Intermediate Accounting I Instructor: Dr. J. Wang Office: 339 Phone: 262-595-2436 Email:...

Intermediate Accounting IIntermediate Accounting I

Instructor: Dr. J. WangInstructor: Dr. J. WangOffice: 339Office: 339

Phone: 262-595-2436Phone: 262-595-2436Email: [email protected]: [email protected]

Grade DeterminationGrade Determination Homework assignmentsHomework assignments 6565 Financial StatementsFinancial Statements Analysis ProjectAnalysis Project 1515 ExamsExams 200200

TOTALTOTAL 280280

CH.1 FINANCIAL ACCOUNTINGCH.1 FINANCIAL ACCOUNTINGAND ACCOUNTING AND ACCOUNTING

STANDARDSSTANDARDS

I. ACCOUNTINGI. ACCOUNTING

- is an information system that identifies, - is an information system that identifies, measures, and communicates financial measures, and communicates financial information about economic entities to information about economic entities to interested persons.interested persons.

II.FINANCIAL ACCOUNTINGII.FINANCIAL ACCOUNTING

-- is the process of preparation of a set of is the process of preparation of a set of general-purpose financial statements on general-purpose financial statements on enterprises as a whole for use by parties enterprises as a whole for use by parties both internal and external to the enterprise, both internal and external to the enterprise, such as investors, creditors, managers, such as investors, creditors, managers, unions and government agencies.unions and government agencies.

Financial StatementsFinancial Statements

- B/S- B/S - I/S- I/S - STATEMENT OF CASH FLOWS - STATEMENT OF CASH FLOWS - STATEMENT OF SHAREHOLDERS' - STATEMENT OF SHAREHOLDERS'

EQUITY EQUITY

Role of Accounting in SocietyRole of Accounting in Society

CorporationsCorporationsShareholdersShareholdersCreditors Creditors

Need capital

Need information

Company’s Company’s private private accountants accountants prepare financial prepare financial statementsstatements

IndependentIndependentCPAsCPAs

Make economic Make economic decisions based decisions based on financial on financial statements statements provided by provided by companiescompanies

Private accountants Public accountants Accounting relatedemployment

GAAP

III.GENERALLY ACCEPTED III.GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ACCOUNTING PRINCIPLES

(GAAP)(GAAP)

- those principles that have "substantial - those principles that have "substantial authoritative support" (meaning established authoritative support" (meaning established by an authoritative rule making bodyby an authoritative rule making body

IV.HISTORY OF ACCOUNTING IV.HISTORY OF ACCOUNTING STANDARDS SETTINGSTANDARDS SETTING

PRIOR TO 1929 (STOCK MKT CRASH)PRIOR TO 1929 (STOCK MKT CRASH) - - No GAAPNo GAAP - - No auditing requirementNo auditing requirement


IN 1934IN 1934 Securities and Exchange Commission (SEC) was Securities and Exchange Commission (SEC) was

created to administer the securities laws.created to administer the securities laws. - SEC has the legal authority to prescribe - SEC has the legal authority to prescribe

accounting standards for companies that fall within accounting standards for companies that fall within its jurisdiction (about 12,000 public companies).its jurisdiction (about 12,000 public companies).

- SEC has generally delegate the accounting - SEC has generally delegate the accounting standards setting to the private sector.standards setting to the private sector.


1939 - 19591939 - 1959 Committee on Accounting Procedure Committee on Accounting Procedure

(CAP)(CAP) -- Appointed by AICPA Appointed by AICPA - Issued 51 Accounting Research Bulletins - Issued 51 Accounting Research Bulletins


1959 - 19731959 - 1973 Accounting Principles Board (APB)Accounting Principles Board (APB) - - Created by the AICPACreated by the AICPA - Issued 31 APB Opinions- Issued 31 APB Opinions


1973 - present1973 - present Financial Accounting Standards Board (FASB)Financial Accounting Standards Board (FASB) - - Appointed by Financial Accounting FoundationAppointed by Financial Accounting Foundation - The most significant current source of GAAP- The most significant current source of GAAP - The FASB issues:- The FASB issues: - Standards and interpretations (over - Standards and interpretations (over

121&40)121&40) - Technical bulletins (implementation guides)- Technical bulletins (implementation guides) - Emerging Issues Task Force (EITF)- Emerging Issues Task Force (EITF)

statementstatement - - Financial Accounting Concepts Financial Accounting Concepts

Ch. 2 Ch. 2 Conceptual Framework Conceptual Framework

underlying Financial underlying Financial ReportingReporting

What is the conceptual What is the conceptual framework?framework?

The conceptual framework is, like a The conceptual framework is, like a constitution, a coherent set of objectives constitution, a coherent set of objectives and fundamentals that can lead to and fundamentals that can lead to consistent standards and that prescribes consistent standards and that prescribes the nature, function, and limits of the nature, function, and limits of financial accounting and financial financial accounting and financial statements.statements.

I.I. Need for a Conceptual Need for a Conceptual FrameworkFramework

1.1. Coherence in rules and standards.Coherence in rules and standards. 2.2. Quick solutions to new and Quick solutions to new and

emerging practical problems by emerging practical problems by reference to an existing framework of reference to an existing framework of basic theory.basic theory.

First Level: ObjectivesFirst Level: Objectives. .

