Learning Objectives
Describe the two primary functions of financial accounting
Understand the business activities that financial accounting measures
Determine how financial accounting information is communicated through financial statements
Describe the role that financial accounting plays in the decision-making process
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A Frameworkfor FinancialAccountingChapter 1 Learning ObjectivesDescribe the two primary functions of financial accountingUnderstand the business activities that financial accounting measuresDetermine how financial accounting information is communicated through financial statementsDescribe the role that financial accounting plays in the decision-making processLearning ObjectivesExplain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accountingIdentify career opportunities in accountingExplain the nature of the conceptual framework used to develop generally accepted accounting principlesPart AAccounting as a Measurement/Communication Process1-4Learning Objective 1Describe the two primary functions of financial accounting1-5AccountingA system of maintaining records of a company’s operations and communicating that information to decision makersAccounting InformationManagerial accounting: information provided for internal usersFinancial accounting: information provided for external usersInternal usersPrimary Functions of Financial AccountingMeasure business activitiesCommunicate measurements for decision makingLearning Objective 2Understand the business activities that financial accounting measures1-9Business StructureSole proprietorship: business is owned by one personPartnership: business is owned by two or more personsCorporation: business is legally separate from its ownersOwner-manager separation typicalLimited liability of stockholdersBusiness ActivitiesFinancing activities: transactions the company has with investors and creditorsInvesting activities: transactions involving the purchase and sale of resources that provide benefit for several yearsOperating activities: transactions that relate to the primary operations of the companyBasic Accounting EquationExplains resources and their claims Revenues – Expenses = Net income (loss)Dividends: distributions to ownersLearning Objective 3Determine how financial accounting information is communicated through financial statements1-13Primary financial statementsIncome statementStatement of stockholders’ equityBalance sheetStatement of cash flowsCommunicating Through Financial StatementsIncome StatementReports the company’s revenues and expenses over an interval of timeShows whether revenues were enough to cover expensesStatement of Stockholders’ EquityStockholders’ Equity = Common Stock + Retained EarningsSummarizes the changes in stockholders’ equity over an interval of timeBalance SheetAssets = Liabilities + Stockholders’ EquityPresents the financial position of the company on a particular dateStatement of Cash FlowsMeasures activities involving cash receipts and cash payments over an interval of time Can be classified into three categoriesOperatingcash flowsInvestingcash flowsFinancingcash flowsLearning Objective 4Describe the role that financial accounting plays in the decision-making process1-19Part BFinancial Accounting Information1-20Learning Objective 5Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting1-21Rules of Financial AccountingInvestors & CreditorsFinancial Accounting InformationGenerally Accepted Accounting Principles (GAAP)make their decisions based onShould be based on formal standardsCurrent Standard SettingUnited StatesGlobalFinancial Accounting Standards Board (FASB) International Accounting Standards Board (IASB) Governed by Securities and Exchange Commission (SEC)Role of AuditorsTrained individuals hired by a company as an independent party to verify accuracy of that company’s financial statementsRole of auditorsHelp ensure that management has in fact appropriately applied GAAP in preparing the company’s financial statementsHelp investors and creditors in their decisions by adding credibility to the financial statements. Objectives of Financial AccountingFinancial accounting should provide information that:Is useful to investors and creditors in making decisionsHelps to predict cash flowTells about economic resources, claims to resources, and changes in resources and claimsPart CCareers in Accounting1-26Learning Objective 6Identify career opportunities in accounting1-27Illustration 1.14—Some Career OptionsLearning Objective 7Explain the nature of the conceptual framework used to develop generally accepted accounting principles1-29Conceptual FrameworkAppendixQualitative characteristicsEnhancing qualitative characteristicsCost effectiveness constraintUnderlying assumptionsIllustration 1.15—Qualitative Characteristics of Useful Financial InformationUnderlying AssumptionsIdentify all economic events with a particular economic entityNeed a unit or scale of measurementProvide information of an enterprise at regular time periods Business entity will continue to operate indefinitelyEconomic Entity Assumption Monetary Unit Assumption Periodicity Assumption Going Concern Assumption End of Chapter 11-33