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OVERVIEW

The primary function of financial accounting is to provide relevant and reliable financial information to users external to the business enterprise. The focus of financial accounting is on the information needs of investors and creditors. These users make critical resource allocation decisions that affect the nation’s economy. The primary means of conveying financial information to external users is through financial statements and related notes.

In this chapter you explore important topics such as the FASB’s conceptual framework that serve as a foundation for a more detailed study of financial statements, the way the statement elements are measured, and the concepts underlying these measurements and related disclosures.


LEARNING OBJECTIVES

After studying this chapter, you should be able to:

lLO1Describe the function and primary focus of financial accounting.
lLO2Explain the difference between cash and accrual accounting.
lLO3Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards.
lLO4Explain why the establishment of accounting standards is characterized as a political process.
lLO5Explain the purpose of the FASB’s conceptual framework.
lLO6a
  LO6b
  LO6c		Identify the objectives of financial reporting, the qualitative characteristics of accounting information, and the elements of financial statements.
lLO7Describe the four basic assumptions underlying GAAP.
lLO8Describe the four broad accounting principles that guide accounting practice.

FINANCIAL REPORTING CASE

Misguided Marketing Major

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© Chuck Savage/CORBIS

During a class break in your investments class, a marketing major tells the following story to you and some friends:

The chief financial officer of a large company is interviewing three candidates for the top accounting position with his firm. He asks each the same question:

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After you take some good-natured ribbing from the nonaccounting majors, your friend says, “Seriously, though, there must be ways the accounting profession prevents that kind of behavior. Aren’t there some laws, or rules, or something? Are they based on some sort of theory, or are they just arbitrary?”

By the time you finish this chapter, you should be able to respond appropriately to the questions posed in this case. Compare your response to the solution provided at the end of the chapter.

QUESTIONS

  1. What should you tell your friend about the presence of accounting standards in the United States? Who has the authority for standard setting? Who has the responsibility?  Click for Answer
  2. What is the economic and political environment in which standard setting occurs?  Click for Answer
  3. What is the relationship among management, auditors, investors, and creditors that tends to preclude the “What would you like it to be?” attitude?  Click for Answer
  4. In general, what is the conceptual framework that underlies accounting principles?  Click for Answer





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