CHAPTER 1 FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS OVERVIEW Accounting is the language of business. As such, accountants collect and communicate economic information about business enterprises or other entities to a wide variety of persons. To be useful, financial statements must be clearly understandable and comparable so that users may compare the performance of one business with the performance of the same business for a prior period or with the performance of another similar business. Therefore, all general purpose financial statements should be prepared in accordance with the same uniform guidelines. In this chapter, we will examine the history and sources of current financial accounting standards (generally accepted accounting principles). SUMMARY OF LEARNING OBJECTIVES 1. Describe the essential characteristics of accounting.
The essential characteristics of accounting are: (1) identification, measurement, and communication of financial information about (2) economic entities to (3) interested persons. 2. Identify the major financial statements and other means of financial reporting. The financial statements most frequently provided are (1) the balance sheet, (2) the income statement, (3) the statement of cash flows, and (4) the statement of owners’ or stockholders’ equity. Financial reporting other than financial statements may take various forms. Examples include the president’s letter or supplementary schedules in the corporate annual report, prospectuses, reports filed with government agencies, news releases, management’s forecasts, and descriptions of an enterprise’s social or environmental impact. 3. Explain how accounting assists in the efficient use of scarce resources. Accounting provides reliable, relevant, and timely information to managers, investors, and creditors so that resources are allocated to the most efficient enterprises. Accounting also provides measurements of efficiency (profitability) and financial soundness. 4. Identify some of the challenges facing accounting. Financial reports fail to provide (1) some key performance measures widely used by management, (2) forward-looking information needed by investors and creditors, (3) sufficient information about a company’s soft assets (intangibles) and (4) real-time financial information. 5. Identify the objectives of financial reporting. The objectives of financial reporting are to provide (1) information that is useful in investment and credit decisions, (2) information that is useful in assessing cash flow prospects, and (3) information about enterprise resources, claims to those resources, and changes in the resources and claims to resources. 1-2 Self-Study Problems/Solutions for Intermediate Accounting, 9th Edition ___________________________________________________________________________ 6. Explain the need for accounting standards. In preparing financial statements, accountants are confronted with the potential dangers of bias, misinterpretation, inexactness, and ambiguity. In order to minimize these dangers, the accounting profession has attempted to develop a set of standards that is generally accepted and universally practiced. Without this set of standards, each accountant or enterprise would have to develop its own standards, and readers of financial statements would have to familiarize themselves with every company’s peculiar accounting and reporting practices. As a result, it would be almost impossible to prepare statements that could be compared. 7. Identify the major policy-setting bodies and their role in the standard-setting process. The Securities and Exchange Commission (SEC) is an agency of the federal government that has the broad powers to prescribe, in whatever detail it desires, the accounting standards to be employed by companies...
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