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Unformatted text preview: Chapter 1 -1 CHAPTER 1 FINANCIAL ACCOUNTING AND FINANCIAL ACCOUNTING STANDARDS ACCOUNTING Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield
Chapter 1 -2 Learning Objectives
1. 2. 3. 4. 5. 6. 7. 8. 9. Identify the major financial statements and other means of financial reporting. Explain how accounting assists in the efficient use of scarce resources. Describe some of the challenges facing accounting. List the objectives of financial reporting. Explain the need for accounting standards. Identify the major policysetting bodies and their role in the standardsetting process. Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. Describe the impact of user groups on the rulemaking process. Understand issues related to ethics and financial accounting. Chapter 1 -3 Financial Accounting and Accounting Financial Standards Standards
Financial Financial Statements and Financial Reporting Financial
Accounting and Accounting capital allocation capital Challenges Challenges Objectives Objectives Need to develop Need standards standards Parties Involved in Parties Standard Setting Standard Generally Accepted Generally Accounting Principles Principles FASB Codification Issues in Financial Issues Reporting Reporting Securities and Securities Exchange Commission Commission American Institute of American CPAs CPAs Financial Accounting Financial Standards Board Standards Changing role of the Changing AICPA AICPA Political environment Expectations gap International International accounting standards accounting Ethics Chapter 1 -4 Financial Statements and Financial Reporting
Accounting is an information system that:
(1) (2) (3) identifies records Communicates the economic events of an organization to interested parties Chapter 1 -5 LO 1 Identify the major financial statements and other means of financial reporting.. THE ACCOUNTING THE PROCESS PROCESS Chapter 1 -6 QUESTIONS ASKED BY INTERNAL QUESTIONS USERS USERS Chapter 1 -7 QUESTIONS ASKED BY EXTERNAL QUESTIONS USERS USERS Chapter 1 -8 BOOKKEEPING DISTINGUISHED BOOKKEEPING FROM ACCOUNTING FROM
Includes bookkeeping Also includes much more Bookkeeping
The recording of economic events One part of accounting
Chapter 1 -9 TRANSACTION IDENTIFICATION PROCESS Chapter 1-10 THE ACCOUNTING PROFESSION Public Accountants Accountants Service to the general public through the services they perform. they Private Individuals in companies involved in activities Individuals including cost and tax accounting, systems, and internal auditing. internal Not For Profit Accountants Reporting and control for government units, Reporting foundations, hospitals, labor unions, colleges/universities, and charities. colleges/universities,
Chapter 1-11 THE BUILDING BLOCKS OF THE ACCOUNTING ACCOUNTING Ethics
Standards by which actions are judged as right or wrong, honest or dishonest. wrong, Generally Accepted Accounting Principles
Established by the F.A.S.B and the S.E.C. Established Assumptions Chapter 1-12 Monetary Unit Monetary Only data that can be expressed in terms of money is included in the accounting records. is Economic Entity Economic Includes any organization or unit in society. Includes Financial Statements and Financial Reporting
Economic Entity Financial Information Accounting? Identifies and Measures and Communicates Financial Statements
Balance Sheet Income Statement Statement of Cash Flows Statement of Owners’ or Stockholders’ Equity Note Disclosures Additional Information
President’s letter Prospectuses, SEC Reporting News releases Forecasts Environmental Reports Etc. GAAP
Chapter 1-13 Not GAAP LO 1 Identify the major financial statements and other means of financial reporting.. Financial Statements and Financial Reporting Review
What is the purpose of information presented in notes to the financial statements?
a. b. c. d. To provide disclosure required by generally accepted accounting principles. To correct improper presentation in the financial statements. To provide recognition of amounts not included in the totals of the financial statements. To present management’s responses to auditor comments. Chapter 1-14 LO 1 Identify the major financial statements and other means of financial reporting.. Accounting and Capital Allocation
Resources are limited. Efficient use of resources often determines whether a business thrives.
