intermediate accounting lecture

The Environment of Financial Reporting

Chapter 1

COPYRIGHT 2010 South-Western/Cengage Learning

Intermediate AccountingIntermediate Accounting 11th edition 11th edition

Nikolai Bazley JonesNikolai Bazley Jones

An electronic presentationAn electronic presentationBy Norman SundermanBy Norman Sundermanand Kenneth Buchananand Kenneth BuchananAngelo State University

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31. Understand capital markets and decision making.

2. Know what is included in financial reporting.3. Explain generally accepted accounting

principles (GAAP) and the sources of GAAP.4. Identify the types of pronouncements issued

by the Financial Accounting Standards Board (FASB).

5. Understand how the FASB operates.

Objectives

Objectives6. Describe the relationship between the

Securities and Exchange Commission (SEC) and the FASB.

7. Use ethical models for decision making about ethical dilemmas.

8. Understand creative and critical thinking.9. Describe the joint convergence project of the

FASB and the IASB (Appendix).10. Understand SEC reporting under U.S. GAAP

and IFRS (Appendix).

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5More Accountants NeededNew accounting rules pose

challenges for financial accounting and projections point to increased

hiring of accounting graduates.

6Estimated Hiring Increase

Accounting firms of all sizes plan to increase future hiring.

7Capital Markets

Companies need large amounts of capital for operations

8Stock Exchange

Companies may obtain capital by issuing capital stock...

Capital Markets

9Bank

Capital Markets

or by borrowing from lenders

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Capital Markets

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Accounting Information: Economic Activities and Decision Making

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1. Buy. A potential investor decides to purchase a particular security on the basis of communicated accounting information.

2. Hold. An actual investor decides to retain a particular security on the basis of communicated accounting information.

3. Sell. An actual investor decides to dispose of a particular security on the basis of communicated accounting information.

External and Internal Users

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Sources of Authority

Internal needs

Managerial AccountingFinancial Accounting

GAAP

Comparison of Financial and Managerial Accounting

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Time Frame of Reported Information

Present and future

Managerial Accounting

Primarily historical

Financial Accounting


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Scope

Total company


Individual departments, divisions, and total company



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Type of Information

Primarily quantitative

Sales$275,240

Cost180,120

Gross mar. 95,120Expenses 80,120

Net inc. $15,000


Qualitative as well as quantitative

Materials usage is

unfavorable by $8,400.



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Statement Format

Prescribed by GAAP; oriented toward investment

and credit decisions


Determined by company; focused upon specific decisions being made



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Decision Focus

External


Internal



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The companys accountants prepare both the financial and

the managerial accounting reports

and the information comes from the same information system.


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Financial reporting is the process of communicating

financial accounting information about a company

to external users.

Financial Reporting

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1. The balance sheet (or statement of financial position), which summarizes a companys financial position at a given date.

2. The income statement, which summarizes the results of a companys income-producing activities for a period of time.

3. The statement of cash flows, which summarizes a companys cash inflows and outflows for a period of time.

Companies present at least three major financial statements:

Financial Reporting

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A statement of changes in

stockholders equity is also included by many

companies.

Financial Reporting

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This statement summarizes the changes

in each item of stockholders equity for a

period.

Financial Reporting

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GAAP are the guidelines, procedures, and practices that a company is required to use in recording and reporting the accounting

information in its audited financial statements.

They are like laws and are the rules that must be followed in financial reporting.

Generally Accepted Accounting Principles (GAAP)

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Currently, there is no single document that includes all the accounting standards.

However, the FASB has released its FASB Accounting Standards Codification for verification by its constituents. When

finalized, this Codification will be electronic and will integrate and topically organize U.S.

accounting standards.

FASB Accounting Standards Codification

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A FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and APB Opinions and CAP (AICPA) Accounting Research Bulletins not superceded by actions of the FASB (as well as SEC releases such as Regulation S-X, Financial Reporting Releases, and Staff Accounting Bulletins for companies that file with the SEC)

ContinuedContinued

Hierarchy of Sources of GAAPCategories Authoritative Sources

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B FASB Technical Bulletins, and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides, and AICPA Statements of Position

C FASB Emerging Issues Task Force Consensus Positions, Topics discussed in Appendix D of EITF Abstracts, and, if cleared by the FASB, AICPA Practice Bulletins

ContinuedContinued

Hierarchy of Sources of GAAPCategories Authoritative Sources

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Hierarchy of Sources of GAAP

D FASB Qs and As (Implementation Guides), AICPA Accounting Interpretations, AICPA Industry and Audit Guides, and AICPA Statements of Position not cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry (e.g., AICPA Accounting Trends and Techniques)

Categories Authoritative Sources

There are electronic databases such as the FASB Financial Accounting Research

System (FARS) that include most accounting standards

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The Codification does not change GAAP. Instead, it reorganizes the many

pronouncements on U.S. GAAP into about 90 accounting topics, organized in a

consistent structure.


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The FASB expects the Codification to: Reduce the amount of time and effort needed to

solve an accounting research issue. Improve the usability of the accounting

literature, thereby reducing the chances of not complying with GAAP.

Provide real-time updates as new standards are issued.


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The FASB expects to approve the Codification in 2009. At that time, the Codification will

supercede all then-existing non-SEC standards. Once the Codification has been approved, the FASB will not issue separate

new pronouncements. Instead, any new standards will be structured in a way to

update the Codification.


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History of GAAP in the Private Sector

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Committee on Accounting Procedure (CAP)

In 1938, the AICPA formed the Committee on Accounting Procedure (CAP). This group issued pronouncements known as Accounting Research

Bulletins (ARB), but the CAP did not have authority to enforce its pronouncements and

application was optional. The CAP was criticized because its members were all CPAs and

application was optional, so the AICPA formed the Accounting Principles Board (APB) in 1959 to replace the Committee on Accounting Procedure.

