Chapter 1 - Financial accounting and accounting standards. After studying this chapter, you should be able to: Explain how accounting makes it possible to use scarce resources more efficiently, explain the meaning of “stakeholder” and identify key stakeholders in financial reporting, explaining what is at stake for each one, identify the objective of financial reporting,...
Financial Accounting and Accounting Financial Accounting and Accounting Standards Standards Chapter Intermediate Accounting, 12th Edition Kieso, Weygandt, and Warfield Chapter 1-1 Prepared by Coby Harmon, University of California, Santa Barbara Chapter 1 Learning Objectives Chapter 1 Learning Objectives 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 policysetting bodies and their role in the standardsetting process Explain the meaning of generally accepted accounting principles Describe the impact of user groups on the standardsetting process Understand issues related to ethics and financial accounting Chapter 1-2 Financial Accounting and Accounting Standards Financial Accounting and Accounting Standards Financial FinancialStatements Statements and andFinancial Financial Reporting Reporting Accounting and Capital Allocation Challenges Objectives The Need to Develop Standards Chapter 1-3 Parties PartiesInvolved Involvedinin Standard StandardSetting Setting 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 Generally GenerallyAccepted Accepted Accounting Accounting Principles Principles Issues IssuesininFinancial Financial Reporting Reporting Political Environment The Expectations Gap International Accounting Standards Ethics Characteristics of Accounting Characteristics of Accounting Essential characteristics of accounting are: (1) the identification, measurement, and communication of financial information about (2) economic entities to (3) interested interested parties parties Chapter 1-4 LO 1 Identify the major financial statements and other means of financial reporting Characteristics of Accounting Characteristics of Accounting Economic Entity Financial Statements Additional Information Financial Information Balance Sheet President’s letter Income Statement Prospectuses, Statement of Cash Flows SEC Reporting and Statement of Owners’ or Stockholders’ Equity News releases Measures Note Disclosures Accounting? Identifies and Communicates Environmental Reports Etc GAAP Chapter 1-5 Forecasts Not GAAP LO 1 Identify the major financial statements and other means of financial reporting Characteristics of Accounting Characteristics of Accounting Review What is the purpose of information presented in notes to the financial statements? a b c d Chapter 1-6 To provide disclosure required by generally accepted accounting principles To correct improper presentation in the financial statements To provide recognition of amounts not included in the totals of the financial statements To present management’s responses to auditor comments LO 1 Identify the major financial statements and other means of financial reporting Accounting and Capital Allocation Accounting and Capital Allocation Resources are limited. Efficient use of resources often determines whether a business thrives Illustration 11 Capital Illustration 11 Allocation Process Financial Financial Reporting Reporting Information to help users with capital allocation decisions Chapter 1-7 Users Users Investors, creditors, and other users Capital CapitalAllocation Allocation The process of determining how and at what cost money is allocated among competing interests LO 2 Explain how accounting assists in the efficient use of scare resources Accounting and Capital Allocation Accounting and Capital Allocation Review An effective process of capital allocation is critical to a healthy economy, which Chapter 1-8 a promotes productivity b encourages innovation c provides an efficient and liquid market for buying and selling securities d All of the above LO 2 Explain how accounting assists in the efficient use of scare resources Challenges Facing Financial Accounting Challenges Facing Financial Accounting Nonfinancial Measurements Forwardlooking Information Soft Assets Timeliness Chapter 1-9 LO 3 Describe some of the challenges facing accounting Objectives of Financial Accounting Objectives of Financial Accounting Financial Financialreporting reportingshould shouldprovide provideinformation: information: (a) that is useful to present and potential investors and creditors and other users in (a) that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. making rational investment, credit, and similar decisions. (b) to help present and potential investors and creditors and other users in (b) to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. assessing the amounts, timing, and uncertainty of prospective cash receipts. (c) about the economic resources of an enterprise, the claims to those resources, and (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 the effects of transactions, events, and circumstances that change its resources and claims to those resources. and claims to those resources. Chapter 1-10 LO 4 List the objectives of financial reporting Financial Accounting Standards Board Financial Accounting Standards Board Missions is to establish and improve standards of financial accounting and reporting. Differences between FASB and APB include: Smaller Membership Fulltime, Remunerated Membership Greater Autonomy Increased Independence Broader Representation Chapter 1-17 http://www.fasb.org/ LO 