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Unformatted text preview: CHAPTER 1 FINANCIAL ACCOUNTING AND FINANCIAL ACCOUNTING STANDARDS ACCOUNTING AIM 3331 Intermediate Accounting Prof. Volkan Muslu Chapter 1 -1 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 -2 LO 1 Identify the major financial statements and other means of financial reporting. . World of a Financial Statement User
Financial Accounting = translates events into financial statements
Events Generally Accepted Accounting Principles (GAAP) Management selects from alternative rules and from allowable estimates under GAAP Rules & Management choice Financial Statements
Chapter 1 -3 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. . Accounting and Capital Allocation
Resources are limited. Efficient use of resources often determines whether a business thrives. Investors must trust accounting numbers, or they will not invest.
Illustration 1-1 C a p ita l Allo c a tio n P ro c e s s 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 -5 LO 2 Explain how accounting assists in the efficient use of scare resources. Accounting and Capital Allocation Review
An e ffe c tive p ro c e s s o f c a p ita l a llo c a tio n is c ritic a l to a h e a lth y e c o no m y , wh ic h
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 -6 LO 2 Explain how accounting assists in the efficient use of scare resources. How important is financial accounting information?
Wal-Mart Stock around the announcement of 2003 3rd Quarter Earnings (Lower than expected earnings) MCap=$220 bn. Drop=around 10%
59.5 59 58.5 58 57.5 STOCK PRICE 57 56.5 56 55.5 55 54.5 54 1-Nov-03 3-Nov-03 5-Nov-03 7-Nov-03 9-Nov-03 11-Nov-03 13-Nov-03 15-Nov-03 17-Nov-03 19-Nov-03 21-Nov-03 23-Nov-03 DATE Chapter 1 -7 How important is financial accounting information?
Wal-Mart Stock around the announcement of 2005 3rd Quarter Earnings (Earnings in accordance with the expectations)
51 50.5 50 49.5 STOCK PRICE 49 48.5 48 47.5 47 46.5 30-Oct-05 4-Nov-05 9-Nov-05 14-Nov-05 DATE 19-Nov-05 24-Nov-05 29-Nov-05 4-Dec-05 Chapter 1 -8 Challenges Facing Financial Accounting
Nonfinancial Measurements Forwardlooking Information Soft Assets Timeliness Chapter 1 -9 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 (a) is 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 amounts, receipts. receipts (c) clearly portrays the economic resources of an enterprise, the economic claims to those resources, and the effects of transactions, events, and claims circumstances that change its resources and claims to those change resources. resources
Chapter 1-10 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 1-11 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 1-12 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 1-13 LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Securities and Exchange Commission
Federal institution http://www.sec.gov Develop and standardize information of public companies Securities Act of 1933 Securities Act of 1934 Encouraged private standard-setting body (FASB) SEC requires public companies to adhere to GAAP What is a public company? (those with more than $10 mn. assets & 500 owners) About 12,000. SEC Oversight (Delegates, Accepts, Rejects, Counsels) SEC Enforcement (Reporting, Restatements, Litigation)
Chapter 1-14 LO 6 Identify the major policy-setting bodies and their role in the standard-setting process. role American Institute of CPAs
National professional organization Established the following:
Committee on Accounting Procedures (CAP) Accounting Principles Board (APB) 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 1-15 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 1-16 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 establish improve 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 1-17 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 1-18 LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Financial Accounting Standards Board Review
Thefirst ste take in thee p n stablishm nt of a typical FAS state e is e B m nt The
a.. a b. c. d.
Chapter 1-19 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 Types of Pronouncements
I ssue by theFAS d B:
Standards, Interpretations, and Staff Positions (authoritative) Financial Accounting Concepts (7) Emerging Issues Task Force Statements (a lot, problem filter) Chapter 1-20 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 1-21 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 1-22 LO 6 Identify the major policy-setting bodies and 6 LO LO their role in the standard-setting process. role Generally Accepted Accounting Principles
Thoseprinciple that havesubstantial authoritative support. s Major source of GAAP are s : Major
FASB Standards, Interpretations, and Staff Positions APB Opinions AICPA Accounting Research Bulletins Chapter 1-23 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 1-24 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
Which of the following accounting pronouncements is the most authoritative?
a. b. c. d. FASB Statement of Financial Accounting Concepts. FASB Technical Bulletins. AICPA Accounting Principles Board Opinion. AICPA Statement of Position. Chapter 1-25 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
Accounting standards areas m a product of political action as the uch y areof care logic or e pirical findings. ful m Chapter 1-26 LO 8 Describe the impact of user groups on the rule-making process. 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 1-27 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 1-28 LO 8 Describe the impact of user groups on the rule-making process. LO Issues in Financial Reporting
What thepublic thinks accountants should do vs. what accountants t hink the can do. y
Difficult to close SarbanesOxley Act (2002) Public Company Accounting Oversight Board (PCAOB) Chapter 1-29 LO 8 Describe the impact of user groups on the rule-making process. LO Issues in Financial Reporting
International Accounting Standards
Two se of standards acce d for inte ts pte rnational 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 1-30 LO 8 Describe the impact of user groups on the rule-making process. LO Issues in Financial Reporting
CA1-9 (GAAP Terminology): With accounting and finance, it often helps to be fluent in abbreviations and acronyms. Instructions: Presented below is a list of common accounting acronyms. Identify the term for which each acronym stands, and provide a brief definition of each term. (a) AICPA (b) CAP (c) ARB (d) APB (e) FAF (f) FASAC (g) SOP (h) GAAP (i) CPA (j) FASB (k) SEC (l) IASB Chapter 1-31 LO 9 Understand issues related to ethics and financial accounting. LO Issues in Financial Reporting
Ethics in the Environment of Financial Accounting
I n accounting, wefre ntly e que ncounte e r thical dile m m as.
GAAP does not always provide an answer Doing the right thing is not always easy or obvious Chapter 1-32 LO 9 Understand issues related to ethics and financial accounting. LO 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 1-33 Accounting is interesting and fun, because… Diversity of businesses and events Many different players Diverse incentives Economic incentives Managers’ incentives Uncertainty regulations (over 2,000 documents over 60 years), challenges 60 Changing regulations (IFRS, Codification, Changing XBRL, Real-time reporting, Fair value vs. historical cost) historical Chapter
1-34 Many Many Summary Accounting is a complex field contrary to Accounting common perceptions. common Financial accounting information facilitates the Financial exchange of resources (U.S. financial markets largest & most sophisticated==U.S. financial reporting most robust & transparent) reporting To become a sophisticated financial statement To user, you need to understand how the information in financial statements is recorded. information Chapter 1-35 ...
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This note was uploaded on 02/14/2011 for the course AIM 6330 taught by Professor Volkanmuslu during the Spring '10 term at University of Texas at Dallas, Richardson.
- Spring '10