Kieso_Inter_13e_Ch01 - CHAPTER 1 FINANCIAL ACCOUNTING AND...

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Unformatted text preview: CHAPTER 1 FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 1-1 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 1-2 Financial Statements and Financial Reporting Essential characteristics of accounting are: (1) (2) (3) the identification, measurement, and communication of financial information about economic entities to interested parties. Chapter 1-3 LO 1 Identify the major financial statements and other means of financial reporting. . 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 1-4 Not GAAP LO 1 Identify the major financial statements and other means of financial reporting. . Financial Statements and Financial Reporting Review a. b. c. d. Wh a t is th e p urp o s e o f info rm a tio n p re s e nte d in no te s to th e fina nc ia l s ta te m e nts ? 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 1-5 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, or even a society, thrives. Illustration 1-1 C a p ita l Allo c a tio n P ro c e s s Financial Reporting Information to help users with capital allocation decisions. Users Investors, creditors, and other users Capital Allocation The process of determining how and at what cost money is allocated among competing interests. Chapter 1-6 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 1-7 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 1-8 LO 3 Describe some of the challenges facing accounting. Objectives of Financial Accounting Financial reporting should provide information that: (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 1-9 LO 4 List the objectives of financial reporting. Objectives of Financial Accounting Review All of thefollowing areobje s of financial re ctive porting e pt to xce provideinform ation 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 1-10 LO 4 List the objectives of financial reporting. Need to Develop Standards Various users need financial information, that is comparable between companies and consistent between time periods. 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. Chapter 1-11 Generally Accepted Accounting Principles (GAAP) 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 1-12 LO 6 Identify the major policy-setting bodies and their role in the standard-setting process. Securities and Exchange Commission SEC was established by federal government Power over accounting and reporting for public companies Securities Act of 1933 Securities Exchange Act of 1934 Encouraged private standard-setting body SEC requires public companies to adhere to GAAP SEC Oversight Enforcement Authority Chapter 1-13 LO 6 Identify the major policy-setting bodies and their role in the standard-setting process. 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 1-14 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. Accounting Standards Board Financial Accounting Foundation Financial Accounting Standards Board Selects members of the FASB Funds their activities Exercises general oversight. Mission to establish and improve standards of financial accounting and reporting, in other words GAAP. Financial Accounting Standards Advisory Council Chapter 1-15 Consult on major policy issues. LO 6 Identify the major policy-setting bodies and their role in the standard-setting process. Financial Accounting Standards Board Missions is to establish and improve standards of financial accounting and reporting. Differences between FASB and APB include: Smaller Membership Fulltime, Remunerated Membership Greater Autonomy Increased Independence Broader Representation, CPA not required. http://www.fasb.org/ Chapter 1-16 LO 6 Identify the major policy-setting bodies and their role in the standard-setting process. Due Process FASB relies on two basic premises: Responsive to entire economic community (2) Operates 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 1-17 LO 6 Identify the major policy-setting bodies and their role in the standard-setting process. Financial Accounting Standards Board Review The first step taken in the establishment of a typical FASB statement is a. b. c. d. Chapter 1-18 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 role in the standard-setting process. Types of Pronouncements Issued by the FASB: Standards, Interpretations, and Staff Positions. Financial Accounting Concepts Emerging Issues Task Force Statements Chapter 1-19 LO 6 Identify the major policy-setting bodies and their role in the standard-setting process. 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 1-20 LO 6 Identify the major policy-setting bodies and their role in the standard-setting process. Changing Role of AICPA After the FASB replaced the APB, 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 1-21 LO 6 Identify the major policy-setting bodies and 6 LO their role in the standard-setting process. Generally Accepted Accounting Principles Those principles that have substantial authoritative support. Major sources of GAAP are: FASB Standards, Interpretations, and Staff Positions since 1973 APB Opinions from 1959 to 1972 AICPA Accounting Research Bulletins from 1939 to 1959 Chapter 1-22 LO 7 Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. Generally Accepted Accounting Principles All below provide "support," but GAAP must have "substantial authoritative support" Illustration 1-4 G AAP Do c um e nts GAAP is based first on FASB Statements, Interpretations, and Staff Positions; APB Opinions; and Accounting Research Bulletins (ARBs). Chapter 1-23 LO 7 Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. Standard Setting CPAs and Accounting Firms AICPA (AcSEC) Business Entities Illustration 1-6 Us e r G ro up s th a t Influ e nc e Ac c o unting S ta nd a rd s Financial Community Preparers FASB Academicians (e.g., FEI) Government (SEC, IRS, other agencies) Investing Public Industry Associations Accounting standards are as much a product of political action as they are of careful logic or empirical findings. Chapter 1-24 LO 8 Describe the impact of user groups on the rule-making process. Issues in Financial Reporting Expectation Gap What the public thinks accountants should do vs. what accountants think they can do. Difficult to close SarbanesOxley Act (2002) Public Company Accounting Oversight Board (PCAOB) Chapter 1-25 LO 8 Describe the impact of user groups on the rule-making process. Issues in Financial Reporting International Accounting Standards Two sets of standards accepted for international use: 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 1-26 LO 8 Describe the impact of user groups on the rule-making process. Issues in Financial Reporting Ethics in the Environment of Financial Accounting In accounting, we frequently encounter ethical dilemmas. GAAP does not always provide an answer Doing the right thing is not always easy or obvious Let's look at some cases. Chapter 1-27 LO 9 Understand issues related to ethics and financial accounting. Diversity in Practice iGAAP includes the standards, referred to as International Financial Reporting Standards (IFRS), developed by the IASB. Differences between U.S. GAAP and iGAAP exist because of different user needs. iGAAP tends to be simpler and less stringent than U.S. GAAP. Regulators have recently eliminated the need for foreign companies that trade shares in U.S. markets to reconcile their accounting with U.S. GAAP. Chapter 1-28 ...
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