Contents

PART 1: AN OVERVIEW OF FINANCIAL ACCOUNTING

1 FINANCIAL ACCOUNTING AND ITS ECONOMIC CONTEXT

Financial Reporting and Investment Decisions

Economic Consequences

User Orientation

The Demand for Financial Information: A User's Orientation

Consumption and Investment

Where to Invest?

The Demand for Documentation

The Demand for an Independent Audit

Martin and the CPA: Different Incentives

The Auditor's Report, the Management Letter, and the Financial Statements

Descriptions of Financial Statements

Analysis of Financial Statements

What Form of Investment: Debt or Equity?

A Decision Is Made, but Important Questions Still Remain

The Economic Environment in which Financial Reports Are Prepared and Used

Reporting Entities and Industries

Corporate Governance

Financial Information Users and Capital Markets

Contracts: Debt Covenants and Management Compensation

Financial Reporting Regulations and Standards

Generally Accepted Accounting Principles

Independent Auditors

Board of Directors and Audit Committee

Sarbanes-Oxley Act

Legal Liability

Professional Reputation and Ethics

International Perspective: Movement Toward a Global Financial Reporting System

Appendix 1A

Summary of Key Points

Key Terms

Internet Research Exercise

Issues for Discussion

2 THE FINANCIAL STATEMENTS

Capital Flows and Operating, Investing, and Financial Activities

The Classified Balance Sheet

A Photograph of Financial Condition

Balance Sheet Classifications

Assets

Liabilities

Shareholders' Equity

The Income Statement ...

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