are What the major objectives of financial reporting? Who uses financial
reporting? What type of information will each user group need? Why?
The major objectives of financial reporting are 1. Information that is useful in decision making to
current and impending investors and creditors. 2. Information that helps current and impending
investors and creditors evaluate the amounts, timing, and uncertainty of net cash inflows. 3.
Recognizes the economic resources of an enterprise, the entitlements to those resources, and the
effects that transactions, events, and conditions have on those resources. Current and impending
investors and creditors use financial reporting. The financial statements needed to completely
understand the companys financial information are the balance sheet, the income statement, the
statement of cash flows, and the statement of owners equity.
What is the purpose of generally accepted accounting principles (GAAP) and
the accounting cycle? Is it possible to deviate from GAAP and the accounting
cycle and still prepare financial statements? Why? What are some possible
consequences of this course of action?
What organizations are responsible for governing financial reporting? What is
the role of each organization? How have the roles changed in the last 20
years? How might their roles change in the next 20 years?
There are four organizations that have developed the generally accepted
accounting principles (GAAP). The Securities and Exchange Commission
(SEC), the American Institute of Certified Public Accountants (AICPA),
Financial Accounting Standards Board (FASB), and the Government
Accounting Standards Board (GASB) are responsible for governing financial
reporting.
The SEC is a federal agency that helps to develop and standardize financial
information presented to stockholders.
The AICPA is a national professional organization of practicing Certified Public
Accountants that has been an important part of developing the GAAP.
The FASB establishes and improves the standards of financial accounting and
reporting for the guidance and education of the public.
The GASB sets standards for state and local government.
Before 1973 there was another organization that was in place the Accounting
Principles Board. The boards opinions were based on research studies and
were supposed to be supported by reasons and analysis.
Their roles might change in the next 20 years because there might be a need
to follow more along the lines of the international standards.
What is the purpose of generally accepted accounting principles (GAAP) and
the accounting cycle? Is it possible to deviate from GAAP and the accounting
cycle and still prepare financial statements? Why? What are some possible
consequences of this course of action?
Generally accepted accounting principles are a mutual set of standards an
authoritative accounting body has established or commonly accepted over
time ways of reporting accounting information. A set of standards set to
prepare financial statements like the balance sheet and income statement to
provide accurate information throughout the accounting cycle. According to
investopedia.com the accounting cycle is a methodical set of rules to ensure
the accuracy and conformity of financial statements.
It is possible to deviate from GAAP and the accounting cycle and still prepare
financial statement such as internal documents to lure in new investors. An
example would be reporting assets at market value instead of at cost. Some
consequences would be loss of investors.
Readmore:http://www.investopedia.com/terms/a/accountingcycle.asp#ixzz1lFYmRuh1
Generally accepted accounting principles, or GAAP for short, are the accounting rules used to
prepare and standardize the reporting of financial statements, such as balance sheets, income
statements and cashflow statements, for publicly traded companies and many private companies
in the United States. GAAP-based income is measured so that the information provided on
financial statements is useful to those making economic decisions about a company, such as
potential investors and creditors.
Without GAAP, companies would be free to decide for themselves what financial information to
report and how to report it, making things quite difficult for investors and creditors who have a
stake in that company. Because financial statements prepared under GAAP are intended to reflect
an economic reality, GAAP makes a company's financials comparable and understandable so that
investors, creditors and others can make rational investment, credit and other financial decisions.
In order to be useful and helpful to users, GAAP requires information on financial statements to
be relevant, reliable, comparable and consistent.
Regulating GAAP
Although it is not written in law, the U.S. Securities and Exchange Commission (SEC) requires
publicly traded companies and other regulated companies to follow GAAP for financial
reporting. Although smaller companies are not required to use GAAP, there are certain situations,
such as obtaining credit or seeking investors, which require, by contract, those companies to also
follow GAAP when preparing their financial statements.
The SEC does not set GAAP; GAAP is primarily issued by the Financial Accounting Standards
Board (FASB). Government entities, however, must follow a different set of GAAP standards as
determined by the Governmental Accounting Standards (GASB).
