A Critical Component Of Any Accounting Theory Course

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Midterm Exam Accounting 598 Part 2 2. A critical component of any accounting theory course is an understanding of the conceptual framework. 2a. The conceptual framework identifies the primary users of accounting information as investors, creditors, and those who advise them. It also assumes a “prudent” investor; that is, an investor who takes the time to become reasonably well informed with respect to accounting theory and practice. Discuss this concept with respect to the current economic environment. Are different groups of investors “prudent?” According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment. One of the most debatable topics in the accounting industry today is the extent in which we should make the financial statements understandable to the general population. The FASB currently gears its reporting standards toward... ... middle of paper ... ...ant that FASB maintain a careful balance between cost and effectiveness. As Wolk carefully pointed out, “the FASB’s primary objective is providing useful information for external users subject to the benefits > costs constraint. Neutrality means being concerned primarily with decision usefulness rather than distributive effects” (Wolk, Dodd, & Tearney, 2003). It is for all of these reasons that I believe the identification, of the primary users, does not have an impact on the concept of neutrality. Neutrality is entirely independent of who the users are. References Financial Accounting Standards Board. (2006, July 6). Conceptual Framework for Financial Reporting. Financial Accounting Series , 1-55. Wolk, H., Dodd, J., & Tearney, M. (2003). Accounting Theory: Conceptual Issues in a Political and Economic Environment (6th edition ed.). South-Western College Pub.

In this essay, the author

  • Opines that the fasb's purpose is to protect all financial statement users, but there are limitations with respect to cost and feasibility.
  • Opines that the identification of investors and creditors as primary users of financials does not have an impact on the concept of neutrality.
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