CHAPTER 1 Accounting—Present and Past McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.,...

CHAPTER 1

Accounting—Present and Past

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

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What is Accounting?

Accounting is the process of:

Identifying

Measuring

Communicating

>Economic

information

about an entity

For decisions

and informed

judgments


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Users and Uses of Accounting Information

User Decision/Informed Judgment MadeManagement Planning, directing and controllingInvestors Assessing amounts, timing, and

uncertainty of future cash returns on their investment

Creditors Assessing probability of collection and the risk of late (or non-) payment

Employees Planning for retirement and future job prospects

Securities and Exchange Commission

Reviewing for compliance of all required information


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Financial Accounting

Financial accounting generally refers to the

process that results in the preparation and reporting of financial statements for

an entity.

Financial accounting is primarily externally

oriented and concerned with the historical results

of an entity’s performance.


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Managerial Accounting/Cost Accounting

Managerial accounting is concerned with the use of

economic and financial information to plan and

control many of the activities of the entity and

to support the management decision-

making process.

Cost accounting relates to the determination and

accumulation of product, process, or service costs.


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Auditing—Public Accounting

Public accounting firms and individual Certified

Public Accountants (CPAs) provide auditing services and issue an independent

auditor’s report.

An independent auditor’s report usually contains three brief paragraphs and states whether the financial statements are prepared in conformity with generally accepted accounting principles. An auditor’s report can be unqualified (a “clean”

opinion) or qualified.


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Internal Auditing

Internal auditors are professional accountants

who perform functions much like those of an

external auditor. However, internal auditors are employed in industry

rather than public accounting.


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Governmental and Not-for-Profit Accounting

Governmental units (e.g., municipal, state, and

federal agencies) and not-for-profit entities (e.g.,

universities, hospitals, and religious organizations)

require the same accounting functions to be

performed as do other accounting entities.


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Income Tax Accounting

Tax practitioners often develop specialties in the

taxation of individuals, partnerships, corporations,

trusts and estates, or international tax law

issues.


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How Has Accounting Developed?

Mesopotamians record tax receipts

on clay tablets.

3000 B.C.


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Luca Pacioli published first textbook describing a comprehensive double-

entry bookkeeping system.

3000 B.C. 1494


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The industrial revolution of the 19th century generated the need for large amounts of

capital to finance the enterprises that supplanted individual craftsmen.

This need resulted in the corporate form of organization and the need to provide

investors with reports showing the financial position and the results of operations.

3000 B.C. 1494 1800’s


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Accounting professionals in this country organized themselves in the early 1900’s and worked hard to

establish certification laws, standardized audit procedures, and other attributes of a profession.

3000 B.C. 1494 1800’s 1900’s


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The Securities Act of 1933 and the Securities Exchange Act of 1934 gave the Securities and Exchange Commission (SEC)

the authority to establish accounting principles for companies whose securities had to be registered with the SEC.

Between 1932 to 1934 the American Institute Accountants and the New York Stock Exchange agreed on five broad

principles of accounting.

3000 B.C. 1494 1800’s 1900’s 1932to

1934

1933&

1934


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The Committee on Accounting Procedure of the American Institute of Accountants issued 51 Accounting Research

Bulletins that dealt with accounting principles.

Although the SEC has the authority to establish accounting principles, the standard-setting process has been delegated to

other organizations over the years.

3000 B.C. 1494 1800’s 1900’s 1932to

1934

1933&

1934

1939to

1959


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The APB ultimately issued 39 Opinions on serious accounting issues, but it failed to develop a conceptual underpinning for

accounting.

In 1959, the Accounting Principles Board (APB) replaced the Committee on Accounting Procedure as the standard-setting

body.

3000 B.C. 1494 1800’s 1900’s 1932to

1934

1933&

1934

1939to

1959

1959


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The Financial Accounting Foundation (FAF) was created and established the Financial Accounting Standards Board (FASB)

as the authoritative standard-setting body within the accounting profession.

The FASB has issued 145 Statements of Financial Accounting Standards that have established standards of accounting and

reporting for particular issues.

3000 B.C. 1494 1800’s 1900’s 1932to

1934

1933&

1934

1939to

1959

19731959


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The Sarbanes-Oxley Act of 2002 creates a five-member Public Company Accounting Oversight Board (PCAOB) which

has the authority to set and enforce auditing, attestation, quality control, and ethics standards for public companies.

3000 B.C. 1494 1800’s 1900’s 1932to

1934

1933&

1934

1939to

1959

1973 20021959


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Managerial/Cost Accounting

Cost Accounting Standards Board (CASB)

Auditing/Public Accounting

Auditing Standards Board (part of AICPA)

Government and Not-for-Profit

Governmental Accounting Standards

Board (GASB)

Standards for Other Types of Accounting


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International Accounting Standards

The International Accounting Standards

Committee (IASC) seeks methods of

providing comparability between

financial statements prepared according to

the differing accounting standards of its member nations.


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Ethics and the Accounting Profession

Independence

Integrity

Objectivity

Competence


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The Conceptual Framework

Statements of Financial Accounting Concepts (SFACs) describe concepts and

relationships that underlie financial accounting standards.

1. Objectives of Financial Reporting of Business Enterprises

2. Qualitative Characteristics of Accounting Information

3. Elements of Financial Statements of Business Enterprises

4. Objectives of Financial Reporting of Nonbusiness Organizations

5. Recognition and Measurement in Financial Statements

6. Elements of Financial Statements

7. Using Cash Flow Information and Present Value in Accounting Measurement


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End of Chapter 1

CHAPTER 1 Accounting—Present and Past McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.,...

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