SECTION B

Financial Accounting: The Context

In Section A, we looked at the accounting techniques which underpin the preparation and interpretation of the financial statements of sole traders, partnerships and limited companies. These techniques do not exist in a vacuum. In this section, we examine five crucial aspects of the context in which these accounting techniques are applied.

Chapter 10 investigates the regulatory and conceptual frameworks within which accounting operates. The regulatory framework provides a set of rules and regulations which govern accounting. The conceptual theory is broader and seeks to set out a theoretical framework to underpin accounting. Then, in Chapter 11, the main potential alternative measurement systems which can underpin the preparation of accounts are laid out. This chapter shows how using different measurement systems can yield different profits and different valuations of the statement of financial position.

The annual report, the main way in which public limited companies communicate financial information to their shareholders, is discussed in Chapter 12. This chapter outlines the nature, context and function of the annual report. Both the content and the presentation of the annual report are examined.

Finally, Chapters 13 and 14 investigate two interesting aspects of financial accounting: creative accounting and international accounting. Creative accounting explores the flexibility within accounting and shows how managers may manipulate financial information out of self-interest. Finally, Chapter 14 provides a broad international view of accounting. It shows that different countries have different accounting environments. Moreover, this chapter also shows the progress which has been made towards the harmonisation of accounting practices both in the UK and worldwide. In particular, the role of the International Accounting Standards Board is investigated.