providers investments.
Financial reporting should help investors assess both.

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The Need To Develop Standards

Various users
need financial
information

The accounting profession has

attempted to develop a set of
standards that are generally
accepted and universally
practiced.
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Financial Statements
Balance
Balance Sheet
Sheet
Income
Income Statement
Statement
Statement
Statement of
of Stockholders
Stockholders Equity
Equity
Statement
Statement of
of Cash
Cash Flows
Flows
Note
Note Disclosure
Disclosure

Generally
Generally Accepted
Accounting
Accounting Principles
(GAAP)
(GAAP)

Parties Involved In Standard Setting

Three organizations:

Securities and Exchange Commission (SEC).

Federal agency;

Requires registrants to adhere to GAAP.

Two private sector entities that develop accounting

standards:
American

Institute of Certified Public Accountants

(AICPA).
Financial

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Accounting Standards Board (FASB).

Generally Accepted Accounting Principles

Principles that have substantial authoritative support.
Major sources of GAAP:

FASB Standards, Interpretations, and Staff Positions.

APB Opinions.
APB:

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Accounting Principle Board, FASBs predecessor

AICPA Accounting Research Bulletins.

Generally Accepted Accounting Principles

FASB Codification

Goal in developing the Codification is to provide in one place all

the authoritative literature related to a particular topic.

Creates one level of GAAP, which is considered authoritative.

All other accounting literature is considered non-authoritative.

FASB has developed the Financial Accounting
Standards Board Codification Research System
(CRS). CRS is an online real-time database that
provides easy access to the Codification.

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Issues in Financial Reporting

GAAP in a Political Environment
GAAP is as
much a product
of political
action as they
are of careful
logic or
empirical
findings.

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Illustration 1-6
User Groups that
Influence the Formulation
of Accounting Standards

Issues in Financial Reporting

International Accounting Standards
Two sets of standards accepted for international use:

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U.S. GAAP, issued by the FASB.

International Financial Reporting Standards (IFRS),

issued by the IASB.

Issues in Financial Reporting

Ethics in the Environment of Financial
Accounting
In accounting, we frequently encounter ethical dilemmas.

GAAP does not always provide an answer.

Doing the right thing is not always easy or obvious.

The Generally Accepted Accounting

Principles werent as generally accepted
as I thought.

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