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Unformatted text preview: CHAPTER 1 FINANCIAL ACCOUNTING AND FINANCIAL ACCOUNTING STANDARDS ACCOUNTING Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield 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 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 -3 Not GAAP Accounting and Capital Allocation Resources are limited. Efficient use of resources often determines whether a business thrives. 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 -4 Challenges Facing Financial Accounting Nonfinancial Measurements Forward­looking Information Soft Assets Timeliness Chapter 1 -5 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 -6 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 -7 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 -8 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 -9 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 1-10 http://www.aicpa.org/ 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 1-11 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. 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 http://www.fasb.org/ Chapter 1-12 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 1-13 Types of Pronouncements Issued by the FASB: Standards, Interpretations, and Staff Positions. Financial Accounting Concepts Emerging Issues Task Force Statements Chapter 1-14 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 1-15 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 1-16 Generally Accepted Accounting Principles Those principles that have substantial authoritative support. Major sources of GAAP are: Major FASB Standards, Interpretations, and Staff Positions APB Opinions AICPA Accounting Research Bulletins Chapter 1-17 Generally Accepted Accounting Principles Illustration 1-4 G AAP Do c um e nts Chapter 1-18 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 1-19 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 1-20 ...
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