Illustration 1-1 Allocation Proce ss Capital Financial Financial Reporting Reporting
Information to help Information users with capital allocation decisions. allocation Users
Investors, creditors, Investors, and other users and Capital Allocation
The process of The determining how and at what cost money is allocated among competing interests. competing Chapter 1-15 LO 2 Explain how accounting assists in the efficient use of scare resources. Accounting and Capital Allocation Review
An effective process of capital allocation is critical to a healthy economy, which
a. b. c. d. promotes productivity. encourages innovation. provides an efficient and liquid market for buying and selling securities. All of the above. Chapter 1-16 LO 2 Explain how accounting assists in the efficient use of scare resources. Challenges Facing Financial Accounting
Nonfinancial Measurements Forwardlooking Information Soft Assets Timeliness Chapter 1-17 LO 3 Describe some of the challenges facing accounting. Objectives of Financial Accounting
Financial reporting should provide information that: Financial
(a) is useful to present and potential investors and creditors and other users in making (a) is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. (b) helps present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. (c) clearly portrays the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change its resources and claims to those resources. Chapter 1-18 LO 4 List the objectives of financial reporting. Objectives of Financial Accounting Review
All of the following are objectives of financial reporting All except to provide information except
a. b. c. d. About enterprise resources, claims to those resources, and changes in them. That is useful in investment and credit decisions. About the management and major shareholders of an enterprise. That is useful in assessing cash flow prospects. Chapter 1-19 LO 4 List the objectives of financial reporting. Need to Develop Standards
Various users need financial information Financial Statements Balance Sheet Income Statement Statement of Stockholders’ Equity Statement of Cash Flows Note Disclosure The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Generally Accepted Generally Accounting Principles (GAAP) (GAAP) Chapter 1-20 LO 5 Explain the need for accounting standards. Parties Involved in Standard Setting Three organizations: Securities and Exchange Commission (SEC) American Institute of Certified Public Accountants (AICPA) Financial Accounting Standards Board (FASB) Chapter 1-21 LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Securities and Exchange Commission
Established by federal government Accounting and reporting for public companies Securities Act of 1933 Securities Act of 1934 Encouraged private standard-setting body SEC requires public companies to adhere to GAAP SEC Oversight Enforcement Authority
Chapter 1-22 LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role American Institute of CPAs
National professional organization Established the following:
Committee on Accounting Procedures Accounting Principles Board 1939 to 1959 Issued 51 Accounting Research Bulletins (ARBs) Problem-by-problem approach failed 1959 to 1973 Issued 31 Accounting Principle Board Opinions (APBOs) Wheat Committee recommendations adopted in 1973 Chapter 1-23 http://www.aicpa.org/ LO 6 Financial Accounting Standards Board
Wheat Committee’s recommendations resulted in the creation of a the Financial Accounting Standards Board in 1973. Financial Accounting Foundation Financial Accounting Standards Board
Financial Accounting Standards Advisory Council
Chapter 1-24 Selects members of the FASB Funds their activities Exercises general oversight. Mission to establish and improve standards of financial accounting and reporting. Consult on major policy issues. LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Financial Accounting Standards Board
Missions is to establish and improve standards of financial Missions accounting and reporting. Differences between FASB and APB include: APB
Smaller Membership Fulltime, Remunerated Membership Greater Autonomy Increased Independence Broader Representation
http://www.fasb.org/ Chapter 1-25 LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Financial Accounting Standards Board Review
The first step taken in the establishment of a typical The FASB statement is
a.. a b. c. d.
Chapter 1-26 The board conducts research and analysis and a discussion memorandum is issued. A public hearing on the proposed standard is held. The board evaluates the research and public response and issues an exposure draft. Topics are identified and placed on the board’s agenda.
LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Due Process
FASB relies on two basic premises:
Responsive to entire economic community (2) Operate in full view of the public
(1) Step 1 = Topic placed on agenda Step 2 = Research conducted and Discussion Memorandum issued. Step 3 = Public hearing Step 4 = Board evaluates research, public response and issues Exposure Draft Step 5 = Board evaluates responses and issues final Statement of Financial Accounting Standard Chapter 1-27 LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Types of Pronouncements
Is s ue d b y th e FAS B:
Standards, Interpretations, and Staff Positions. Financial Accounting Concepts Emerging Issues Task Force Statements Chapter 1-28 LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Types of Pronouncements
CA1-11 (Accounting Pronouncements) Standard setting bodies have issued a number of authoritative pronouncements. A list is provided on the left, below, with a description of these pronouncements on the right. (d) (f) (c) (e) (a) (b) Chapter 1-29 LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Changing Role of AICPA
The AICPA established the Accounting Standards Executive Committee (AcSEC): Audit and Accounting Guides Statements of Position (SOP) Practice Bulletins AICPA and AcSEC no longer issues authoritative accounting guidance for public companies. PCAOB oversees the development of auditing standards. AICPA continues to develop and grade the CPA examination.
