Classified income statement and classified balance

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Classified income statement and classified balance sheet Defined several types of asset, liability, equity, revenue, and expense accounts Creating financial statements from different accounts Solving Accounting Equations Introduction to Ratios The remaining sections of Chapter 1 describe the current U.S. regulatory environment for accounting 1-70 What is GAAP? There are a multitude of possible ways to determine when revenue should be reported and how to appropriately record expenses The set of acceptable accounting methods is called Generally Accepted Accounting Principles (more commonly known as GAAP ) GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions.
36 1-71 Who Determines the Accounting Rules? GAAP is established by both tradition, common practices, and through three organizations Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) Public Company Accounting Oversight Board (PCAOB) Other parties influence accounting rules through lobbying and political clout Publicly-traded companies (Management / Directors) Accounting firms (Auditors) Security analysts Investors / pension plans / insurance companies / banks 1-72 Development of Accounting Regulations After the stock market crash of 1929, the federal government began to regulate accounting and auditing Prior to 1933, the accounting profession was regulated primarily by states. State regulation was lax and led to many problems. For example, companies often used different methods of reporting the same transaction, making it difficult to compare the relative performance of two companies Companies also often did not disclose their accounting methods, making it difficult to figure out how they calculated their net income
37 1-73 Important Laws which establish the Accounting Regulation Process Securities Act of 1933 Securities and Exchange Act of 1934 Regulation FD (adopted in 2000) Sarbanes-Oxley Act of 2002 1-74 Original Legislation for Security Regulation Prior to 1933, regulation of securities was chiefly governed by state laws. Securities Act of 1933 Regulates issuance of new securities Before issuing securities, companies must file a registration statement that includes audited financial statements Securities and Exchange Act of 1934 Regulates secondary trading activities Required companies with > 500 shareholders and > $10 million of assets to file annual 10-K, quarterly 10-Q, and periodic 8-K reports with SEC. Established the Securities and Exchange Commission (SEC)
38 1-75 Role of the SEC in Setting Accounting Standards The SEC is a government agency responsible for overseeing “public” securities markets, including all companies selling stock to the public and all stock exchanges (e.g., NYSE, NASDAQ) Has the power to prescribe accounting practices to be used by all “public” companies, but has delegated this power to the FASB Public Companies must file a Form S-1 (registration statement) prior to an initial public offering (IPO), and thereafter must:

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