Financial Accounting and Accounting Standards

Chapter

1Intermediate Accounting, 12th Edition Kieso, Weygandt, and Warfield

Chapter 1-1

Prepared by Coby Harmon, University of California, Santa Barbara

Chapter 1 Learning Objectives1. 2. 3. 4. 5. 6. 7. 8. 9.Chapter 1-2

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 objectives of financial reporting. Explain the need for accounting standards. Identify the major policy-setting bodies and their role in the policystandardstandard-setting process. Explain the meaning of generally accepted accounting principles. Describe the impact of user groups on the standard-setting standardprocess. Understand issues related to ethics and financial accounting.

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Financial Statements and Financial Reporting Accounting and Capital Allocation Challenges Objectives The Need to Develop Standards

Parties I v lved in Parti Inv lv i Standard Setting tandard tting

Generally Accepted Acc unting Principles

Issues in inancial Rep rting ep

Securities and Exchange Commission (SEC) American Institute of Certified Public Accountants (AICPA) Financial Accounting Standards Board (FASB) Governmental Accounting Standards Board (GASB) Changing Role of the AICPA

Political Environment The Expectations Gap International Accounting Standards Ethics

Chapter 1-3

Characteristics of AccountingEssential characteristics of accounting are:(1) the identification, measurement, and communication of financial information about (2) economic entities to (3) interested parties parties.

Chapter 1-4

LO 1 Identify the major financial statements and other means of financial reporting.. reporting.

Characteristics of AccountingEconomic Entity Financial Information Accounting? Identifies and Measures and Communicates Financial StatementsBalance Sheet Income Statement Statement of Cash Flows Statement of Owners or Stockholders Equity Note Disclosures

Additional InformationPresidents letter Prospectuses, SEC Reporting News releases Forecasts Environmental Reports Etc.

GAAPChapter 1-5

Not GAAP

LO 1 Identify the major financial statements and other means of financial reporting.. reporting.

Characteristics of Accounting

ReviewWhat is the purpose of information presented in notes to the financial statements?a. To provide disclosure required by generally accepted accounting principles. b. To correct improper presentation in the financial statements. c. To provide recognition of amounts not included in the totals of the financial statements. d. To present managements responses to auditor comments.Chapter 1-6

LO 1 Identify the major financial statements and other means of financial reporting.. reporting.

Accounting and Capital AllocationResources are limited. Efficient use of resources often determines whether a business thrives.

Illustration 1-1 Capital 1Allocation Process

Financial ReportingInformation to help users with capital allocation decisions.

UsersInvestors, creditors, and other users

Capital AllocationThe process of determining how and at what cost money is allocated among competing interests.

Chapter 1-7

LO 2 Explain how accounting assists in the efficient use of scare resources.

Accounting and Capital Allocation

ReviewAn effective process of capital allocation is critical to a healthy economy, whicha. c. promotes productivity. provides an efficient and liquid market for buying and selling securities. b. encourages innovation.

d. All of the above.

Chapter 1-8

LO 2 Explain how accounting assists in the efficient use of scare resources.

Challenges Facing Financial AccountingNon-financial Measurements Forward-looking Information Soft Assets Timeliness

Chapter 1-9

LO 3 Describe some of the challenges facing accounting.

Objectives of Financial AccountingFinancial reporting should provide information:(a) that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. (b) to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. (c) about 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 1-10

LO 4 List the objectives of financial reporting.

Objectives of Financial Accounting

ReviewAll of the following are objectives of financial reporting except to provide informationa. About enterprise resources, claims to those resources, and changes in them. About the management and major shareholders of an enterprise.

b. That is useful in investment and credit decisions. c.

d. That is useful in assessing cash flow prospects.

Chapter 1-11

LO 4 List the objectives of financial reporting.

Need to Develop StandardsVarious users need financial information Financial StatementsBalance 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 epted Accounting Principles ccounting nting (GAAP)

Chapter 1-12

LO 5 Explain the need for accounting standards.

Parties Involved in Standard SettingFour organizations:

Securities and Exchange Commission (SEC) American Institute of Certified Public Accountants (AICPA) Financial Accounting Standards Board (FASB) Government Accounting Standards Board (GASB)

Chapter 1-13

LO 6 Identify the major policy-setting bodies and policytheir role in the standard-setting process. standard-

Securities and Exchange CommissionEstablished by federal government Accounting and reporting for public companies

Securities Act of 1933

Securities Act of 1934

Encouraged private standard-setting body EC requires public companies to adhere to GAA EC versight Enforcement AuthorityChapter 1-14

LO 6 Identify the major policy-setting bodies and policytheir role in the standard-setting process. standard-

American Institute of CPAsNational 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 1-15

http://www.aicpa.org/

LO 6

Financial Accounting Standards BoardWheat Committees recommendations res lted in the creation of a . the inancial ccounting tandards oard in 1 Financial ccounting Foundation Financial Accounting Standards BoardFinancial Accounting Standards Advisory CouncilChapter 1-16

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.

