CFAS CHAPTER 1: The Need for Financial Reporting

indirect users

users of accounting information to provide advice or to protect the interest of a direct user.

external users

users other than the management of the entity that do not have ready access to financial reports and rely heavily on negotiations and regulations to obtain information about a business enterprise

Internal users

users who have ready access to specific types of accounting information.

direct users

users with direct interest use financial information as a tool to protect their own interest in the enterprise.

present and potential creditors

Ø Assess the ability of the enterprise to pay its loans and the interest attaching to such loans.

Financial Accounting

Ø Broadest branch of accounting Ø Focuses on the needs of external users Ø Concerned with the recognition, measurement and communication of economic resources, economic obligations and changes in economic resources and obligations. Ø Communicated through a complete set of financial statements Ø Assumes that external users have common information needs such as to evaluate the business entity's profitability, liquidity and stability Ø Should conform to the accounting standards as developed by standards setting bodies.

tax accounting

Ø Concerned with the computation of taxes and preparation of tax returns submitted to a taxing authority.

cost accounting

Ø Concerned with the measurement and recognition of cost of services provide or products manufactured. Ø It is helpful to a service entity in the control and management of cost, it is more ordinarily associated with manufacturing companies as a tool of both financial and management accounting.

inactive owners

Ø Delegate the stewardship of the enterprise's resources to the management. Use the financial statements to keep track of t enterprise's financial condition and financial performance to make decisions whether they should hold or sell their equity.

taxing authorities

Ø Dependent on the financial information to collect the correct amount of taxes, to determine taxation policies and to set basis for national income and similar statistics.

Suppliers

Ø Determine whether the cost of such goods and services will be paid when due. Dependent upon the continuation of the enterprise as a major customer

employees

Ø Evaluate the financial status of the enterprise to assess the latter's ability to provide remuneration, retirement benefits and employment opportunities.

customers

Ø Have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on, the enterprise as their supplier.

general public

Ø Interested about the trends and the range of business entities' economic activities, as the general direction of business growth is indicative of the nation's economic status.

regulatory bodies

Ø Rely on financial information to determine business entities comply with prescribed rules and regulations.

management accounting

Ø Serves the information needs of the internal users. Ø Managers and owners use accounting information in making and implementing short-term and long-range plans for the enterprise as well as making routine and major economic decisions. Ø Because the information required by the management may vary based on the specific needs at a particular time, the information provided is not structured and is not necessarily conforming to the accounting standards.

Active owners, management

Ø Use financial information for internal decision-making purposes Ø Use financial information to evaluate the entity's performance, make financial and operational plans and implement business decisions. Ø Some decision needs faced by them are to continue or to liquidate, to infuse additional investments, to borrow from creditors and to change business methods and strategies. Ø Evaluate financial information to determine whether demands of employees for improved remuneration and economic benefits will be granted.

Financial reporting

the communication of this set of financial statements and other financial information, the purpose of which is to provide useful financial information to an entity's stakeholders.

reporting entity (accounting entity)

may be a business enterprise, a government unit, a not-for-profit organization, an individual, a unit within an enterprise, a group of entities, and any other unit that is considered to have a personality different from the personality of its owners, members and employees.

Labor unions

protect the interest of the employees

Securities and Exchange Commission (SEC)

protect the interest of the investors and the public

financial and legal consultants

provide advice and assistance to their clients who may be customers, lenders, suppliers of the firm

Owners Managers Creditors Suppliers Customers Employees Taxing Authority

Enumerate direct users

Accounting

a system or discipline that provides the stake holders financial information.

accounting standards

main purpose is to ensure the relevance and reliability provided to the external users

management accounting

a branch of accounting designed to meet the information needs of internal users.

financial accounting

branch of accounting that provides a product called financial statements which are general purpose reports provided to external users.

Accounting Entity Concept

concept that separates the personality of the enterprise from its owners and other stakeholders. - capable of controlling its own economic resources and incurring economic obligations.

quantitative

focuses on entity's economic resources, economic obligations, changes in economic resources and economic obligations brought about by income and expenses and other transactions.

monetary unit

generally the unit of measure used in communicating accounting information

Accounting Process

has the ultimate purpose of generating general purpose financial statements that provide information about economic entities, that are to be used as a basis for the formulation of economic decisions.