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External users

Users of accounting information who are not directly involved in the operations of the business.

Internal users

Users of accounting information who are directly involved in the operations of the business.

Examples of external users

Lenders, shareholders, governments.

Examples of internal users

Managers, officers, budget officers.

Main objective of financial reporting

To provide useful financial information to investors, lenders, and creditors for decision making.

General-purpose financial statements

Income statement, balance sheet, statement of owners' equity, and statement of cash flows.

Securities and Exchange Commission (SEC)

The organization that has legal authority over U.S. public company financial reporting.

Financial Accounting Standards Board (FASB)

The body that sets U.S. accounting standards (GAAP).

Financial Accounting Foundation (FAF)

Selects FASB members, funds activities, and provides oversight.

FASB Accounting Standards Codification (ASC)

The single official source of U.S. GAAP.

International Accounting Standards Board (IASB)

The body that sets international accounting standards.

GAAP

Generally described as a rules-based system.

IFRS

Generally described as a principles-based system.

Fundamental qualitative characteristics of useful accounting information

Relevance and faithful representation.

Qualities that enhance accounting information

Comparability, verifiability, timeliness, understandability.

Materiality

Information is material if it would influence the decision of a reasonable investor.

Elements of financial statements

Assets, liabilities, equity, revenues, expenses, gains, losses, investments by owners, distributions to owners, comprehensive income.

Basic assumptions of accounting

Monetary unit, economic entity, time period, going concern.

Basic principles of accounting

Measurement (cost/fair value), revenue recognition, expense recognition (matching), full disclosure.

Expectations gap

The difference between what the public thinks accountants should do and what accountants actually do.

Major challenges in financial reporting

Nonfinancial measurements, forward-looking information, reporting soft assets, timeliness, understandability.

Comprehensive income

All changes in equity from non-owner sources during a period.

What is the Objective of financial reporting?

To provide financial information about the reporting entity that is useful to stakeholders in making decisions about providing resources.

What is a Reporting Entity?

The specific business or organization for which financial statements are prepared, separate from its owners.

What are the Qualitative Characteristics of useful financial information?

Relevance, faithful representation, comparability, verifiability, timeliness, and understandability

What are the Elements of financial statements?

The basic building blocks: assets, liabilities, equity, income, and expenses

What is Recognition and Derecognition?

Recognition is recording an item in the financial statements; derecognition is removing it when it no longer meets the criteria

What is Measurement in financial reporting?

Determining the monetary amounts of items in financial statements (e.g., historical cost, fair value).

What is Presentation in financial reporting?

How financial information is displayed and structured within the financial statements.

What are Notes in financial reporting?

Additional disclosures that provide context, explanations, and details beyond the numbers in the statements