Intermediate accounting 17e stice skousen cengage chapter 01

Stice | Stice | Skousen Intermediate Accounting,17E Financial Reporting PowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine University © 2010 Cengage Learning Definition of Accounting “Accounting is a service activity Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions—in making reasoned choices among alternative courses of action.” Statement of the Accounting Principles Board No 4, par 40 1-2 Key Features of this Definition Accounting— • Provides a vital service in today’s business environment • Is concerned primarily with quantitative financial information that is used in conjunction with qualitative evaluations in making judgments • Information is used in making decisions about how to allocate scarce resources • Information is intended to be useful in making economic decisions about the future 1-3 Users of Accounting Information • Stakeholders are all parties interested in the financial health of a company • Internal users make decisions that directly affect the internal operations of the enterprise • External users make decisions concerning their relationship to the enterprise 1-4 External Funding Management accounting is concerned primarily with financial reporting for internal users, especially management Financial accounting focuses on the development and communication of financial information for external users 1-5 Creditors Creditors need need information information about about the the profitability profitabilityand and stability stability of of the the company company to to decide decide whether whether to to lend lend money money to to the the company company and, and, ifif so, so, what what interest interest rate rate to to charge charge Investors Investors (both (both existing existing stockholders stockholders and and potential potential investors) investors) need need information information concerning concerning the the safety safety and and profitability profitabilityof of their their investment investment 1-6 Financial Reporting The Thebalance balancesheet sheet reports, reports,as asof ofaacertain certain point pointin intime, time,the the resources resourcesof ofaacompany company (the (theassets), assets),the the company’s company’sobligations obligations (the (theliabilities), liabilities),and andthe the equity equityof ofthe theowners owners 1-7 Financial Reporting The Theincome incomestatement statement reports, reports,for foraacertain certain interval, interval,the thenet netassets assets generated generatedthrough through business businessoperations operations (revenues), (revenues),the thenet netassets assets consumed consumed(the (theexpenses), expenses), and andthe thedifference difference(net (net income) income) 1-8 Financial Reporting The Thestatement statementof of cash cash flows flows reports, reports,for foraa certain certaininterval, interval,the the amount amountof ofcash cash generated generatedand andconsumed consumed by byaacompany companythrough through operating, operating,financing, financing,and and investing investingactivities activities 1-9 Financial Reporting Accounting estimates and judgments are outlined in the notes to financial statements 1-10 Qualitative Characteristics of Accounting Information Conservatism Conservatism The concept of conservatism can be summarized as follows: When in doubt, recognize all losses but don’t recognize any gains 1-46 Recognition • Recognition—Taking all the estimates and judgments into one number and using that number to make a journal entry • Recognition Criteria—For an item to be formally recognized, it must meet one of the definitions of the elements of the financial statements – For example, revenue must meet the definition of revenue to be recorded and reported on the income statement • Disclosure—Skipping the journal entry and just relying on the note to convey the information to users 1-47 Measurement Five measurement attributes are: Historical cost Current replacement cost Fair value Net realizable value Present (or discounted) value 1-48 Reporting Included in the recommended set of general-purpose financial statements are reports that show the following: • Financial position at the end of the period • Earnings (net income) for the period • Cash flows during the period • Investments by and distributions to owners during the period • Comprehensive income for the period 1-49 Reporting Comprehensive income differs from earnings in that it includes unrealized gains and losses not recognized in the income statement 1-50 Full Disclosure Principle For financial statements to be most effective, all relevant information should be presented in an unbiased, understandable, and timely manner This is sometimes referred to as the full disclosure principle 1-51 Traditional Assumptions The FASB conceptual framework is influenced by five basic assumptions Economic entity Going concern Arm’s-length transactions Stable monetary unit Accounting period 1-52 Traditional Assumptions of the Accounting Model Economic Economic Entity Entity The business enterprise is viewed as a specific economic entity separate and distinct from its owners and any other business unit 1-53 Traditional Assumptions of the Accounting Model Going Going Concern Concern In the absence of evidence to the contrary, the entity is viewed as a going concern In other words, it is assumed that the enterprise will last indefinitely 1-54 Traditional Assumptions of the Accounting Model Arm’s-Length Arm’s-Length Transactions Transactions Transactions are assumed to occur between independent parties, each of which is capable of protecting its own interests 1-55 Traditional Assumptions of the Accounting Model Stable Stable Monetary Monetary Unit Unit The stable monetary unit assumption allows for the ignoring of changes in the dollar’s purchasing power resulting from inflation 1-56 Traditional Assumptions of the Accounting Model Accounting Accounting Period Period Because accounting information is needed on a timely basis, the life of a business is divided into specific accounting periods, usually one year 1-57 Careers in Financial Accounting Public Public Accounting Accounting Pubic accountants not work for a single business enterprise Rather, they provide a variety of services for many different individuals and business clients 1-58 Careers in Financial Accounting Corporate Corporate Accounting Accounting A large business enterprise employs financial accountants who are primarily concerned with external financial reporting, management accountants who are primarily concerned with internal financial reporting, and tax accountants 1-59 Careers in Financial Accounting User User (Analyst, (Analyst, Banker, Banker, Consultant) Consultant) Many students take accounting in preparation for becoming a user of financial statements Credit analysts, investment bankers, brokers, and business consultants need a strong working knowledge of accounting as well as strong skills in information technology 1-60 ... comment on accounting standards issues (continues) 1-23 American Accounting Association (AAA) • The AAA publishes a number of academic journals, including The Accounting Review and Accounting. .. International Accounting Standards Board (IASB) • Accounting standards issued by the IASB are referred to as International Financial Reporting Standards (IFRSs) if issued since to 2 001 and International Accounting. .. financial accounting standards for state and local government entities 1-14 The Standard-Setting Process • The major functions of the FASB are to study accounting issues and to establish accounting