Lecture Intermediate Accounting (13th edition) - Chapter 1: Financial accounting and accounting standards
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Chapter
1-1
CHAPTER
1
FINANCIAL ACCOUNTING AND
ACCOUNTING STANDARDS
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield
Chapter
1-2
Learning Objectives
Learning Objectives
1.
Identify the major financial statements and other means of financial reporting.
2.
Explain how accounting assists in the efficient use of scarce resources.
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 policysetting bodies and their role in the standardsetting process.
7.
Explain the meaning of generally accepted accounting principles (GAAP) and the role
of the Codification for GAAP.
8.
Describe the impact of user groups on the rulemaking process.
9.
Understand issues related to ethics and financial accounting.
Chapter
1-3
Financial Accounting and Accounting Standards
Financial Accounting and Accounting Standards
Financial
Statements and
Financial Reporting
Accounting and
capital allocation
Challenges
Objectives
Need to develop
standards
Chapter
1-4
Parties Involved in
Standard Setting
Securities and
Exchange
Commission
American Institute of
CPAs
Financial Accounting
Standards Board
Changing role of the
AICPA
Generally Accepted
Accounting
Principles
FASB Codification
Issues in Financial
Reporting
Political environment
Expectations gap
International
accounting standards
Ethics
Financial Statements and Financial Reporting
Financial Statements and Financial Reporting
Essential characteristics of accounting are:
Chapter
1-5
(1)
the identification, measurement, and communication of
financial information about
(2)
economic entities to
(3)
interested parties.
LO 1 Identify the major financial statements and other means of financial reporting ..
Financial Statements and Financial Reporting
Financial Statements and Financial Reporting
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
1-6
Forecasts
Not GAAP
LO 1 Identify the major financial statements and other means of financial reporting ..
Financial Statements and Financial Reporting
Financial Statements and Financial Reporting
Review
What is the purpose of information presented in notes to the
financial statements?
a.
b.
c.
d.
Chapter
1-7
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
Allocation Process
Financial
Financial
Reporting
Reporting
Information to help
users with capital
allocation decisions.
Chapter
1-8
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
1-9
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
1-10
LO 3 Describe some of the challenges facing accounting.
Objectives of Financial Accounting
Objectives of Financial Accounting
Financial
Financialreporting
reportingshould
shouldprovide
provideinformation
informationthat:
that:
(a) is useful to present and potential investors and creditors and other users in making
(a) is useful to present and potential investors and creditors and other users in making
rational investment, credit, and similar decisions.
rational investment, credit, and similar decisions.
(b) helps present and potential investors and creditors and other users in assessing the
(b) helps present and potential investors and creditors and other users in assessing the
amounts, timing, and uncertainty of prospective cash receipts.
amounts, timing, and uncertainty of prospective cash receipts.
(c) clearly portrays the economic resources of an enterprise, the claims to those
(c) clearly portrays the economic resources of an enterprise, the claims to those
resources, and the effects of transactions, events, and circumstances that change
resources, and the effects of transactions, events, and circumstances that change
its resources and claims to those resources.
its resources and claims to those resources.
Chapter
1-11
LO 4 List the objectives of financial reporting.
Objectives of Financial Accounting
Objectives of Financial Accounting
Review
All of the following are objectives of financial reporting except to
provide information
Chapter
1-12
a.
About enterprise resources, claims to those resources, 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.
LO 4 List the objectives of financial reporting.
Need to Develop Standards
Need to Develop Standards
Various users need
financial information
The accounting profession has
attempted to develop a set of
standards that are generally accepted
and universally practiced.
Chapter
1-13
Financial Statements
Balance Sheet
Income Statement
Statement of Stockholders’ Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting Principles
(GAAP)
LO 5 Explain the need for accounting standards.
Parties Involved in Standard Setting
Parties Involved in Standard Setting
Three organizations:
Securities and Exchange Commission (SEC)
American Institute of Certified Public Accountants (AICPA)
Financial Accounting Standards Board (FASB)
Chapter
1-14
LO 6 Identify the major policysetting bodies and their role in
the standardsetting process.
Securities and Exchange Commission
Securities and Exchange Commission
Established by federal government
Accounting and reporting for public companies
Securities Act of
Securities Act of
1933
1933
Securities Act of
Securities Act of
1934
1934
Encouraged private standardsetting body
SEC requires public companies to adhere to GAAP
SEC Oversight
Enforcement Authority
Chapter
1-15
LO 6 Identify the major policysetting bodies and their role in
the standardsetting process.
American Institute of CPAs
American Institute of CPAs
National professional organization
Established the following:
Committee on
Committee on
Accounting Procedures
Accounting Procedures
Chapter
1-16
Accounting Principles
Accounting Principles
Board
Board
1939 to 1959
1959 to 1973
Issued 51 Accounting
Research Bulletins
(ARBs)
Issued 31 Accounting
Principle Board
Opinions (APBOs)
Problem-by-problem
approach failed
Wheat Committee
recommendations
adopted in 1973
/>
LO 6
Financial Accounting Standards Board
Financial Accounting Standards Board
Wheat Committee’s recommendations resulted in the creation of a the Financial
Accounting Standards Board in 1973.
Accounting Standards Board
Financial Accounting
Financial Accounting
Foundation
Foundation
Selects members of the FASB
Funds their activities
Exercises general oversight.
Financial Accounting
Financial Accounting
Standards Board
Standards Board
Mission to establish and improve standards
of financial accounting and reporting.
Financial Accounting
Financial Accounting
Standards Advisory
Standards Advisory
Council
Council
Chapter
1-17
Consult on major policy issues.
LO 6 Identify the major policysetting bodies and their role in
the standardsetting process.
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
1-18
/>
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
1-19
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
1-20
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
1-21
LO 6 Identify the major policysetting bodies and their role in
the standardsetting process.
Types of Pronouncements
Types of Pronouncements
CA111 (Accounting Pronouncements) Standard setting bodies have issued a
number of authoritative pronouncements. A list is provided on the left, below,
with a description of these pronouncements on the right.
(d)
(f)
(c)
(e)
(a)
(b)
Chapter
1-22
LO 6 Identify the major policysetting bodies and their role in
the standardsetting process.
Changing Role of AICPA
Changing Role of AICPA
The AICPA established the Accounting Standards Executive Committee (AcSEC):
Audit and Accounting Guides
Statements of Position (SOP)
Practice Bulletins
AICPA and AcSEC no longer issues authoritative accounting guidance for public
companies.
PCAOB oversees the development of auditing standards.
AICPA continues to develop and grade the CPA examination.
Chapter
1-23
LO 6 Identify the major policysetting bodies and their role in
LO 6
the standardsetting process.
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
1-24
LO 7 Explain the meaning of generally accepted accounting principles
and the role of the Codification for GAAP.
(GAAP)
Generally Accepted Accounting Principles
Generally Accepted Accounting Principles
Illustration 14 GAAP
Documents
Chapter
1-25
LO 7 Explain the meaning of generally accepted accounting principles
and the role of the Codification for GAAP.
(GAAP)
