This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 1 Environment and Theoretical Structure of Financial Accounting
Part A Financial Accounting Environment
• Accounting provides useful information about economic activity to help produce good decisions and
foster a prosperous society
• Financial accounting – financial information provided to external users
• The primary focus of financial accounting is on the financial information provided by profit-oriented
companies to their present and potential investors and creditors
• Financial statements: balance sheet, income statement, statement of cash flows, statement of
shareholders’ equity
• Financial reporting – process of providing information to external users
The Economic Environment and Financial Reporting
• Capital markets – provide a mechanism to help the economy allocate resources efficiently
• Three primary forms of organizations: sole proprietorship, partnerships, and corporation
• Corporation – acquire capital from investors in exchange for ownership interest and from creditors by
borrowing
o Dominant form of business organization
• Initial market transactions – issuance of stocks and bonds by the corporation
• Secondary market transactions – transfers of stocks and bonds between individuals and institutions
• Corporations receive no new cash from secondary market transactions
The Investment-Credit Decision – A Cash Flow Perspective
• Investors and creditors are willing to provide capital to a corporation (buy stocks or bonds) only if they
expect to receive more cash in return at some time in the future
• Shareholders will receive cash from their investment through ultimate sale of the ownership shares of
stock and periodic dividends
• Rate of return - dividends+share price appreciation
initial investment
o Investor provides $10,000 cash through stock at the end of 2017, receive $400 dividend during
2018, and sells ownership interest at the end of 2018 for $10,600
▪ $400 +$600
$10,000 =10%
• Investors and creditors would like to invest in stocks or bonds that provide highest rate of return
• The expected rate of return and the uncertainty, or risk, of that return are key variables in the
investment decision
Cash versus Accrual Accounting
• Accrual accounting – measurement of the entity’s accomplishments and resource sacrifices during the
period regardless of when cash is received or paid
• Cash basis accounting – difference between cash receipts and cash disbursements during a reporting
period from transactions related to providing goods and services to customers
Cash Basis Accounting
• Net operating cash flow – difference between cash receipts and cash disbursements during a reporting
period from transactions related to providing goods and services to customers
• Net operating cash flow is a measure of concern in the long-run, but not necessarily in the short-run
o Companies may receive or pay cash for prior period sales or make advance payments
Trusted by Thousands of
Students
Here are what students say about us.
Resources
Company
Copyright ©2022 All rights reserved. | CoursePaper is not sponsored or endorsed by any college or university.