Chapter One - Intermediate Accounting Intermediate Chapter...

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Unformatted text preview: Intermediate Accounting Intermediate Chapter 1 Financial Accounting and Accounting Standards Learning Objectives Learning 2 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 objective 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 Financial Statements and Financial Reporting Financial Essential Characteristics of accounting are: The identification, measurement, and communication of financial information about Economic entities to Interested parties LO 1: Identify the major financial statements and other means of financial reporting 3 Financial Statements and Financial Reporting Financial Financial Reporting Economic Entity Financial Information Identifies and Measures and Communicates Financial Statements Additional Information Balance Sheet Income Statement Statement of Cash Flows Statement of Owners’ or Stockholders’ Equity Note Disclosures GAAP 4 LO 1: Identify the major financial statements and other means of financial reporting President’s Letter Prospectuses, SEC Reporting News Releases Management’s Forecasts Environmental Reports Not GAAP Accounting and Capital Allocation Accounting Financial Reporting The financial information a company provides to help users with capital allocation decisions about the company. 5 Users (Present and Potential) Investors and creditors use financial reports to make their capital allocation decisions. LO 2: Explain how accounting assists in the efficient use of scarce resources Capital Allocation The process of determining how and at what cost money is allocated among competing interests. Challenges Facing Financial Accounting Challenges Nonfinancial Measurements Forward-looking Information Soft Assets 6 Customer satisfaction indexes Backlog information Unique marketing setup (Dell) Brand image (J. Crew) Timeliness LO 3: Describe some of the challenges facing accounting Objective of Financial Accounting Objective The objective of general-purpose The financial statements is to 7 Provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments, and providing or settling loans and other forms of credit. Information that is decision­useful to capital providers (investors) may also be helpful to other users of financial reporting who are not investors. LO 4: List the objective of financial reporting Need to Develop Standards Need Various users need financial information Financial Statements: •Balance Sheet •Income Statement •Statement of Stockholder’ Equity •Statement of Cash Flows •Note Disclosures The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Generally Accepted Accounting Principles (GAAP) 8 LO 5: Explain the need for accounting standards Parties Involved in Standard Setting Parties Three Organizations: Securities and Exchange Commission (SEC) American Institute of Certified Public Accountants (AICPA) Financial Accounting Standards Board (FASB) LO 6: Identify the major policy­setting bodies and their role in the standard –setting process 9 Securities and Exchange Commission Securities Established by federal government to develop and standardize financial information presented to stockholders Encouraged private standard­setting body SEC requires public companies to adhere to GAAP SEC Oversight – SEC relies on FASB to develop accounting standards Enforcement Authority – companies listed on a stock exchange must submit their financial statements to the SEC LO 6: identify the major policy­setting bodies and their role in the standard­setting process 10 American Institute of CPAs American National professional organization of practicing CPAs Established the following: Committee on Accounting Procedures • 1959 to 1973 • 1939 to 1959 • Issued 51 Accounting Research Bulletins (ARBs) • Problem­by­problem approach failed 11 Accounting Principles Board • Issued 31 Accounting Principle Board Opinions (APBOs) • Wheat Committee recommendations adopted in 1973 http://www.aicpa.org/ Financial Accounting Standards Board Financial Wheat Committee’s recommendations resulted in the creation of the Financial Accounting Standards Board in 1973 Financial Accounting Foundation • Selects members of the FASB • Funds their activities • Exercises general oversight Financial Accounting Standards Board • Mission to establish and improve standards of financial accounting and reporting Financial Accounting Standards Advisory Board 12 • Consult on major policy issues LO 6: Identify the major policy­setting bodies and their role in the standard­setting process Financial Accounting Standards Board Financial Mission 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/ LO 6: Identify the major policy­setting bodies and their role in the standard­setting process 13 Due Process Due FASB relies on two basic premises: (1) Responsive to entire economic community (2) Operate in full view of the public Step 1 = Topic placed on agenda Step 2 = Research conducted and Preliminary Views issued Step 3 = Public hearing Step 4 = Board evaluates research, public response and issues Draft Step 5 = Board evaluates responses and issues final Statement Step = Board evaluates responses and issues final Statement Financial Accounting Standard 14 Exposure of LO 6: Identify the major policy­setting bodies and their role in the standard­setting process Types of Pronouncements Types Issued by the FASB: 15 Standards, Interpretations, and Staff Positions Financial Accounting Concepts Emerging Issues Task Force Statements LO 6: Identify the major policy­setting bodies and their role in the standard­setting process Changing Role of AICPA Changing The AICPA established the Accounting Standards Executive Accounting Committee (AcSEC): Committee 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 LO 6: Identify the major policy­setting bodies and their role in the standard­setting process 16 Generally Accepted Accounting Principles Generally Those principles that have substantial authoritative substantial support. support. Major sources of GAAP are: FASB Standards, Interpretations, and Staff Positions APB Opinions AICPA Accounting Research Bulletins LO 7: Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP 17 FASB Codification FASB The document that comprise GAAP vary in format, completeness, and structure. In some cases the documents are inconsistent and difficult to interpret. In response to these concerns, the FASB developed the Financial Accounting Standards Board Accounting Standards Codification. The Codification provides in one place all of the authoritative literature related to a particular topic. Issues in Financial Reporting Issues Standard Setting in a Political Environment Accounting standards are as much a product of political action as they are of careful logic or empirical findings. LO 8: Describe the impact of user groups on the rule­making process 19 Standard Setting Standard Business Entities Illustration 1-6---User Groups that Influence Accounting Standards CPAs and Accounting Firms Financial Community AICPA (AcSEC) Preparers (e. FASB g., FEI) Academicians Government Investing Public Industry Associations (SEC, (SEC, IRS, other agencies) Accounting standards, interpretations, and bulletins LO 8: Describe the impact of user groups on the rule­making process 20 Issues in Financial Reporting Issues International Accounting Standards Two sets of standards accepted for international use: 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 FASB best be served if only one set of GAAP is used. best LO 8: Describe the impact of user groups on the rule­making process 21 Issues in Financial Reporting Issues Ethics in the Environment of Financial Ethics Accounting 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 LO 9: Understand issues related to ethics and financial accounting 22 ...
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