Accounting Principles and Reporting StandardsAccounting Principles

and Reporting Standards

Section 1: Generally Accepted

Accounting Principles

Chapter

14

Section Objectives1. Understand the process used to develop generally

accepted accounting principles.

2. Identify the major standards-setting bodies and their roles in the standard-setting process.

3. Describe the users and uses of financial reports.

The Need for Generally Accepted Accounting Principles

Generally Accepted Accounting Principles (GAAP)

Ensure that financial statements are meaningful and

useful.

Are used whether the business is large or small.

Allow financial statements of different companies to

be compared.

Allow a company to compare its own financial statements from period to period.

Objective 1. The Development of Generally Accepted Accounting Principles

Public sector government represented by SEC

In the United States, accounting principles are developed through a cooperative effort between the public sector and private sector.

Private sector business represented by FASB

Objective 2. Identify the major accounting standards-setting bodies and their roles in the standards-setting process.

Securities and Exchange Commission

Regulates all publicly held companies and all companies with more than a specified number of shareholders or owners.

Determines the form and content of accounting reports filed by companies under its jurisdiction.

Has authority to define accounting terms and to prescribe accounting principles.

Lets the accounting profession develop principles and standards, but has the final authority.

Financial Accounting Standards Board

Seven member board — each having distinguished accounting backgrounds — who are full-time employees.

Responsible for developing financial accounting standards and principles.

Develops and issues Statements of Financial Accounting Standards.

Has issued about 150 standards that the SEC recognizes as authoritative.

American Institute of Certified Public Accountants (AICPA)

In the past, GAAP were developed by AICPA committees.

In 1972 the AICPA and other organizations formed the FASB.

The AICPA requires its members to confirm that audited companies follow the FASB Statements of Financial Accounting Standards.

Federal and State Agencies

Require detailed systems of accounting for public utilities.

Issue income tax rules for companies (IRS).

Some companies adopt tax accounting rules for financial records, provided the rules don’t conflict with GAAP.

Other Organizations

Federal and State Agencies other than the SEC

AAA (American Accounting Association)

NYSE (New York Stock Exchange)

IASC (International Accounting Standards Committee)

American Accounting Association (AAA)

Has members who:

teach accounting;

write textbooks and articles.

Stimulates the acceptance of accounting principles.

New York Stock Exchange (NYSE)

Required corporations to publish annual reports as early as 1900.

Required independent audits for corporations since 1933.

International Accounting Standards Board (IASB)

Wants to develop standards that can be adopted

throughout the world.

Has issued about 50 international accounting standards.

In an important move, in 2002 the European Union voted to require companies whose securities aretraded on exchanges in member countries toprepare financial reports on the basis of IASBStandards.

Objective 3. Users and Uses of Financial Reports

The FASB has concluded that financial reporting rules should focus on providing information to investors and creditors.

The focus is not on

tax authorities

managementregulatory agencies

Why does FASB focus on helping investors and creditors instead of other interested parties?

QUESTION

The other interested parties — management, tax authorities, regulatory agencies — have access to specific information from the firm’s records not available to the public.

ANSWER

Investors and creditors expect to receive a cash flow directly or indirectly from the business entity:

directly from the distribution of the company’s earnings.

indirectly through the disposal of their interests for cash.

Financial report users need information about:

Profits

Economic resources (assets)

Claims against assets (liabilities and owner’s equity)

Changes in assets and in claims against assets

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The ______ sector (government) is represented by the _____________ ____________________.

The ______ sector (business) is represented by the _________________________________.

The ______ requires its members to confirm that audited companies follow the Statements developed by the _____.

AICPA

private

public

Complete the following sentences:

Securities and

Financial Accounting

Exchange Commission

Standards Board

FASB

SECTION

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The FASB has concluded that financial reporting rules should focus on providing information to ________ and ________.

Cash flows are received _______ from a company through the distribution of the company’s earnings.

Cash flows are received ________ from a company through the sale of interest in the company for cash.

indirectly

directly

investors

Complete the following sentences:

creditors

SECTION

Thank Youfor using

College Accounting, 11th Edition

Price • Haddock • Brock