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Chapter 1: Question 4CA (page 24)

CA 1-4 (Financial Accounting) Omar Morena has recently completed his first year of studying accounting. His instructor for next semester has indicated that the primary focus will be the area of financial accounting.

Instructions

  1. Differentiate between financial accounting and managerial accounting.
  2. One part of financial accounting involves the preparation of financial statements. What are the financial statements most frequently provided?
  3. What is the difference between financial statements and financial reporting?

Short Answer

Expert verified

Financial accounting refers to the preparation of reports for general purposes, whereas managerial accounting provides information to the inside of an organization.

The financial statements that are most frequently provided include the balance sheet, the income statement, the cash flow statement, and the statement of shareholder’s equity or owner’s equity.

Financial statements like balance sheets or cash flow statements consist of information relating to a certain subject. On the other hand, a financial report consists of information on various other related topics.

Step by step solution

01

Meaning of Financial statement

A reported statement that provides useful information of the business to its directors, stakeholders, potential investors, and creditors is referred to as a financial statement.

02

Difference between financial accounting and managerial accounting.

Financial accounting may be defined as the art of recording, classifying, and summarizing in a significant manner in terms of money transactions and events, which are in part at least of a financial character and interpreting the results thereof. On the other hand, managerial accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and accumulation of financial information to plan, evaluate, and control within an organization and to assure appropriate use of and accountability for its resources.

Financial accounting provides information regarding the status of the business and the results of its operations to management as well as to its external parties. Whereas managerial accounting assists management in informing policies and planning and controlling the business enterprise's operations.

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Most popular questions from this chapter

The expectations gap is:

  1. What financial information management provides and what users want.
  2. What the public thinks accountants do and what accountants think they can do.
  3. What the governmental agencies want form standard-setting and what the standard-setters provide.
  4. What the users of financial statements want from the government and what is provided.

Presented below are three models for setting GAAP.

  1. The purely political approach, where national legislative action decrees GAAP.
  2. The private, professional approach, where GAAP is set and enforced by private professional actions only.
  3. The public/ private mixed approach, where GAAP is basically set by private-sector bodies that behave as though they were public agencies and whose standards to a great extent are enforced through governmental agencies.

Instructions

  1. Which of these three models best describes standard-setting in the United States? Provide justification for your answer.
  2. Why do companies, financial analysts, labor unions, industry trade associations, and others take such an active interest in standard-setting?
  3. Cite an example of a group other than the FASB that attempts to establish accounting standards. Speculate as to why another group might wish to set its own standards.

Accounting standard-setters use the following process in establishing accounting standards:

  1. Research, exposure draft, discussion paper, standard.
  2. Discussion paper, research, exposure draft, standard.
  3. Research, preliminary views, discussion paper, standard.
  4. Research, discussion paper, exposure draft, standard.

(GAAP and Standard-Setting) Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false.

  1. The objective of financial statements emphasizes a stewardship approach for reporting financial information.
  2. The purpose of the objective of financial reporting is to prepare a balance sheet, an income statement, a statement of cash flows, and a statement of owners’ or stockholders’ equity.
  3. Because they are generally shorter, FASB interpretations are subject to less due process compared to FASB standards.
  4. The objective of financial reporting uses an entity rather than a proprietary approach in determining what information to report.

Presented below are comments made in the financial press.InstructionsPrepare responses to the requirements in each item.

a) Rep. John Dingell, at one time the ranking Democrat on the House Commerce Committee, threw his support behind the FASB’s controversial derivatives accounting standard and encouraged the FASB to adopt the rule promptly. Indicate why a member of Congress might feel obligated to comment on his proposed FASB standard.

b) In a strongly worded letter to Senator Lauch Faircloth (R-NC) and House Banking Committee Chairman Jim Leach (R-IA), the American Institute of Certified Public Accountants (AICPA) cautioned against government intervention in the accounting standard-setting process, warning that it had the potential of jeopardizing U.S. capital markets. Explain how government intervention could possibly affect capital markets adversely.
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