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.
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This study assessed that an effective ratio with near optimal interpretation results in feasible investment decisions, corporate solvency and profit potential and a track down impact on economic growth .The basic objective of financial statements is simply to supply relevant and decision helpful information and facts to individuals who considered necessary such information in a manner competent to satisfy their aims as well as such objectives need to drive the method of measurement. Accounting information need to always point to making sure that users of the information receive the absolute minimum level of information and facts that is related and useful, reliable,
Additionally, today’s society is filled with legal and ethical concerns that surround numerous individuals and their responsibility is to keep all information private and accurate. Furthermore, accounting and financial reporting is the most significant function of a business and entails a great sense of legal, ethical and technological concern.
On September 28, 1998, Chairman of the U.S. Securities and Exchange Commission Arthur Levitt sounded the call to arms in the financial community. Levitt asked for, "immediate and coordinated action… to assure credibility and transparency" of financial reporting. Levitt’s speech emphasized the importance of clear financial reporting to those gathered at New York University. Reporting which has bowed to the pressures and tricks of earnings management. Levitt specifically addresses five of the most popular tricks used by firms to smooth earnings. Secondly, Levitt outlines an eight part action plan to recover the integrity of financial reporting in the U.S. market place. What are the basic objectives of financial reporting? Generally accepted accounting principles provide information that identifies, measures, and communicates financial information about economic entities to reasonably knowledgeable users. Information that is a source of decision making for a wide array of users, most importantly, by investors and creditors. Investors and creditors who are responsible for effective allocation of capital in our economy. If financial reporting becomes obscure and indecipherable, society loses the benefits of effective capital allocation. Nothing illustrates the importance of transparent information better than the pre-1930’s era of anything goes accounting. An era that left a chasm of misinformation in the market. A chasm that was a contributing factor to the market collapse of 1929 and the years of economic depression. An entire society suffered the repercussions of misinformation. Families, and retirees depend on the credibility of financial reporting for their futures and livelihoods. Levitt describes financial reporting as, a bond between the company and the investor which if damaged can have disastrous, long-lasting consequences. Once again, the bond is being tested. Tested by a financial community fixated on consensus earnings estimates. The pressure to achieve consensus estimates has never been so intense. The market demands consistency and punishes those who come up short. Eric Benhamou, former CEO of 3COM Corporation, learned this hard lesson over a few short weeks in 1996. Benhamou and shareholders lost $7 billion in market value when 3COM failed to achieve expectations. The pressures are a tangled web of expectations, and conflicts of interest which Levitt describes as "almost self-perpetuating." With pressures mounting, the answer from U.S. managers has been earnings management with a mix of managed expectations. March of 1997 Fortune magazine reported that for an unprecedented sixteen consecutive quarters, more S&P 500 companies have beat the consensus earnings estimate than missed them.
The goal of the Codification is to simplify the organization of thousands of authoritative U.S. accounting pronouncements issued by multiple standard-setters. To achieve this goal, the FASB initiated a project to integrate and topically organize all relevant accounting pronouncements issued by the U.S. standard-setters including those of the FASB, the American Institute of Certified Public Accountants (AICPA), and the Emerging Issues Task Force (EITF)
In this essay I am going to explain and identify external users of accounting information and give detail on the main characteristics and how these characteristics and the conceptual framework develop the benefits of financial statements for external users.
There are different understandings of financial reporting. In general terms, we can equate it to reporting of “external accounting”; which indicates an accounting that disseminates through internal business management to owner or broader stakeholder. From mainstream economist point of view, financial accounting can also be described as information that guides economic decisions. For information specifically in financial accounting, the approaching of perfect information is often taken as desired. More transparent information often leads to improved economic decisions. However, more transparent information means the more cost associated with providing the information.
The success of a company is very dependent upon its financial accounting. In accounting there are numerous Regulatory bodies that govern the accounting world. These companies are extremely important to a company because they set the standards when it comes to the language and decision making of a company. These regulatory bodies can be structured as agencies, associations, commissions, and boards. Without companies like the Security and Exchange Commission (SEC), The Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB), Internal Accounting Standards Board (IASB), Internal Revenue Service (IRS), and other regulatory bodies a company could not make well informed decisions. In this paper the author will look at only four of them.
The FASB and the SEC, historically, worked exclusively on developing and implementing United States Generally Accepted Accounting Principles (US GAAP) for public and private companies and not-for-profit organizations. The SEC was formed through the 1934 Securities Exchange Act due to the 1929 stock market crash, which instilled it as a regulatory agency. The SEC previously set US GAAP accounting standards until it transferred authority to the FASB, but maintains legislative jurisdiction and is a key component in overseeing the FASB accounting standards. The SEC’s purpose is to ensure regulatory compliance of financial accounting reporting by protecting US and foreign investors of securities sold in the US (Palmon, Peytcheva & Yezegel,
Judgement is a notion of relevance and reliability in developing and applying accounting policies. It is a requirement of management that they exercise a high degree of professional judgement when selecting appropriate accounting policies in the preparation of financial statements that is relevant to decision-making and assessment needs of users. Management should also consider the applicability of IFRS and AASB in dealing with similar and related issues and then the definitions, recognition criteria in the Conceptual Framework when there is no IFRS standard or interpretation in certain circumstances that are specifically applicable. Management may also consider the most current pronouncements of other standard-setting bodies to the extent that do not conflict with IFRS and AASB in developing accounting standards and accepted industry practices by using a similar conceptual framework.
Change is inevitable. Yogi Berra once said “The future ain’t what it used to be.” It is clear that the future of the accounting profession ain’t what it used to be (Gormon and Hargadon 1). The changes occurring are happening fast, they are dynamic and they are completely and undeniably real. Since the world around the accountant is changing, the accountant has no option but to change as well. The field of accounting has always been one to know change and to know adjustment, but within the recent past and certainly within the next few decades, the changes that are occurring and will occur absolutely are the most dramatic and exponential yet. Obvious changes lie in the expanding scope of services performed by accountants, the increased use of
The introduction of International Financial Reporting Standards, users of financial statements are facing a wide range of information on financial instruments yet it is becoming increasingly difficult to understand what is most important.
If we look at the contribution of Accounting to Financial Economic Thought, the initial idea of an individual, a firm or an economy is obtained on the basis of Financial Accounting information provided. An in-depth understanding of the financial accounting information provided will guide the decisions towards an optimal resource allocation.
Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and is prepared by professionals (financial analysts), thus providing them with the basis in making investment decisions.