Intermediate Accounting Chapter 1.pdf

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Course Code
ACCT 370

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Chapter 1 FinancialAccounting andAccounting Standards Financial Statements and Financial Reporting • essential characteristics of accounting: 1) identification, measurement, and communication of financial information about 2) economic entities to 3) interest parties  financial accounting: the process that culminates in the preparation of financial reports  managerial accounting: the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, control, and evaluate a company's operations • some financial information is better provided, or can be provided only, by means of financial reporting other than formal financial statements Accounting and Capital Allocation • performance must be measured accurately and fairly on a timely basis so that the right managers and companies are able to attract investment capital • unreliable and irrelevant information → poor capital allocation → adversely affects the securities market Objective of Financial Reporting • to provide financial information about reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity General-Purpose Financial Statements • provide at the least cost the most useful information possible Equity Investors and Credits • identified by objective as primary users for financial statements Entity Perspective • proprietary perspective: financial reporting should be focused on needs of shareholders ← not appropriate Decision-Usefulness • investors interested in assessing: 1) company's ability to generate net cash inflows and 2) management's ability to protect and enhance the capital provider's investments • economic resources, claims to these resources, and changes in them must be understood Parties Involved in Standard-Setting Securities and Exchange Commission • most companies that issue securities to the public are required to file with the SEC • has broad powers to prescribe accounting practices and standards for companies under its jurisdiction Public/Private Partnership • SEC believes that the initiative for establishing and improving accounting standards should remain in the private sector, subject to Commission oversight SEC Oversight • generally, the SEC relies on the FASB to develop standards, but involvement varies Enforcement • if the SEC believes that an accounting or disclosure irregularity exists regarding the form or content of the financial statements, it sends a deficiency letter • if disagreement continues, SEC may issue a “stop order”, which prevents issuing or trading securities • the Department of Justice may also file criminal charges for violations American Institute of CPAs • Committee onAccounting Procedures (CAP)'s problem-by-problem approach failed to provided the needed structured body of accounting principles • Accounting Principles Board (APB) failed to act promptly to correct alleged accounting abuses; unproductive ◦ Wheat Committee: study group that examined theAPB to determined the needed changes • Accounting Stan
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