9. Flow of Information through the Financial Statements Income Statement Statement of Equity Balance Sheet Statement of Cash Flows Reports Net Income Ending balance reported Change in cash as reported displays the change in cash position

10. Accounting and Capital Allocation Financial reporting aids users in the allocation of scarce resources (capital)

12. Capital Allocation Process

13. Accounting and Capital Allocation Financial Reporting aids Users (present and potential) Capital Allocation decisions Financial statements and other forms of financial reporting Users include: investors, creditors, unions, government agencies, and other Involves determining how funds are allocated among competing interests

15. Sources of Capital

25. Objectives of Financial Reporting Yes Resource Allocation Decisions Assess Management Stewardship Yes Was income earned to generate future cash? Able to meet obligations and pay a return on investment Did management’s decisions on resource acquisition and allocation increase shareholder wealth? Investor and creditor confidence continues Capital continues to be available

27. Understanding User Needs in the Financial Reporting Process Management Users Financial Statements Prepare the reports Use the reports for investment/lending decisions Use the reports to acquire capital Aggressive financial reporting has a direct impact on the user’s decision-making process

41. Challenges Facing Accounting Globalization Technology New economy Accountability Need for international harmonization of standards Ability to produce and access timely information A move from the traditional ‘resource-based’ to a ‘knowledge-based’ economy Driven by more sophisticated and varied investors

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