1 - 1
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.1 - 1
Environment and Theoretical Structure of Financial Accounting
1
1 - 2
Financial Accounting Environment
Profit-orientedcompanies
Not-for-profitentities
Households
Providers ofFinancial
InformationExternal
User Groups
Investors
Creditors
Employees
Labor unions
Customers
Suppliers
Governmentagencies
Financialintermediaries
Relevant
FinancialInformation
1 - 3
Financial Accounting Environment
Relevant financial information is provided primarily through financial statements and related disclosure notes. Balance Sheet Income Statement Statement of Cash Flows Statement of Shareholders’ Equity
1 - 4
The Economic Environment and Financial Reporting
A sole proprietorshipis owned by a
single individual.
A sole proprietorshipis owned by a
single individual.
A partnership isowned by two ormore individuals.
A partnership isowned by two ormore individuals.
A corporation is ownedby shareholders.
A corporation is ownedby shareholders.
1 - 5
Investment-Credit Decisions ─ A Cash Flow Perspective
Shareholders Receive
Cash
1. Dividends2. Sale of Stock
Creditors Receive
Cash
1. Interest2. Loan Repayment
Accounting information should help investors and creditors evaluate the amount, timing, and uncertainty of the enterprise’s future
cash flows.
1 - 6
Cash versus Accrual Accounting
Cash Basis Accounting Revenue is recognized when cash is received. Expenses are recognized when cash is paid.
OROROR
OR
Accrual AccountingRevenue is recognized when earned.
Expenses are recognized when incurred.
1 - 7
Cash versus Accrual Accounting
Cash Basis Accounting Carter Company has sales on account totaling
$100,000 per year for three years. Carter collected $50,000 in the first year and $125,000 in the second and third years. The company prepaid $60,000 for
three years’ rent in the first year. Utilities are $10,000 per year, but in the first year only $5,000 was paid.
Payments to employees are $50,000 per year.
Let’s look at the cash flows.
1 - 8
Cash versus Accrual Accounting
Cash Basis Accounting
Cash flows in any one year may notbe a predictor of future cash flows.
1 - 9
Cash versus Accrual Accounting
Accrual Basis Accounting
Net Income is considered a better indicator of future cash flows.
1 - 10
The Development of Financial Accounting and Reporting Standards
Concepts, principles, and
procedures weredeveloped to meet the
needs of external users (GAAP).
1 - 12
Current Standard Setting
• Supported by the Financial Accounting Foundation
• Five full-time, independent voting members• Answerable only to the Financial Accounting
Foundation• Members not required to be CPAs
Financial Accounting Standards Board
1 - 13
FASB Accounting Standards Codification
The objective of the codification project was to integrate and organize by topics all relevant accounting pronouncements
into a searchable, online database.
1 - 14
Establishment of Accounting StandardsA Political Process
GAAP
Internal RevenueServicewww.irs.gov
American Instituteof CPAswww.aicpa.org
Securities andExchangeCommissionwww.sec.gov
AmericanAccountingAssociation www.aaa-edu.org
GovernmentalAccountingStandards Boardwww.gasb.org
Financial ExecutivesInternationalwww.fei.org
International Accounting Standards Boardwww.iasb.org
1 - 15
FASB’s Standard-Setting Process Board receives recommendations for projects. Board votes to add the project to its agenda . Board deliberates the issues at a series of public
meetings. Board issues an Exposure Draft (ED). Board holds a public roundtable meeting on the ED. Staff analyzes feedback and the Board re-deliberates
the proposed revisions at public meetings . Board issues a Standards Update describing
amendments to the Codification.
1 - 16
Toward Global Accounting Standards
The main objective of the International Accounting Standards Board (IASB) is to
develop a single set of high quality, understandable and enforceable global
accounting standards to help participants in the world’s capital markets and other users
make economic decisions.
1 - 17
Role of the Auditor
Auditors serve as independent intermediaries to help insure that
management has appropriately applied GAAP in preparing the company’s
financial statements.
1 - 18
Financial Reporting Reform
As a result of numerous financial scandals, Congress passed the Public Company Public Company
Accounting Reform and Investor Protection Accounting Reform and Investor Protection Act of 2002Act of 2002, (Sarbanes-Oxley Act). The goal
was to restore credibility and investor confidence in the financial reporting process.
1 - 19
A Move Away from Rules-Based Standards?
• Rules based accounting standards vs. objectives-oriented approach
• Objectives oriented (principles-based) approach stressed professional judgment
1 - 20
Ethics in Accounting
• For financial information to be useful, it should possess the fundamental decision-specific qualities of relevance and faithful representation.
• Management may be under pressure to report desired results and ignore or bend existing rules.
1 - 22
Evolution of Accounting Principles The Move Toward Fair Value
Fair value is the price that would be received to sell assets or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.
Market Approaches
Income Approaches
CostApproaches