Financial Accounting
A
Framework
for Financial
Accounting
Chapter 1
Spiceland | Thomas | Herrmann
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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
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Learning Objectives
• Explain the term generally accepted accounting
principles (GAAP) and describe the role of GAAP
in financial accounting
• Identify career opportunities in accounting
• Explain the nature of the conceptual framework
used to develop generally accepted accounting
principles
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Part A
Accounting as a Measurement/
Communication Process
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Learning Objective 1
Describe the two primary functions of financial
accounting
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Accounting
• A system of maintaining records of a company’s
operations and communicating that information to
decision makers
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Accounting Information
• Managerial accounting: information provided for
internal users
• Financial accounting: information provided for
external users
Internal users
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Primary Functions of Financial
Accounting
• Measure business activities
• Communicate measurements for decision making
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Illustration 1.2—Framework for
Financial Accounting
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Learning Objective 2
Understand the business activities that financial
accounting measures
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Business Structure
• Sole proprietorship: business is owned by one
person
• Partnership: business is owned by two or more
persons
• Corporation: business is legally separate from its
owners
• Owner-manager separation typical
• Limited liability of stockholders
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Business Activities
• Financing activities: transactions the company
has with investors and creditors
• Investing activities: transactions involving the
purchase and sale of resources that provide
benefit for several years
• Operating activities: transactions that relate to the
primary operations of the company
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Basic Accounting Equation
• Explains resources and their claims
Revenues – Expenses = Net income (loss)
• Dividends: distributions to owners
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Business Activities and
Their Measurement
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Learning Objective 3
Determine how financial accounting information is
communicated through financial statements
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Communicating Through
Financial Statements
• Primary financial statements
•
•
•
•
Income statement
Statement of stockholders’ equity
Balance sheet
Statement of cash flows
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Income Statement
• Reports the company’s revenues and expenses
over an interval of time
• Shows whether revenues were enough to cover
expenses
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Illustration 1.5—Income Statement
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Statement of Stockholders’ Equity
Summarizes the changes in stockholders’
equity over an interval of time
Stockholders’ Equity
= Common Stock + Retained Earnings
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Illustration 1.6—Statement of Stockholders’
Equity
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Balance Sheet
Presents the financial position of the
company on a particular date
Assets = Liabilities + Stockholders’ Equity
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Illustration 1.7—Balance Sheet
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Statement of Cash Flows
Measures activities involving cash receipts and
cash payments over an interval of time
Can be classified into three categories
Operating
cash flows
Investing
cash flows
Financing
cash flows
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Illustration 1.8—Statement of Cash Flows
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Illustration 1.9—Links among Financial
Statements
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Learning Objective 4
Describe the role that financial accounting plays in
the decision-making process
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Illustration 1.10—Use of Financial Accounting
Information in Investing and Lending
Decisions
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Part B
Financial Accounting Information
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Learning Objective 5
Explain the term generally accepted accounting
principles (GAAP) and describe the role of GAAP in
financial accounting
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Rules of Financial Accounting
Investors &
Creditors
make their decisions
based on
Financial Accounting
Information
Should be based
on formal
standards
Generally Accepted Accounting Principles
(GAAP)
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Current Standard Setting
United States
Global
Financial Accounting
Standards Board (FASB)
International Accounting
Standards Board (IASB)
Governed by
Securities and Exchange
Commission (SEC)
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Role of Auditors
Trained individuals hired by a company as an
independent party to verify accuracy of that
company’s financial statements
Role of auditors
Help ensure that
management has in fact
appropriately applied GAAP
in preparing the company’s
financial statements
Help investors and
creditors in their decisions
by adding credibility to the
financial statements.
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Objectives of Financial
Accounting
• Financial accounting should provide information
that:
• Is useful to investors and creditors in making
decisions
• Helps to predict cash flow
• Tells about economic resources, claims to
resources, and changes in resources and claims
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Part C
Careers in Accounting
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Learning Objective 6
Identify career opportunities in accounting
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Illustration 1.14—Some Career
Options
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Illustration 1.14—Some Career
Options
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Learning Objective 7
Explain the nature of the conceptual framework
used to develop generally accepted accounting
principles
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Conceptual Framework
Appendix
•
•
•
•
Qualitative characteristics
Enhancing qualitative characteristics
Cost effectiveness constraint
Underlying assumptions
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Illustration 1.15—Qualitative Characteristics
of Useful Financial Information
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Cost Effectiveness Constraint
• Cost constraint suggests that:
• Financial accounting information is provided only
when the benefits of doing so exceed the costs
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Underlying Assumptions
Economic Entity
Assumption
Monetary Unit
Assumption
Identify all economic events
with a particular economic
entity
Need a unit or scale of
measurement
Periodicity
Assumption
Going Concern
Assumption
Provide information of an
enterprise at regular time
periods
Business entity will continue
to operate indefinitely
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End of Chapter 1
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