Environment and Theoretical Structure of Financial Accounting 1
Financial Accounting Environment Profit-oriented companies Not-for-profit entities Households Providers of Financial Information External User Groups Investors Creditors Employees Labor unions Customers Suppliers Government agencies Financial intermediaries Relevant Financial Information
Financial Accounting Environment
Relevant financial information is provided primarily through financial statements and related disclosure notes.
Statement of Cash Flows
Statement of Shareholders’ Equity
The Economic Environment and Financial Reporting A sole proprietorship is owned by a single individual. A partnership is owned by two or more individuals. A corporation is owned by shareholders.
Investment-Credit Decisions ─ A Cash Flow Perspective Shareholders Receive Cash
Sale of Stock
Creditors Receive Cash
Accounting information should help investors and creditors evaluate the amount, timing , and uncertainty of the enterprise’s future cash flows.
Cash versus Accrual Accounting
Cash Basis Accounting Revenue is recognized when cash is received . Expenses are recognized when cash is paid .
Revenue is recognized when earned . Expenses are recognized when incurred .
The Development of Financial Accounting and Reporting Standards Concepts, principles, and procedures were developed to meet the needs of external users (GAAP).
Historical Perspective and Standards
Current Standard Setting
Supported by the Financial Accounting Foundation
Five full-time, independent voting members
Answerable only to the Financial Accounting Foundation
Members not required to be CPAs
Financial Accounting Standards Board
Establishment of Accounting Standards A Political Process GAAP Internal Revenue Service www.irs.gov American Institute of CPAs www.aicpa.org Securities and Exchange Commission www.sec.gov American Accounting Association www.aaa-edu.org Governmental Accounting Standards Board www.gasb.org Financial Executives International www.fei.org International Accounting Standards Board www.iasb.org
Toward Global Accounting Standards The main objective of the International Accounting Standards Board (IASB) is to develop a single set of high quality, understandable and enforceable global accounting standards to help participants in the world’s capital markets and other users make economic decisions.
Role of the Auditor
Auditors serve as independent intermediaries to help insure that management has appropriately applied GAAP in preparing the company’s financial statements.
Financial Reporting Reform As a result of numerous financial scandals, Congress passed the Public Company Accounting Reform and Investor Protection Act of 2002 , (Sarbanes-Oxley Act). The goal was to restore credibility and investor confidence in the financial reporting process.