Class Notes for Financial Accounting in an Economic Context, 9th Edition

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CHAPTER 1Financial Accounting and Its Economic ContextSYNOPSISIn this introductory chapter, the author discusses the economic context of financial accountingincluding:1)the demand for financial information;2)the environment of financial accounting;3)the controls associated with the financial accounting process; and4)generallyaccepted accounting principles.The author illustratesand discusses the rolesthat equity investors, debt investors, managers,and auditors have in the financial accounting environment, providing a basis for the discussionof both a user orientation and an economic consequence perspective.The author introduces the auditor’s report, the management letter, the financial statements andthe footnotes. The author also presents the basic concepts of financial statement analysis,solvency and earning power. The basic forms of investment, debt and equity are described.The economic environment in which financial reports are prepared andused is discussed andkey elements of the financial environment are introduced.Aninternationalperspectiveofthegeneralstateofaccountingpracticesandstandardsthroughout the world is also considered.Theethicsvignetteconsiderstheindependenceofaccountingfirmswhoalsoserveasmiddlemen in the sale of their audit client’s products.The Internet research exercise examines subsequent results forIBMa company thathasperformed well duringrecentyears, but fell short of analysts’expectationsin Q1 of 2013.The author compares and contrasts the four different types of accounting (i.e., financial, not-for-profit, managerial, and tax) along six dimensions in Appendix 1A.The following key points are emphasized in Chapter 1:1.The economic role of financial accounting statements.2.The four financial statements and the kind of financial information each provides.3.The standard audit report, management letter, and footnotes to the financial statements.4.The two forms of investment—debt and equity—and how information on the financialstatements relates to them.5.The nature and importance of corporate governance and the role of financial statements.6.The current status ofaccounting standard setting–both in the U.S. and internationally.

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