Financial Accounting and Accounting Standards

5/25/2018 Financial Accounting and Accounting Standards

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Chapter1-1

Financial Accounting and

Accounting Standards

Chapter1

Intermediate Accounting,12th Edition

Kieso, Weygandt, and Warfield

Prepared by Coby Harmon, University of California, Santa Barbara


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Chapter1-2

1. Identify the major financial statements and other means offinancial reporting.

2. Explain how accounting assists in the efficient use of scarceresources.

3. Describe some of the challenges facing accounting.

4. List the objectives of financial reporting.5. Explain the need for accounting standards.

6. Identify the major policy-setting bodies and their role in thestandard-setting process.

7. Explain the meaning of generally accepted accounting principles.

8. Describe the impact of user groups on the standard-settingprocess.

9. Understand issues related to ethics and financial accounting.

Chapter 1 Learning Objectives


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Chapter1-3

Financial Accounting and Accounting Standards

Financial Statements

and Financial

Reporting

Accounting andCapital Allocation

Challenges

Objectives

The Need to

Develop Standards

Parties Involved in

Standard Setting

Generally Accepted

Accounting

Principles

Issues in Financial

Reporting

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

Political Environment

The Expectations

Gap

International

Accounting

Standards

Ethics


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Chapter1-4 LO 1 Identify the major financial statements and other means of financial reporting..

Characteristics of Accounting

Essential characteristics of accounting are:

(1) the identification, measurement, andcommunicationof financial information about

(2) economic entities to

(3) interested parties.


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Chapter1-5

FinancialInformation

Accounting?

Identifies

and

Measures

and

Communicates

Balance Sheet

Income Statement

Statement of CashFlows

Statement ofOwners or

Stockholders Equity

Note Disclosures

Presidents letter

Prospectuses,

SEC Reporting

News releases

Forecasts

Environmental

ReportsEtc.

GAAP Not GAAP

Financial Statements Additional InformationEconomic Entity


LO 1 Identify the major financial statements and other means of financial reporting..


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Chapter1-6 LO 1 Identify the major financial statements and other means of financial reporting..

What is the purpose of information presented innotes to the financial statements?

a. To provide disclosure required by generallyaccepted accounting principles.

b. To correct improper presentation in the financialstatements.

c. To provide recognition of amounts not included inthe totals of the financial statements.

d. To present managements responses to auditorcomments.

Review



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Chapter1-7

Accounting and Capital Allocation

Resources are limited. Efficient use of resources oftendetermines whether a business thrives.

Financial

Reporting

Information to help

users with capital

allocation decisions.

Users

Investors, creditors,

and other users

Capital 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.

Illustration 1-1 CapitalAllocation Process


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Chapter1-8

An effective process of capital allocation is critical to ahealthy economy, which

a. promotes productivity.b. encourages innovation.

c. provides an efficient and liquid market for buying

and selling securities.

d. All of the above.

Accounting and Capital Allocation

LO 2 Explain how accounting assists in the efficient use of scare resources.

Review


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Chapter1-9

Challenges Facing Financial Accounting

Non-financial Measurements

Forward-looking Information

Soft Assets

Timeliness

LO 3 Describe some of the challenges facing accounting.


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Chapter1-10

Financial reporting should provide information:

(a) that is useful to present and potential investors andcreditors and other users in making rational investment,credit, and similar decisions.

(b) to help present and potential investors and creditors andother users in assessing the amounts, timing, anduncertainty of prospective cash receipts.

(c) about the economic resources of an enterprise, the claimsto those resources, and the effects of transactions,events, and circumstances that change its resources andclaims to those resources.

Objectives of Financial Accounting

LO 4 List the objectives of financial reporting.


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Chapter1-11

All of the following are objectives of financialreporting except to provide information

a. About enterprise resources, claims to thoseresources, and changes in them.

b. That is useful in investment and credit decisions.

c. About the management and major shareholders of

an enterprise.

d. That is useful in assessing cash flow prospects.

Objectives of Financial Accounting

LO 4 List the objectives of financial reporting.

Review


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Chapter1-12

Need to Develop Standards

Various usersneed financialinformation

The accounting professionhas attempted to develop a

set of standards that aregenerally accepted anduniversally practiced.

Financial StatementsBalance SheetIncome StatementStatement of Stockholders EquityStatement of Cash FlowsNote Disclosure

Generally Accepted

Accounting Principles(GAAP)

LO 5 Explain the need for accounting standards.


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Chapter1-13

Parties Involved in Standard Setting

Four organizations:

Securities and Exchange Commission (SEC)

American Institute of Certified Public

Accountants (AICPA) Financial Accounting Standards Board (FASB)

Government Accounting Standards Board (GASB)

LO 6 Identify the major policy-setting bodies andtheir role in the standard-setting process.


