The Financial Reporting Envrionment & Judgement and Applied Financial Accounting Research

Financial Accounting

process of identifying, measuring, communicating

1. financial info

2. of an economic entitiy

3. to various user groups within the (4) legal, economic, political, and social environment

why is financial info necessary

to assist in the efficient allocation of capital

• info users use financial info to assess the risks and returns of a particular investment and direct capital to the most productive uses

4 basic financial statements

• balance sheet (aka statement of financial position)

• statement of comprehensive income

• statement of cash flows

• statement of shareholders’ equity

financial info also includes

• a letter to shareholders

• a formal discussion and analysis of the firm by the management of the firm

• management report

• auditors’ report

• financial summary

economic entity

• company is an entity of its own

• organization or unit with activities that are separate from those of its owners and other entities

• ex: corporations, partnerships, sole proprietorships, governmental orgs

users of financial reports

• equity investors

• creditors

• financial analysts

• employees and labor unions

• suppliers and customers

• government agencies

• competitors

• external auditors internal auditors

• regulatory bodies

• professional organizations

equity investors

shareholders of the company

creditors

banks and other financial institutions that lend money to the company

financial analysts

use financial info to review and analyze reported results of the companies they cover and make investment recommendations

employees and labor union

useful financial information during negotiation of new labor agreements and compensation contracts

suppliers and customers

use financial statements to determine whether to conduct business or purchase products from a company

government agencies

review the financial statement of publicly traded companies for a variety of reasons that are in the public interest

competitors

use financial info to determine their market position relative to the reporting entity and to attempt to identify future strategies of the reporting entity

external auditors

independent of the company and responsible for ensuring that management prepares and issues financial statements that comply with accounting standards and fairly present the financial position and economic performance of the company

internal auditors

• employees of the company serving in an advisory role to management

• provide info to management regarding the company’s operations and proper functioning of its internal controls

regulatory bodies

protect investors and oversee the accounting and auditing standard setting process

professional organizations

support accounting professionals throughout their careers by providing training, professional skills development, and other resources

accounting standards

• standards are designed to encourage consistent, transparent and truthful reporting

• GAAP

• IFRS

• US companies that list overseas are still permitted to use GAAP, and foreign companies listed on US exchanges are permitted to use IFRS