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1 3 Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities Principles of Accounting, Volume 1: Financial Accounting

the standards and rules that accountants follow while recording and reporting financial activities

IFRS currently has complete profiles for 167 jurisdictions, including those in the European Union. The United States uses a different system, the generally accepted accounting principles (GAAP). With the increasingly complex nature of global business, the need for reliable, transparent financial information is more pronounced today than ever before.

The profits, then, can be used to sustain and improve the business through investments in employees, research, and development, and other measures intended to help ensure the long-term success of the business. Automobile dealerships, clothes, cell phones, and computers are all examples of everyday products that are purchased and sold by retail firms. What distinguishes a manufacturing firm from a retail firm is that in a retail firm, the products are sold in the same condition as when the products were purchased – no further alterations were made to the products. A good starting point for our course is to improve your understanding of the importance of accounting and finance to business. Of particular interest is the difference between accounting and financial management. When you have completed reading the following sections, you should be able to discuss the differences between accounting and financial reporting, and why the information contained in these reports is of interest to key stakeholders.

Introduction to GAAP

Efficiently using existing resources allows the businesses to improve quality of the products and services offered, remain competitive in the marketplace, expand when appropriate, and ensure longevity of the business. An income statement can be useful to management, but managerial accounting gives a company better insight into production and pricing strategies compared with financial accounting. Financial accounting rules regarding an income statement are more useful for investors seeking to gauge a company’s profitability and external parties looking to assess the risk or consistency of operations. It lists the company’s assets, liabilities, and equity, and the financial statement rolls over from one period to the next. Financial accounting guidance dictates how a company records cash, values assets, and reports debt. For example, GAAP stipulates how to file income statements, what financial periods to include, and how to report cash flow.

Financial accounting focuses on preparing external financial reports that are used by outsiders; that is, people who have an interest in the business but are not part of the company’s management. Although they provide useful information for managers, these reports are used primarily the standards and rules that accountants follow while recording and reporting financial activities by lenders, suppliers, investors, government agencies, and others to assess the financial strength of a business. Since accounting principles differ around the world, investors should take caution when comparing the financial statements of companies from different countries.

Understanding GAAP

As these statements are used by
various constituents of the society/regulators, they need to reflect an
accurate view of the financial position of the organization. It is very
helpful to check the financial position of the business for a specific
period. With such a prominent difference in approach, dozens of other discrepancies surface throughout the standards. The chart below includes only a couple of the variations that may affect how a business reports its financial information. While the United States does not require IFRS, over 500 international SEC registrants follow these standards.

the standards and rules that accountants follow while recording and reporting financial activities

What would become the American Institute of Certified Public Accountants (AICPA) and the New York Stock Exchange (NYSE) attempted to launch the first accounting standards to be used by firms in the United States in the 1930s. The International Financial Reporting Standards (IFRS) are a set of accounting rules for public companies with the goal of making company financial statements consistent, transparent, and easily comparable around the world. The key difference between financial and managerial accounting is that financial accounting provides information to external parties, while managerial accounting helps managers within the organization make decisions. Managerial accounting assesses financial performance and hopes to drive smarter decision-making through internal reports that analyze operations. The entire purpose of financial accounting is to prepare financial statements, which are used by a variety of groups and often required as part of agreements with the preparing company.

The IFRS: History and Purpose

Instead, a service business does not sell tangible products to customers but rather provides intangible benefits (services) to customers. Figure 1.5 illustrates the distinction between manufacturing, retail, and service businesses. Critics of principles-based accounting systems say they can give companies far too much freedom and do not prescribe transparency. They believe because companies do not have to follow specific rules that have been set out, their reporting may provide an inaccurate picture of their financial health. In the case of rules-based methods like GAAP, complex rules can cause unnecessary complications in the preparation of financial statements. These critics claim having strict rules means that companies must spend an unfair amount of their resources to comply with industry standards.

the standards and rules that accountants follow while recording and reporting financial activities

Even though they appear transparent, non-GAAP figures can create confusion for investors and regulators. As GAAP issues or questions arise, these boards meet to discuss potential changes and additional standards. For instance, when the COVID-19 pandemic hit, the board members met to address how governments and businesses must report the financial effects of the pandemic. So it’s no surprise that more people are paying attention to accounting topics. We now recognize that accounting is the backbone of any business, providing a framework to understand the firm’s financial condition.