ch1 lecture notes-06-handout - CH.1 FINANCIAL ACCOUNTING...

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Unformatted text preview: CH.1 FINANCIAL ACCOUNTING CH.1 AND ACCOUNTING AND STANDARDS STANDARDS I. ACCOUNTING I. - iis an information system that identifies, s measures, and communicates financial information about economic entities to interested persons. interested II.FINANCIAL ACCOUNTING II.FINANCIAL - is the process of preparation of a set of general-purpose financial statements on enterprises as a whole for use by parties both internal and external to the enterprise, such as investors, creditors, managers, unions and government agencies. unions Financial Statements Financial - B/S - I/S - STATEMENT OF CASH FLOWS STATEMENT - STATEMENT OF SHAREHOLDERS' STATEMENT EQUITY III.GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) (GAAP) - those principles that have "substantial those authoritative support" (meaning established by an authoritative rule making body by IV.HISTORY OF ACCOUNTING STANDARDS SETTING STANDARDS PRIOR TO 1929 (STOCK MKT CRASH) - No GAAP No - No auditing requirement No IV.HISTORY OF ACCOUNTING STANDARDS SETTING STANDARDS IN 1934 Securities and Exchange Commission (SEC) was Securities created to administer the securities laws. created - SEC has the legal authority to prescribe SEC accounting standards for companies that fall within its jurisdiction (about 12,000 public companies). its - SEC has generally delegate the accounting SEC standards setting to the private sector. standards IV.HISTORY OF ACCOUNTING STANDARDS SETTING STANDARDS 1939 - 1959 Committee on Accounting Procedure Committee (CAP) (CAP) - Appointed by AICPA - Issued 51 Accounting Research Bulletins Issued IV.HISTORY OF ACCOUNTING STANDARDS SETTING STANDARDS 1959 - 1973 Accounting Principles Board (APB) - Created by the AICPA Created - Issued 31 APB Opinions IV.HISTORY OF ACCOUNTING STANDARDS SETTING STANDARDS 1973 - present Financial Accounting Standards Board (FASB) - Appointed by Financial Accounting Foundation Appointed - The most significant current source of GAAP - The FASB issues: - Standards and interpretations (over 121&40) - Technical bulletins (implementation guides) - Emerging Issues Task Force (EITF) statement statement - Financial Accounting Concepts Ch. 2 Conceptual Framework underlying Financial Reporting Reporting What is the conceptual framework? framework? The conceptual framework is, like a The constitution, a coherent set of objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements. statements. I. I. Need for a Conceptual Need Framework Framework 1. Coherence in rules and standards. 2. Quick solutions to new and emerging Quick practical problems by reference to an existing framework of basic theory. existing First Level: Objectives. First To provide information that is useful to To useful present and potential investors and investors creditors in making rational investment, creditors credit, and similar decisions. credit, Second Level: Qualitative Characteristics and Elements. Characteristics For information to be useful, it must be: (1) Relevance. Accounting information is relevant if it is capable of making a difference in a decision. Relevant information has making (a) Predictive value. (b) Feedback value. (c) Timeliness. (2) Reliability. Accounting information is reliable to the extent that users can depend on it to represent the economic conditions or events that it purports to represent. Reliable information has that (a) Verifiability. (b) Representational faithfulness. (c) Neutrality. In addition, the information must also be comparable and consistent. Third Level: Recognition and Measurement Concepts Measurement Assumptions Principles Constraints Third Level: Recognition and Measurement Concepts Measurement 1. Assumptions. a. Economic entity assumption—economic activity can be —economic identified with a particular unit of accountability. identified b. Going concern assumption—business enterprises will —business have a long enough life to justify the use of accruals and deferrals. have c. Monetary unit assumption—the monetary unit (i.e., the —the dollar) is the most effective means of expressing to interested parties changes in capital and exchanges of goods and services. A second assumption is that the monetary unit remains reasonably stable. Note that during the inflationary period of the 1970s this assumption was criticized by many accountants. criticized d. Periodicity assumption—activities of an enterprise can —activities be divided into artificial time periods. be Third Level: Recognition and Measurement Concepts Measurement 2. Principles. a.Historical cost principle—acquisition cost is the most objective and verifiable —acquisition basis to account for assets and liabilities. Definite and objective, not subject to interpretation. interpretation. b.Revenue recognition principle—revenue is recognized when (1) it’s earned —revenue and (2) It’s realized or realizable. and c.Matching principle—efforts (expenses) should be matched with c. —efforts accomplishments (revenues) if feasible. accomplishments (a) When direct association exists, expense costs against When revenues in the period when the revenue is recognized. revenues (b) When association exists but is difficult to identify, allocate When costs rationally and systematically to expense in the periods benefited. costs (c) When little if any association exists, expense immediately. d.Full disclosure principle—revealing in financial statements any facts of —revealing sufficient importance to influence the judgment and decisions of an informed reader. Companies use of notes and supplementary information in financial reporting. Companies Third Level: Recognition and Measurement Concepts Measurement 3. Constraints modifying basic theory: a. Cost-benefit—the benefit to be derived from having —the accounting information should exceed the cost of providing it. Frequently it is easier to assess the costs than it is to determine the benefits of providing a particular item of information. benefits b. Materiality—if the amount is significant when compared —if with other items, sound and acceptable standards should be followed. with (1) The determination of materiality requires The considerable judgment, a potential for abuse exists. considerable (2) Immaterial items are recorded but need not be Immaterial separately disclosed. separately c. Industry practice—peculiar nature of industry or —peculiar business may result in variation. business d. Conservatism—when in doubt choose the solution that —when will be least likely to overstate assets and income. will ...
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This note was uploaded on 05/15/2010 for the course ACCOUNTING B97702031 taught by Professor Lyz during the Spring '09 term at Punjab Engineering College.

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