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Chapter1-14

SecuritiesAct of 1933

SecuritiesAct of 1934

Securities and Exchange Commission

Established by federal governmentAccounting and reporting for public companies

Encouraged private standard-setting body

SEC requires public companies to adhere to GAAPSEC Oversight

Enforcement Authority



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Chapter1-15

American Institute of CPAs

National professional organizationEstablished the following:

LO 6

Committee on

AccountingProcedures

Accounting

Principles Board

1939 to 1959

Issued 51 Accounting

Research Bulletins

(ARBs)

Problem-by-problem

approach failed

1959 to 1973

Issued 31 Accounting

Principle Board

Opinions (APBOs)

Wheat Committee

recommendations

adopted in 1973

http://www.aicpa.org/
http://www.aicpa.org/http://www.aicpa.org/


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Chapter1-16

Financial Accounting Standards Board

Wheat Committees recommendations resulted in the creation of athe Financial Accounting Standards Board in 1973.

FinancialAccounting

Foundation

Selects members of the FASBFunds their activities

Exercises general oversight.

FinancialAccounting

Standards Board

Financial AccountingStandards Advisory

Council

Mission to establish and improvestandards of financial accountingand reporting.

Consult on major policy issues.



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Chapter1-17

Missions is to establish and improve standards offinancial accounting and reporting. Differences

between FASB and APB include:


Smaller MembershipFull-time, Remunerated Membership

Greater Autonomy

Increased Independence

Broader Representationhttp://www.fasb.org/

http://www.fasb.org/http://www.fasb.org/


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Chapter1-18

The first step taken in the establishment of a typicalFASB statement is

a. The board conducts research and analysis and adiscussion 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 boards

agenda.


Review



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Chapter1-19

FASB relies on two basic premises:(1) Responsive to entire economic community

(2) Operate in full view of the public

Due Process

Step 1 = Topic placed on agendaStep 2 = Research conducted and Discussion Memorandum

issued.

Step 3 = Public hearing

Step 4 = Board evaluates research, public response andissues Exposure Draft

Step 5 = Board evaluates responses and issues final

Statement of Financial Accounting Standard



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Chapter1-20

Issued by the FASB:

Types of Pronouncements

Standards, Interpretations, and Staff Positions.

Financial Accounting Concepts

Emerging Issues Task Force Statements



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Chapter1-21

Governmental Accounting Standards Board

Created in 1984 to address state and local governmental reporting

issues.

LO 6

FinancialAccountingFoundation

FinancialAccounting

Standards Board

Financial AccountingStandards Advisory

Council

GovernmentalAccounting

Standards Board

GovernmentalAccounting Standards

Advisory Council

http://www.gasb.org/
http://www.fasb.org/http://www.fasb.org/


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Chapter1-22

Generally Accepted Accounting Principles

Those principles that have substantial authoritativesupport.

Major sources of GAAP are:

FASB Standards, Interpretations, and Staff PositionsAPB Opinions

AICPA Accounting Research Bulletins

LO 7 Explain the meaning of generally accepted accounting principles.


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Chapter1-23

FASB Statements,Interpretations, and

Staff PositionsAPB Opinions

CAP AccountingResearch Bulletins

Category A(Most Authoritative)

FASB TechnicalBulletins

AICPA Industry Auditand Accounting Guides

AICPA Statements ofPosition

Category B

FASB Emerging Issues Task Force AICPA AcSEC Practice Bulletins

Category C

AICPA Accounting

Interpretations

Category D (Least Authoritative)

FASB Implementation

Guides

Recognized Industry

Practices

House of GAAP

LO 7


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Chapter1-24

Which of the following accounting pronouncements is themost authoritative?

a. FASB Statement of Financial Accounting Concepts.b. FASB Technical Bulletins.

c. AICPA Accounting Principles Board Opinion.

d. AICPA Statement of Position.

Generally Accepted Accounting Principles

LO 7 Explain the meaning of generally accepted accounting principles.

Review


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Chapter1-25

Issues in Financial Reporting

Standard Setting in a Political EnvironmentAccounting standards are as much a product ofpolitical action as they are of careful logic orempirical findings.

LO 8 Describe the impact of user groups on the standard-setting process.


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Chapter1-26

FASB Preparers(e.g., FEI)

Financial

Community

Government(SEC, IRS, other

agencies)

Industry

Associations

Business Entities

CPAs and

Accounting Firms

AICPA (AcSEC)

Academicians

Investing Public

Accounting standards,interpretations, and bulletins

Standard Setting


Illustration 1-5 UserGroups that InfluenceAccounting Standards


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Chapter1-27

All those who serve on the FASB must be

Certified Public Accountants.

Review:



False


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Chapter1-28


Expectation Gap

What the public thinks accountants should do vs.what accountants think they can do.

Difficult to close

Sarbanes-Oxley Act (2002)

Public Company Accounting Oversight Board

(PCAOB)



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Chapter

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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 beserved if only one set of GAAP is used.



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Chapter

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Ethics in the Environment of Financial AccountingIn accounting, we frequently encounter ethicaldilemmas.

GAAP does not always provide an answer

Doing the right thing is not always easy or obvious

LO 9 Understand issues related to ethics and financial accounting.


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Chapter

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Copyright

Copyright 2006 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permittedin Section 117 of the 1976 United States Copyright Act withoutthe express written permission of the copyright owner isunlawful. Request for further information should be addressed

to the Permissions Department, John Wiley & Sons, Inc. Thepurchaser may make back-up copies for his/her own use onlyand not for distribution or resale. The Publisher assumes noresponsibility for errors, omissions, or damages, caused by theuse of these programs or from the use of the informationcontained herein.

Financial Accounting and Accounting Standards

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