6 Identify the major policysetting bodies and their role in the standardsetting process Financial Accounting Standards Board Financial Accounting Standards Board Review The first step taken in the establishment of a typical FASB statement is Chapter 1-18 a The board conducts research and analysis and a discussion memorandum is issued b A public hearing on the proposed standard is held c The board evaluates the research and public response and issues an exposure draft d Topics are identified and placed on the board’s agenda LO 6 Identify the major policysetting bodies and their role in the standardsetting process Due Process Due Process FASB relies on two basic premises: Responsive to entire economic community (2) Operate in full view of the public (1) 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 Standard Chapter 1-19 LO 6 Identify the major policysetting bodies and their role in the standardsetting process Types of Pronouncements Types of Pronouncements Issued by the FASB: Standards, Interpretations, and Staff Positions Financial Accounting Concepts Emerging Issues Task Force Statements Chapter 1-20 LO 6 Identify the major policysetting bodies and their role in the standardsetting process Governmental Accounting Standards Board Governmental Accounting Standards Board Created in 1984 to address state and local governmental reporting issues. Financial Accounting Financial Accounting Foundation Foundation Chapter 1-21 Financial Accounting Financial Accounting Standards Board Standards Board Governmental Governmental Accounting Standards Accounting Standards Board Board Financial Accounting Financial Accounting Standards Advisory Council Standards Advisory Council Governmental Accounting Governmental Accounting Standards Advisory Standards Advisory Council Council http://www.gasb.org/ LO 6 Generally Accepted Accounting Principles Generally Accepted Accounting Principles Those principles that have substantial authoritative support. Major sources of GAAP are: FASB Standards, Interpretations, and Staff Positions APB Opinions AICPA Accounting Research Bulletins Chapter 1-22 LO 7 Explain the meaning of generally accepted accounting principles House of GAAP House of GAAP AICPA Accounting Interpretations FASB Implementation Guides Recognized Industry Practices Category D (Least Authoritative) FASB Emerging Issues Task Force AICPA AcSEC Practice Bulletins Category C FASB Technical Bulletins AICPA Industry Audit and Accounting Guides AICPA Statements of Position Category B FASB Statements, FASB Statements, Interpretations, and Staff Interpretations, and Staff Positions Positions Chapter 1-23 APB Opinions APB Opinions CAP Accounting Research CAP Accounting Research Bulletins Bulletins Category A (Most Authoritative) LO 7 Generally Accepted Accounting Principles Generally Accepted Accounting Principles Review Which of the following accounting pronouncements is the most authoritative? Chapter 1-24 a FASB Statement of Financial Accounting Concepts b FASB Technical Bulletins c AICPA Accounting Principles Board Opinion d AICPA Statement of Position LO 7 Explain the meaning of generally accepted accounting principles Issues in Financial Reporting Issues in Financial Reporting Standard Setting in a Political Environment Accounting 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 standardsetting process. Standard Setting Business BusinessEntities Entities CPAs CPAsand and Accounting AccountingFirms Firms AICPA AICPA(AcSEC) (AcSEC) Academicians Academicians Investing InvestingPublic Public Illustration 15 User Groups Illustration 15 that Influence Accounting Standards Financial Financial Community Community FASB FASB Preparers Preparers (e.g., (e.g.,FEI) FEI) Government Government (SEC, (SEC,IRS, IRS,other other agencies) agencies) Industry Industry Associations Associations Accounting standards, interpretations, and bulletins Chapter 1-26 LO 8 Describe the impact of user groups on the standardsetting process. Issues in Financial Reporting 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 standardsetting process. Issues in Financial Reporting Issues in Financial Reporting Expectation Gap What the public thinks accountants should do vs. what accountants think they can do Difficult to close SarbanesOxley Act (2002) Public Company Accounting Oversight Board (PCAOB) Chapter 1-28 LO 8 Describe the impact of user groups on the standardsetting process. Issues in Financial Reporting Issues in Financial Reporting International Accounting Standards Two 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 standardsetting process. Issues in Financial Reporting Issues in Financial Reporting Ethics in the Environment of Financial Accounting In 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. Copyright Copyright Copyright © 2006 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 1-31 ... Accounting Procedures Chapter 1- 15 Accounting Principles Accounting Principles Board Board 19 39 to 19 59 19 59 to 19 73 Issued 51 Accounting Research Bulletins (ARBs) Issued 31 Accounting Principle... business thrives Illustration 1 1 Capital Illustration 1 1 Allocation Process Financial Financial Reporting Reporting Information to help users with capital allocation decisions Chapter 1- 7 Users Users Investors,... All of the following are objectives of financial reporting except to provide information Chapter 1- 11 a About enterprise resources, claims to those resources, and changes in them b That is useful in investment and credit decisions