Types of Accounting
Financial accounting tends to be driven by rules, issued by the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB) and the International Accounting Standards Committee (IASC).
The objectives of financial reporting are to provide information that is:
Useful to those making investment and credit decisions who have a reasonable understanding of business and economic activities;
- Helpful to present and potential investors and creditors and other users in assessing the amount, timing and uncertainty of future cash flows; and
- About economic resources, the claims to those resources and the changes in them.
While these objectives are aimed at satisfying the equity and credit investors (whom the FASB considers to be the primary users of financial statements), they are likely to be useful to all other user groups. Different financial statement users have both coinciding and conflicting needs for the various statements. In general, equity investors are concerned with a company's long-term earnings and growth, as well as its ability to offer returns via dividends and stock price appreciation. Equity investors bear the company's largest and most volatile risk, and thus require comprehensive analyses that offer the highest level of scrutiny. On the other hand, credit investors, such as banks and other lenders, place more specific emphasis on the company's ability to assure the repayment of their investment (via interest payments and the return of principal at maturity).
The financial accounting process culminates in the preparation of financial reports relative to the enterprise as a whole that help answer the following questions about a firm's financial success: What is the financial position of the firm on a given day? How well did the firm do during a given period?
To answer these questions, and to satisfy the fiduciary reporting responsibility of management, accountants prepare a single set of general-purpose financial statements that are expected to fairly, clearly, and completely present the economic facts of the operations of the enterprise. In preparing financial statements, accountants are confronted with the potential dangers of bias, misinterpretation, inexactness and ambiguity.