How Board to Apply GAAP
Accountants apply GAAP through FASB pronouncements called Financial Accounting Standards
(FASs). Since its formation in 1973, the FASB has issued over 100 formal FAS pronouncements.
Before the FASB was formed, its predecessor, the Accounting Principles Board (APB), issued 31
opinions between 1959 and 1973. The APB was preceded by the Committee on Accounting
Procedure, which issued 51 pronouncements known as Accounting Research Bulletins (ARBs)
from 1939 to 1959. Some of the APB opinions and ARBs are still in force today.
Although the rules found in the formal pronouncements of the FASB and its predecessors are the
main sources of GAAP, GAAP rules are also found in statements from the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants; pronouncements
by expert accountants; and other practices that are not found in formal pronouncements but are
generally accepted because they represent a common practice in a particular industry. For
example, there is a general assumption that financial statements must be based on the premise
that a company will continue in existence unless there is substantial evidence to the contrary.
Because of the myriad of GAAP sources, accountants must rely on their own knowledge and
professional judgment when deciding how the GAAP concepts should be interpreted and applied.
What are some other reasons that it is important that we have standards in
accounting?
It is important to have an accurate and fair value of assets and liabilities to
know exactly how a company is doing. I am wondering where mark-to-market
accounting stands in the GAAP? According to generally accepted accounting
principles (GAAP), companies are supposed to record the value of assets at
their cost in order to err on the side of caution. Mark-to-market value is a form
of accounting where the standards of assigning a value to an asset or liability
is based on the current market price. Companies still use mark-to-market
value. On January 27,2012 the Wall Street Journal reported that UPS is going
to Adopt Mark-to Market accounting methods.
Mrs. Cooper,
Thank you for the article. I guess what I am confused about is the fact that Enron was
able to use this mark to market accounting to show enormous profits on money they
had not even received. Now it seems like mark to market is a problem for mortgage
companies who have given these subprime loans and now are claiming the market
prices for the mortgages that they have given to clients that are losing money because
of low value prices. Why would the GAAP or IFRS allow this practice to still be in
affect if it is such a problem?
What are different criteria for recognizing revenue? Why are there so many
revenue recognition methods? Why are the methods subjective, and what are
the implications on income statement quality?
The two conditions for recognizing revenue is when it is 1) being realized or realizable or 2)
being earned.
According to SAB 101--GENERAL REVENUE RECOGNITION RULES organizations should
not recognize revenue until is realized or realizable and earned. Before revenue is recognized,
transactions must meet the following criteria:
There is a persuasive evidence of an arrangement.
The sellers price to the buyer is fixed or determinable.
Delivery has occurred or services have been rendered.
Collectability is reasonably assured.
There are four different criterias for recognizing revenues. The first would be at the point of
sale. For example, the text uses delivery as a point of sale period. The second would be prior to
delivery of the product. The third is after delivery of the product. This means that the product
ships and delivers to the customer and the customer pays therefore the revenue would occur after
the product has delivered. The last is based on special sales transactions such as franchises and
consignment transactions.
References:
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate accounting (12th ed.).
Hoboken, NJ: John Wiley & Sons.
http://www.journalofaccountancy.com/Issues/2001/Jun/TheRightWayToRecognizeRevenue
What are the differences between regular and irregular items on an income
statement? What are the requirements for items to qualify as irregular? What
are some examples of irregular items? What is the effect of irregular items on
an investors analysis of a company?
Differences between regular and irregular items on an income statement is that regular income is
paid on a schedule such as weekly or monthly whereas irregular items are not paid on a schedule.
Irregular items include discontinued operations, changes in accounting principles, or
extraordinary items. Extraordinary items are loss of product due to natural destruction that is a
rare occurrence in that area. Irregular items are reported separately because this helps creditors
and investors predict the future of cash flows.
Unusual gains and losses are items such as restructuring charges. Changes in accounting
principles can be a change in how to price inventory from FIFO to average cost. Changes in
estimates are when the useful life and salvage values of depreciable assets change. Finally,
correction of errors is similar to changing the accounting principles. They are prior period
adjustments that may come from improper reporting of items such as revenue, inventories, or
restructurings.