Chapter 1-30 LO 6 Identify the major policy-setting bodies and 6 LO LO their role in the standard-setting process. role Generally Accepted Accounting Principles
T h o s e p rinc ip le s th a t h a ve substantial authoritative support. Ma jo r s o urc e s o f G AAP a re :
FASB Standards, Interpretations, and Staff Positions APB Opinions AICPA Accounting Research Bulletins Chapter 1-31 LO 7 Explain the meaning of generally accepted accounting principles LO (GAAP) and the role of the Codification for GAAP. (GAAP) Generally Accepted Accounting Principles
Illustration 1-4 GAAP Documents Chapter 1-32 LO 7 Explain the meaning of generally accepted accounting principles LO (GAAP) and the role of the Codification for GAAP. (GAAP) Generally Accepted Accounting Principles Review
Wh ic h o f th e fo llo wing a c c o unting p ro no unc e m e nts is th e m o s t a uth o rita tive ?
a. b. c. d. FASB Statement of Financial Accounting Concepts. FASB Technical Bulletins. AICPA Accounting Principles Board Opinion. AICPA Statement of Position. Chapter 1-33 LO 7 Explain the meaning of generally accepted accounting principles LO (GAAP) and the role of the Codification for GAAP. (GAAP) Issues in Financial Reporting
Standard Setting in a Political Environment
Ac c o unting s ta nd a rd s a re a s m uc h a p ro d uc t o f p o litic a l a c tio n a s th e y a re o f c a re ful lo g ic o r e m p iric a l find ing s . Chapter 1-34 LO 8 Describe the impact of user groups on the rule-making process. LO Standard Setting Business Entities Illustration 1-6 User Groups that Influence Accounting Standards CPAs and Accounting Firms AICPA (AcSEC) Financial Community FASB Preparers
(e.g., FEI) Academicians Government
(SEC, IRS, other agencies) Investing Public Industry Associations Accounting standards, interpretations, and bulletins
Chapter 1-35 LO 8 Describe the impact of user groups on the rule-making process. LO Issues in Financial Reporting Review:
All those who serve on the FASB must be Certified Public Accountants. False Chapter 1-36 LO 8 Describe the impact of user groups on the rule-making process. LO Issues in Financial Reporting
Wh a t th e p ub lic th inks a c c o unta nts s h o uld d o vs . wh a t a c c o unta nts th ink th e y c a n d o .
Difficult to close SarbanesOxley Act (2002) Public Company Accounting Oversight Board (PCAOB) Chapter 1-37 LO 8 Describe the impact of user groups on the rule-making process. LO Issues in Financial Reporting
International Accounting Standards
T wo s e ts o f s ta nd a rd s a c c e p te d fo r inte rna tio na l us e :
U.S. GAAP, issued by the FASB International Financial Reporting Standards (IFRS), issued by the IASB FASB and IASB recognize that global markets will best be served if only one set of GAAP is used. Chapter 1-38 LO 8 Describe the impact of user groups on the rule-making process. LO Issues in Financial Reporting
Ethics in the Environment of Financial Accounting
In a c c o unting , we fre q ue ntly e nc o unte r e th ic a l d ile m m a s .
GAAP does not always provide an answer Doing the right thing is not always easy or obvious Chapter 1-39 LO 9 Understand issues related to ethics and financial accounting. LO Users Users of financial reports include all of the following except except a. creditors. b. government agencies. c. unions. d. All of these are users. Chapter 1-40 How How does accounting help the capital allocation process attract investment capital? capital? a. Provides timely, relevant information. b. Encourages innovation. c. Promotes productivity. d. a and b above. Chapter 1-41 What What is a possible danger if politics plays too big a role in accounting standard setting? setting? a. Accounting standards that are not truly Accounting generally accepted. generally b. Individuals may influence the standards. c. User groups become active. d. The FASB delegates its authority to The elected officials. elected Chapter 1-42 The The Financial Accounting Standards Board (FASB) was proposed by the (FASB) a. American Institute of Certified Public American Accountants. Accountants. b. Accounting Principles Board. c. Study Group on the Objectives of Study Financial Statements. Financial d. Special Study Group on establishment of Special Accounting Principles (Wheat Committee). Accounting Chapter 1-43 Companies Companies that are listed on a stock exchange are required to submit their financial statements to the financial a. AICPA. b. APB c. FASB. d. SEC. Chapter 1-44 ...
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This note was uploaded on 02/17/2010 for the course ACCT 4397 taught by Professor Staff during the Spring '08 term at University of Houston.
- Spring '08
- Financial Accounting