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ACT3391FALL2010handoutCH1to9

ACT3391FALL2010handoutCH1to9 - Notes related to Chapter 1...

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Notes related to Chapter 1 Accounting is a service activity. Its function is to provide quantitative information about economic entities that is intended to be useful in making economic decisions. Financial statements and the related footnote disclosures are the principal means through which a company communicates (provides information to) its financial information to those outside of the company. Unreliable and irrelevant financial information leads to poor capital allocation and can adversely affect the securities markets. Investors must trust the accounting numbers or they will abandon the market and put their resources elsewhere. The 3 objectives of financial reporting: 1. provide information useful in making investment and credit decisions (financial statement preparers assume a level of competence on the part of users) 2. provide information useful in assessing future cash flows 3. provide information that portrays a company’s resources (also known as assets), claims to those resources (creditors in the form of liabilities and owners in the form of equity accounts have “claims” to a company’s assets), and events/transactions that change the company’s resources and claims to those resources (these events/transactions would be reflected on the income statement, the statement of cash flows, and statement of changes in stockholders’ equity, and the footnotes that accompany the financial statements) The common set of accounting standards and procedures is called GAAP – Generally Accepted Accounting Principles . One set of rules makes it easier for users of financial statements to read and compare the financial statements of different companies. The Financial Accounting Standards Board (FASB) is developing the FASB Accounting Standards Codification (more simply, “the Codification ”) to provide in one place all the authoritative literature related to a particular topic. Be sure to make reference to the discussion of the FASB Codification that is at the back of our textbook. Understand who can set GAAP, who does set GAAP, and who did set GAAP. The Securities & Exchange Commission (SEC) was established by the United States Congress in 1934 during the Great Depression that followed the Crash of 1929. The SEC has the authority to set GAAP but has delegated that authority to others. At the time the SEC was created, no group issued accounting standards. At the urging of the SEC, the AICPA formed the CAP in 1939. The first group to set GAAP was the Committee on Accounting Procedure (CAP) – their pronouncements were called Accounting Research Bulletins (ARBs) The second group to set GAAP was the Accounting Principles Board (APB) – their pronouncements were called APB Opinions The third and current group to set GAAP is the FASB – their primary pronouncements are called Statements of Financial Accounting Standards (SFASs) Appreciate: 1
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the due process system of the FASB; make sure that you appreciate the fact that the standard-setting
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