To provide information that is To provide information that is usefuluseful to to present and potential present and potential investorsinvestors and and creditorscreditors in making rational investment, in making rational investment, credit, and similar decisions.credit, and similar decisions.

Second Level: Qualitative Second Level: Qualitative Characteristics and ElementsCharacteristics and Elements..

For information to be useful, it must be:For information to be useful, it must be: (1)(1) Relevance.Relevance. Accounting information is relevant if it is capable Accounting information is relevant if it is capable

of making a difference in a decision. Relevant information hasof making a difference in a decision. Relevant information has (a)(a) Predictive value.Predictive value. (b)(b) Feedback value.Feedback value. (c)(c) Timeliness.Timeliness. (2)(2) Reliability.Reliability. Accounting information is reliable to the extent Accounting information is reliable to the extent

that users can depend on it to represent the economic conditions or that users can depend on it to represent the economic conditions or events that it purports to represent. Reliable information hasevents that it purports to represent. Reliable information has

(a)(a) Verifiability.Verifiability. (b)(b) Representational faithfulness.Representational faithfulness. (c)(c) Neutrality.Neutrality. In addition, the information must also be comparable and consistent.In addition, the information must also be comparable and consistent.

Third Level: Recognition and Third Level: Recognition and Measurement ConceptsMeasurement Concepts

AssumptionsAssumptions PrinciplesPrinciples ConstraintsConstraints


1.1. AssumptionsAssumptions.. a.a. Economic entity assumptionEconomic entity assumption—economic activity can —economic activity can

be identified with a particular unit of accountability.be identified with a particular unit of accountability. b.b. Going concern assumptionGoing concern assumption—business enterprises —business enterprises

will have a long enough life to justify the use of accruals and deferrals.will have a long enough life to justify the use of accruals and deferrals. c.c. Monetary unit assumptionMonetary unit assumption—the monetary unit (i.e., —the monetary unit (i.e.,

the dollar) is the most effective means of expressing to interested the dollar) is the most effective means of expressing to interested parties changes in capital and exchanges of goods and services. A parties changes in capital and exchanges of goods and services. A second assumption is that the monetary unit remains reasonably second assumption is that the monetary unit remains reasonably stable. Note that during the inflationary period of the 1970s this stable. Note that during the inflationary period of the 1970s this assumption was criticized by many accountants.assumption was criticized by many accountants.

d.d. Periodicity assumptionPeriodicity assumption—activities of an enterprise —activities of an enterprise can be divided into artificial time periods.can be divided into artificial time periods.


2.2. PrinciplesPrinciples.. a.a.Historical cost principleHistorical cost principle—acquisition cost is the most objective and —acquisition cost is the most objective and

verifiable basis to account for assets and liabilities. Definite and objective, not subject to verifiable basis to account for assets and liabilities. Definite and objective, not subject to interpretation.interpretation.

b.b.Revenue recognition principleRevenue recognition principle—revenue is recognized when (1) it’s earned —revenue is recognized when (1) it’s earned and (2) It’s realized or realizable.and (2) It’s realized or realizable.

c.c.Matching principleMatching principle—efforts (expenses) should be matched with —efforts (expenses) should be matched with accomplishments (revenues) if feasible.accomplishments (revenues) if feasible.

(a)(a) When direct association exists, expense costs against When direct association exists, expense costs against revenues in the period when the revenue is recognized.revenues in the period when the revenue is recognized.

(b)(b) When association exists but is difficult to identify, allocate When association exists but is difficult to identify, allocate costs rationally and systematically to expense in the periods benefited.costs rationally and systematically to expense in the periods benefited.

(c)(c) When little if any association exists, expense immediately.When little if any association exists, expense immediately. d.d.Full disclosure principleFull disclosure principle—revealing in financial statements any facts of —revealing in financial statements any facts of

sufficient importance to influence the judgment and decisions of an informed reader. sufficient importance to influence the judgment and decisions of an informed reader. Companies use of notes and supplementary information in financial reporting.Companies use of notes and supplementary information in financial reporting.


3.3. Constraints modifying basic theoryConstraints modifying basic theory:: a.a. Cost-benefitCost-benefit—the benefit to be derived from having —the benefit to be derived from having

accounting information should exceed the cost of providing it. accounting information should exceed the cost of providing it. Frequently it is easier to assess the costs than it is to determine the Frequently it is easier to assess the costs than it is to determine the benefits of providing a particular item of information.benefits of providing a particular item of information.

b.b. MaterialityMateriality—if the amount is significant when —if the amount is significant when compared with other items, sound and acceptable standards should be compared with other items, sound and acceptable standards should be followed.followed.

(1)(1) The determination of materiality requires The determination of materiality requires considerable judgment, a potential for abuse exists.considerable judgment, a potential for abuse exists.

(2)(2) Immaterial items are recorded but need not be Immaterial items are recorded but need not be separately disclosed.separately disclosed.

c.c. Industry practiceIndustry practice—peculiar nature of industry or —peculiar nature of industry or business may result in variation.business may result in variation.

d.d. ConservatismConservatism—when in doubt choose the solution —when in doubt choose the solution that will be least likely to overstate assets and income.that will be least likely to overstate assets and income.

Intermediate Accounting I Instructor: Dr. J. Wang Office: 339 Phone: 262-595-2436 Email:...

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