ch 1 Financial Accounting and Accounting Standards

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Unformatted text preview: FINANCIAL ACCOUNTING AND FINANCIAL ACCOUNTING AND FINANCIAL ACCOUNTING STANDARDS ACCOUNTING STANDARDS ACCOUNTING ACCOUNTING Intermediate Accounting Kieso, Weygandt, and Warfield Prepared by Coby Harmon, University of California, Santa Barbara Notes and Narration by Jo Lynne Koehn, University of Central Missouri, Warrensburg Learning Objectives Learning Objectives 1.. 1 Identify the major financial statements and other means of financial reporting. 2. Explain how accounting assists in the efficient use of scarce resources. 3. Describe some of the challenges facing accounting. 4. List the objectives of financial reporting. 5. Explain the need for accounting standards. 6. Identify the major policy­setting bodies and their role in the standard­setting process. 7. Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. 8. Describe the impact of user groups on the rule­making process. 9. Understand issues related to ethics and financial accounting. Financial Accounting and Accounting Financial Accounting and Accounting Financial Financial Standards Standards Standards Standards Financial Financial Statements and Financial Reporting Financial Accounting and Accounting capital allocation capital Challenges Challenges Objectives Objectives Need to develop Need standards standards Parties Involved in Parties Standard Setting Standard Securities and Exchange Commission Commission American Institute of American CPAs CPAs Financial Financial Accounting Standards Board Standards Changing role of the Changing AICPA AICPA Generally Accepted Generally Accounting Principles Principles FASB Codification Issues in Financial Issues Reporting Reporting Political environment Expectations gap International International accounting standards accounting Ethics Financial Statements and Financial Reporting Financial Statements and Financial Reporting Essential characteristics of accounting are: (1) the identification, measurement, and communication of financial information about (2) economic entities to (3) interested parties. LO 1 Identify the major financial statements and other means of financial reporting . . LO Financial Statements and Financial Reporting Financial Statements and Financial Reporting Economic Entity Financial Statements Additional Information Financial Financial Information Balance Sheet President’s letter Income Statement Prospectuses, Statement of Cash Flows SEC Reporting Statement of Owners’ or Stockholders’ Equity News releases Accounting? Identifies and Measures and Note Disclosures Communicates Forecasts Environmental Reports Etc. GAAP Not GAAP LO 1 Identify the major financial statements and other means of financial reporting . . Financial Statements and Financial Reporting Financial Statements and Financial Reporting Review Wh a t is th e p urp o s e o f in fo rm a tio n p re s e nte d in n o te s to th e fina nc ia l s ta te m e nts ? a. b. c. d. To provide disclosure required by generally accepted accounting principles. To correct improper presentation in the financial statements. To provide recognition of amounts not included in the totals of the financial statements. To present management’s responses to auditor comments. LO 1 Identify the major financial statements and other means of financial reporting . . LO Accounting and Capital Allocation Accounting and Capital Allocation Accounting Resources are limited. Efficient use of resources often determines whether a business thrives. ? ? Illustration 1-1 Capital Allocation Process Financial Financial Reporting Reporting Information to help Information users with capital allocation ? ? ? ? allocation decisions. Users Capital Allocation Investors, creditors, Investors, and other users and The process of The determining how and at what cost money is allocated among competing interests. competing LO 2 Explain how accounting assists in the efficient use of scare resources. Accounting and Capital Allocation Accounting and Capital Allocation Review An effective process of capital allocation is critical to a healthy economy, An effective process of capital allocation is critical to a healthy economy, which a. promotes productivity. b. encourages innovation. c. provides an efficient and liquid market for buying and selling securities. d. All of the above. LO 2 Explain how accounting assists in the efficient use of scare resources. Challenges Facing Financial Accounting Challenges Facing Financial Accounting Challenges Nonfinancial Measurements Forward­looking Information Soft Assets Timeliness 及及及 LO 3 Describe some of the challenges facing accounting. Objectives of Financial Accounting Objectives of Financial Accounting Financial reporting should provide information that: Financial reporting should provide information that: (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 (a) is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. rational investment, credit, and similar decisions. (b) helps present and potential investors and creditors and other users in assessing the (b) helps present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. amounts, timing, and uncertainty of prospective cash receipts. (c) clearly portrays the economic resources of an enterprise, the claims to those (c) clearly portrays the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change resources, and the effects of transactions, events, and circumstances that change its resources and claims to those resources. its resources and claims to those resources. LO 4 List the objectives of financial reporting. Objectives of Financial Accounting Objectives of Financial Accounting Review All o f th e fo llo win g a re o b je c tive s o f fina n c ia l re p o rting A ll o e xc e p t to p ro vid e info rm a tio n a. About enterprise resources, claims to those resources, and changes in them. b. That is useful in investment and credit decisions. c. About the management and major shareholders of an enterprise. d. That is useful in assessing cash flow prospects. LO 4 List the objectives of financial reporting. Need to Develop Standards Need to Develop Standards Need Various users need financial information The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Financial Statements Balance Sheet Income Statement Statement of Stockholders’ Equity Statement of Cash Flows Note Disclosure Generally Accepted Generally Accounting Principles (GAAP) (GAAP) LO 5 Explain the need for accounting standards. Parties Involved in Standard Setting Parties Involved in Standard Setting Parties Four organizations: