Chapter 19th Edition Financial Reporting Intermediate Accounting James D Stice Earl K Stice PowerPoint presented by Douglas Cloud Professor Emeritus of Accounting, Pepperdine University © 2014 Cengage Learning 1-1 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 (continued) 1-2 Definition of Accounting Key features in this definition of accounting: • Accounting information is used in making decisions about how to allocate scarce resources • Although accountants place much emphasis on reporting what has already occurred, this past 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 are stakeholders who make decisions that directly affect the internal operations of the enterprise External users are stakeholders who make decisions concerning their relationship to the enterprise 1-4 Users of Accounting Information 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 a Helps users in determining whether a company’s operations are profitable enough to justify additional funding (continued) 1-5 Users of Accounting Information b Helps users in determining how risky a company’s operations are in order to determine what rate of return is necessary to compensate capital providers for the investment risk 1-6 External Investors Creditors Creditors need need information information about about the the profitability profitability and 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 profitability of of their their investment investment 1-7 General-Purpose Financial Statements The balance sheet reports, as of a certain point in time, the resources of a company (the assets), the company’s obligations (the liabilities), and the equity of the owners (continued) 1-8 General-Purpose Financial Statements The income statement reports, for a certain interval, the net assets generated through business operations (revenues), the net assets consumed (the expenses), and the difference, which is called net income (continued) 1-9 General-Purpose Financial Statements The statement of cash flows reports, for a certain interval, the amount of cash generated and consumed by a company through the following three types of activities: operating, financing, and investing activities (continued) 1-10 Recognition, Measurement, and Reporting 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 Income Statement (continued) 1-45 Recognition, Measurement, and Reporting 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 Statement of cash flows (continued) 1-46 Recognition, Measurement, and Reporting Reporting—Included in the recommended set of general-purpose financial statements are reportsStatement that showofthe following: changes in position at the end of the period • Financialowners’ equity • Earnings (net income) for the period • Cash flows during the period • Investments by and distributions to owners during the period (continued) 1-47 Recognition, Measurement, and Reporting 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 (total non-owner changes in equity) for the period (continued) 1-48 Recognition, Measurement, and Reporting • Comprehensive income differs from earnings in that it includes unrealized gains and losses not recognized in the income statement • In 1998, the FASB required companies to provide, in at least one place, information relating to unrealized gains and losses (continued) 1-49 Traditional Assumptions of the Accounting Model The FASB conceptual framework is influenced by five basic assumptions: Economic entity Going concern Arm’s-length transactions Stable monetary unit Accounting period (continued) 1-50 Impact of the Conceptual Framework • The conceptual framework provides a basis for consistent judgments by all those involved in financial reporting • Related to the conceptual framework is the push toward more “principles-based” accounting standards 1-51 Rules vs Principles In July 2003, the SEC submitted a report to Congress recommending that the FASB move toward “objectives-oriented standards” which would have the following characteristics: • Be based on an improved and consistently applied framework • Clearly state the accounting objective of the standard (continued) 1-52 Rules vs Principles • Provide sufficient detail and structure so that the standard can be operationalized and applied on a consistent basis • • Minimize exceptions from the standard Avoid use of percentage tests that allow financial engineers to achieve technical compliance with the standard while evading the intent of the standard 1-53 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 • The four largest firms are Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers (continued) 1-54 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 (continued) 1-55 Careers in Financial Accounting User User (Analyst, (Analyst, Banker, Banker, Consultant) Consultant) Credit analysts, investment bankers, brokers, and business consultants need a strong working knowledge of accounting as well as strong skills in information technology 1-56 The Importance of Personal Ethics • The flexibility inherent in the assumptions underlying the preparation of financial statements means that an accountant can intentionally deceive financial statement users and still be in compliance with GAAP • Our financial reporting system is of limited value if the accountants who operate the system not have strong personal ethics 1-57 Chapter ₵ The The End End $ 1-58 1-59 ... courses of action.” Statement of the Accounting Principles Board No 4, par 40 (continued) 1-2 Definition of Accounting Key features in this definition of accounting: • Accounting information is used... 1-27 American Accounting Association • • • The American Accounting Association (AAA) is an organization of accounting professors It sponsors national and regional meetings where accounting professors... and comment on accounting standards issues (continued) 1-28 American Accounting Association • • The AAA publishes a number of academic journals, including The Accounting Review and Accounting Horizons