LO 6 Identify the major policy-setting bodies and policytheir role in the standard-setting process. standard-

Financial Accounting Standards BoardMissions is to establish and improve standards of financial accounting and reporting. Differences between FASB and APB include:Smaller Membership Full-time, Remunerated Membership Greater Autonomy Increased Independence Broader Representationhttp://www.fasb.org/

Chapter 1-17

LO 6 Identify the major policy-setting bodies and policytheir role in the standard-setting process. standard-

Financial Accounting Standards Board

ReviewThe first step taken in the establishment of a typical FASB statement isa. The board conducts research and analysis and a discussion memorandum is issued. The board evaluates the research and public response and issues an exposure draft.

b. A public hearing on the proposed standard is held. c.

d. Topics are identified and placed on the boards agenda.Chapter 1-18

LO 6 Identify the major policy-setting bodies and policytheir role in the standard-setting process. standard-

Due ProcessFASB relies on two basic premises:(1) (2)

Responsive to entire economic community Operate in full view of the public

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 StandardChapter 1-19

LO 6 Identify the major policy-setting bodies and policytheir role in the standard-setting process. standard-

Types of PronouncementsIssued by the FASB:Standards, Interpretations, and Staff Positions. Financial Accounting Concepts Emerging Issues Task Force Statements

Chapter 1-20

LO 6 Identify the major policy-setting bodies and policytheir role in the standard-setting process. standard-

Governmental Accounting Standards BoardCreated in 1984 to address state and local governmental reporting issues. Financial Accounting Foundation Financial Accounting Standards Board Governmental Accounting Standards Board

Financial Accounting Standards Advisory Council

Gover mental Accounting Standards Standar s Advisor Council

Chapter 1-21

http://www.gasb.org/

LO 6

Generally Accepted Accounting PrinciplesThose principles that have substantial authoritative support. Major sources of GAAP are:FASB Standards, Interpretations, and Staff Positions APB pinions AICPA Accounting esearch Bulletins

Chapter 1-22

LO 7 Explain the meaning of generally accepted accounting principles.

House of GAAPAICPA Accounting Interpretations FASB Implementation Guides Category D (Least Authoritati e) FASB Emerging Issues Task Force AICPA AcSEC Practice Bulletins Recognized Industry Practices

Category C FASB Technical Bulletins AICPA Industry Audit and Accounting Guides Category B FASB Statements, Interpretations, and Staff PositionsChapter 1-23

AICPA Statements of Position

APB Opinions

CAP Accounting Research BulletinsLO 7

Category A (Most Authoritati e)

Generally Accepted Accounting Principles

ReviewWhich of the following accounting pronouncements is the most authoritative?a. c. FASB Statement of Financial Accounting Concepts. AICPA Accounting Principles Board Opinion. b. FASB Technical Bulletins. d. AICPA Statement of Position.

Chapter 1-24

LO 7 Explain the meaning of generally accepted accounting principles.

Issues in Financial ReportingStandard Setting in a Political EnvironmentAccounting standards are as much a product of political action as they are of careful logic or empirical findings.

Chapter 1-25

LO 8 Describe the impact of user groups on the standard-setting process. standard-

Standard Setting Business Entities CPAs and Accounting Firms

Illustration 1-5 User 1Groups that Influence Accounting Standards

Financial Community Preparers(e.g., FEI)

AICPA (AcSEC)

FASB

Academicians

Go ernment(SEC, IRS, other agencies)

In esting Public

Industry Associations

Accounting standards, interpretations, and bulletinsChapter 1-26

LO 8 Describe the impact of user groups on the standard-setting process. standard-

Issues in Financial Reporting Review:All those who serve on the FASB must be Certified Public Accountants.

False

Chapter 1-27

LO 8 Describe the impact of user groups on the standard-setting process. standard-

Issues in Financial ReportingExpectation GapWhat the public thinks accountants should do vs. what accountants think they can do.Difficult to close Sarbanes-Oxley Act (2002) Public Company Accounting Oversight Board (PCAOB)

Chapter 1-28

LO 8 Describe the impact of user groups on the standard-setting process. standard-

Issues in Financial ReportingInternational Accounting StandardsTwo 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 1-29

LO 8 Describe the impact of user groups on the standard-setting process. standard-

Issues in Financial ReportingEthics in the Environment of Financial AccountingIn accounting, we frequently encounter ethical dilemmas.GAAP does not always provide an answer Doing the right thing is not always easy or obvious

Chapter 1-30

LO 9 Understand issues related to ethics and financial accounting.

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Chapter 1-31