Securities and Exchange Commission (SEC) American Institute of Certified Public Accountants (AICPA) Financial Accounting Standards Board (FASB) International Accounting Standards Board (IASB) LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Securities and Exchange Commission Securities and Exchange Commission Es ta b lis h e d b y fe d e ra l g o ve rn m e n t Ac c o untin g a n d re p o rting fo r p u b lic c o m p a nie s Securities Act of Securities Act of Securities Act of 1933 1933 Securities Act of Securities Act of 1934 1934 En c o u ra g e d p riva te s ta nd a rd ­s e tting b o d y S EC re q u ire s p u b lic c o m p a nie s to a d h e re to G AAP S EC O ve rs ig h t En fo rc e m e n t Auth o rity LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role American Institute of CPAs American Institute of CPAs American Na tio na l p ro fe s s io na l o rg a n iza tio n Es ta b lis h e d th e fo llo wing : Committee on Committee on Accounting Procedures Accounting Procedures Accounting Principles Accounting Principles Board Board 1939 to 1959 1959 to 1973 Issued 51 Accounting Research Bulletins (ARBs) Issued 31 Accounting Principle Board Opinions (APBOs) Problem-by-problem approach failed Wheat Committee recommendations adopted in 1973 http://www.aicpa.org/ LO 6 Financial Accounting Standards Board Financial Accounting Standards Board Financial Wheat Committee’s recommendations resulted in the creation of a the Financial Accounting Standards Board in 1973. Financial Accounting Financial Accounting Foundation Foundation Selects members of the FASB Funds their activities Exercises general oversight. Financial Accounting Financial Accounting Standards Board Standards Board Mission to establish and improve standards of financial accounting and reporting. Financial Accounting Financial Accounting Standards Advisory Standards Advisory Council Council 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 Financial Accounting Standards Board Mis s io ns is to e s ta b lis h a nd im p ro ve s ta n d a rd s o f fin a nc ia l Mis a c c o u nting a nd re p o rting . Diffe re n c e s b e twe e n FAS B a n d AP B in c lud e : Smaller Membership Full­time, Remunerated Membership Greater Autonomy Increased Independence Broader Representation http://www.fasb.org/ LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Financial Accounting Standards Board Financial Accounting Standards Board Review T h e firs t s te p ta ke n in th e e s ta b lis h m e nt o f a typ ic a l FAS B s ta te m e n t is a. The board conducts research and analysis and a discussion memorandum is issued. b. A public hearing on the proposed standard is held. c. The board evaluates the research and public response and issues an exposure draft. d. 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 Due Process Due Process FAS B re lie s o n two b a s ic p re m is e s : FAS 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 LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Types of Pronouncements Types of Pronouncements Is s ue d b y th e FAS B: Is Standards, Interpretations, and Staff Positions. Financial Accounting Concepts Emerging Issues Task Force Statements LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Types of Pronouncements Types of Pronouncements Types 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) LO 6 Identify the major policy-setting bodies and their LO role in the standard-setting process. role Changing Role of AICPA 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. LO 6 Identify the major policy-setting bodies and 6 LO LO their role in the standard-setting process. role Generally Accepted Accounting Principles Generally Accepted Accounting Principles Generally T h o s e p rinc ip le s th a t h a ve substantial authoritative support. Ma jo r s o u rc e s o f G AAP a re : FASB Standards, Interpretations, and Staff Positions APB Opinions AICPA Accounting Research Bulletins 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 Generally Accepted Accounting Principles Generally Illustration 1-4 GAAP Documents 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 Issues in Financial Reporting Issues Standard Setting in a Political Environment Ac c o un tin g s ta n d a rd s a re a s m uc h a p ro d u c t o f p o litic a l a c tio n a s th e y a re o f c a re ful lo g ic o r e m p iric a l find in g s . LO 8 Describe the impact of user groups on the rule-making process. LO Standard Setting Standard Setting Business Entities Business Entities CPAs and CPAs and Accounting Firms Accounting Firms AICPA (AcSEC) AICPA (AcSEC) Academicians Academicians Investing Public Investing Public User Groups that Influence Accounting Standards Financial Financial Community Community FASB FASB FASB Preparers Preparers (e.g., FEI) (e.g., FEI) Government Government (SEC, IRS, other (SEC, IRS, other aagencies) gencies) Industry Industry Associations Associations Accounting standards, interpretations, and bulletins LO 8 Describe the impact of user groups on the rule-making process. LO Issues in Financial Reporting Issues in Financial Reporting Review: All those who serve on the FASB must be Certified Public All those who serve on the FASB must be Certified Public Accountants. False LO 8 Describe the impact of user groups on the rule-making process. LO Issues in Financial Reporting Issues in Financial Reporting Issues Expectation Gap Wh a t th e p ub lic th in ks a c c o u nta n ts s h o u ld d o vs . wh a t a c c o u nta n ts th in k th e y c a n d o . Difficult to close Sarbanes­Oxley Act (2002) Public Company Accounting Oversight Board (PCAOB) LO 8 Describe the impact of user groups on the rule-making process. LO Issues in Financial Reporting Issues in Financial Reporting Issues International Accounting Standards T wo s e ts o f s ta nd a rd s a c c e p te d fo r in te rn a tio na l us e : 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. LO 8 Describe the impact of user groups on the rule-making process. LO Issues in Financial Reporting Issues in Financial Reporting Issues 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 (e) FAF (i) CPA (b) CAP (f) FASAC (j) FASB (c) ARB (g) SOP (k) SEC (d) APB (h) GAAP (l) IASB LO 9 Understand issues related to ethics and financial accounting. LO Issues in Financial Reporting Issues in Financial Reporting Issues Ethics in the Environment of Financial Accounting In a c c o un tin g , we fre q u e ntly e n c o u nte r e th ic a l d ile m m a s . 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. 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. ...
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