Comprehensive summary of Section 1.2 and 18 of the book Accounting Principles. This substance is necessary for the intermediate exam for Economics and Business and Mr.drs students. The summary is in English and contains lists, formulas, and a clear structure. Take a look at my collection of the ove...
Chapter 1: Accounting in Action
1) Identify the activities and users associated with accounting.
Accounting consists of three basic activities:
identify: select economic events (transactions)
record: record, classify, and summarize
communicate: prepare accounting reports, analyze and interpret for users
Bookkeeping involves only the recording of economic events. it is therefore just one part of
the accounting process. Accounting involves the entire process of identifying, and
communicating economic events.
Who uses accounting data? Two board groups of users of financial information:
Internal users: managers (marketing managers, production supervisors, finance directors
etc.) who plan, organize, and run the business. They must answer important questions and
therefore need detailed information. Managerial accounting provides internal reports to
help users make decisions about their companies. Example: forecasts of cash needs.
External users: individuals and organizations outside a company. Most common types are
investors (owners): to decide whether to buy, hold, or sell ownership shares
creditors (suppliers and bankers): to evaluate the risks of granting credit
Financial accounting answers the questions from the external users. External users: taxing
authorities, regulatory agencies, customers, labor unions.
2) Explain the building blocks of accounting: ethics, principles, and assumptions.
The ‘Generally Accepted Accounting Principles’ (GAAP) indicate how to report economic
events. The primary accounting standard-setting body in the US is the Financial Accounting
Standards Board (FASB). The Securities and Exchange Commission (SEC) is the agency of he
US government that oversees US financial markets and accounting standard-setting bodies.
The SEC relies on the FASB to develop accounting standards, which public companies must
follow. Many counties adopted the standards issued by the International Accounting
Standars Board (IASB). These standars are called International Financial Reporing Standars
(IFRS). There are efforts made to reduce the differences between GAAP and IFRS (=
convergence).
Measurement principles
GAAP uses the historical cost principle or the fair value principle. Which principle to follow
relates to trade-offs between relevance and faithful representation (factual).
* Historical cost principle: dictates that companies record assets at their cost. This is true at
the time the asset is purchased and over the time the asset is held. $1blijft $1.
* Fair value principle: states that assets and liabilities should be reported at the price
received to sell an asset or settle a liability.
In determining which measurement principle to use, companies weigh the factual nature of
cost figures versus the relevance of fair value. Most companies use cost. Only in situations
where assets are actively traded, do companies apply the fair value principle.
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