CHAPTER 1
ENVIRONMENT AND THEORETICAL STRUCTURE OF FINANCIAL ACCOUNTING
Overview
The primary function of financial accounting is to provide useful financial information to users external to the business enterprise. The focus of financial accounting is on the information needs of investors and creditors. These users make critical resource allocation decisions that affect the nation’s economy. The primary means of conveying financial information to investors, creditors, and other external users is through financial statements and related notes.
In this chapter you explore important topics such as the FASB’s conceptual framework that serve as a foundation for a more detailed study of financial statements, the way the elements of these statements are measured, and the concepts underlying these measurements and related disclosures.
Learning Objectives
LO1–1 Describe the function and primary focus of financial accounting.
LO1–2 Explain the difference between cash and accrual accounting.
LO1–3 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards.
LO1–4 Explain why the establishment of accounting standards is characterized as a political process.
LO1–5 Explain factors that encourage high-quality financial reporting.
LO1–6 Explain the purpose of the conceptual framework.
LO1–7 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements.
LO1–8 Describe the four basic assumptions underlying GAAP.
LO1–9 Describe the recognition, measurement and disclosure concepts that guide accounting practice.
LO1–10 Contrast a revenue/expense approach and an asset/liability approach to accounting standard setting.
LO1–11 Discuss the primary differences