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1. To alleviate criticism about the process of formulating accounting principles, which included wider representation.

2. To create a policy-making body whose rules would be binding on companies rather than optional.

The APB was comprised 17 to 21 The APB was comprised 17 to 21 members, selected primarily members, selected primarily

from the accounting profession.from the accounting profession.

Reasons for Forming the APB

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1. Independence. The members of the APB were part-time volunteers whose major responsibilities were to the business, governmental, or academic organizations employing them.

2. Representation. The public accounting firms and the AICPA were too closely associated with the development of accounting standards.

3. Response time. Emerging problems were not solved quickly enough by the part-time members of the APB.

Criticisms of the APB

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Structure of FASB

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1. Statements of Financial Accounting Standards2. Interpretations3. Staff Positions4. Technical Bulletins5. Statements of Financial Accounting

Concepts6. Other Pronouncements

Types of Pronouncements Issued by the FASB

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FASB Operating Procedures

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Other Organizations Impacting GAAP Securities and Exchange Commission (SEC) The SEC

is a governmental agency that has the legal authority to prescribe accounting principles and reporting practices for all corporations issuing publicly traded securities.

American Institute of Certified Public Accountants (AICPA) The AICPA is the professional organization for all certified public accountants in the United States. To be a member of the AICPA, an individual must have passed the Uniform CPA Examination, hold a CPA certificate, agree to abide by its bylaws and Code of Professional Ethics, and have 150 hours of higher education.

ContinuedContinued

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Other Organizations Impacting GAAP FASB Emerging Issues Task Force (EITF) The

primary objectives of the EITF are (1) to identify significant emerging accounting issues (i.e., unique transactions and accounting problems) that it feels the FASB should address and (2) to develop consensus positions on the implementation issues involving the application of standards.

International Accounting Standards Board (IASB) The IASB issues International Financial Reporting Standards (IFRS) and includes 12 full-time members (and 2 part-time members) from various countries. To date IASB has issued 49 Standards.

ContinuedContinued

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Governmental Accounting Standards Board (GASB) The GASBs responsibility is to establish financial accounting standards for certain state and local governmental entities.

Public Company Accounting Oversight Board (PCAOB) The PCAOB is a non-profit corporation that was created by Congress in the Sarbanes-Oxley Act of 2002. Its purpose is to protect the interests of investors by overseeing auditors of public companies in the preparation of informative, accurate, and independent audit reports for companies that sell securities to the public.

Other Organizations Impacting GAAP

ContinuedContinued

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Cost Accounting Standards Board (CASB) The CASB is responsible only for negotiated federal contracts and subcontracts exceeding $500,000.

Internal Revenue Service (IRS) The IRS administers the Internal Revenue Code enacted by Congress.

American Accounting Association (AAA) The AAA is an organization primarily of academics and practicing accountants.


ContinuedContinued

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Financial Executives International (FEI) The FEI consists primarily of high-level financial executives (such as financial vice-presidents, treasures, and controllers) of major corporations. The FEI publishes a monthly journal called the Financial Executive.

Institute of Management Accountants (IMA) The primary focus of the IMA is on management accounting and financial accounting issues. The IMA publishes a monthly journal called Strategic Finance.


ContinuedContinued

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CFA Institute (CFAI) Members of the CFAI are financial analysts who use accounting information in various investment management and security analysis decisions.


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Participants in the Development of GAAP

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Responsibilities

In carrying out their responsibilities as

professionals, members should exercise sensitive professional

and moral judgments in all their activities.

Principles of the AICPA Code of Professional Conduct

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The Public Interest

Members should accept the obligation to act in a way that will serve the public interest, honor the

public trust, and demonstrate commitment to professionalism.


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Integrity

To maintain and broaden public confidence, members

should perform all professional responsibilities

with the highest sense of integrity.


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Objectivity and Independence

A member should maintain objectivity and be free from conflicts of interest in discharging professional responsibilities. A member in public

practice should be independent in fact and appearance.


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Due Care

A member should observe the professions technical and ethical standards, strive continually to

improve competence and the quality of services, and discharge the

professional responsibility to the best of the members ability.


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Scope and Nature of Service

A member in public practice should observe the Principles of

the CPC in determining the scope and nature of services to

be provided.


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1. The utilitarian model, which evaluates actions based on the greatest good for the greatest number.

2. The rights model, which embraces actions that protect individual moral rights.

3. The justice model, which emphasizes a fair distribution of benefits and burdens.

An Ethicists Basic Approaches to Moral Reasoning

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Creative and Critical Thinking: Impact on Problem Solving

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IFRS and U.S. GAAPMany companies have become globalized. Currently, U.S. corporations are subject to the accounting standards established by the FASB, while foreign corporations are subject to international financial reporting standards (IFRS) established by the IASB or by accounting standards set by their national accounting standards board. These differences in accounting standards have led to differences among U.S. and foreign corporations financial statements. These differences, in turn, have made it difficult for investors and creditors to make valid comparisons across corporations and to make effective buy-sell-hold decisions in the U.S. and foreign capital markets.

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IFRS and U.S. GAAP

To resolve this issue, FASB and the IASB entered into an agreement to develop high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. To achieve this compatibility, the Boards agreed to work together to achieve short-term convergence on a number of individual differences between U.S. and international accounting standards.

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Chapter 1

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The Environment of Financial ReportingPrinting PowerPointObjectivesObjectivesMore Accountants NeededEstimated Hiring IncreaseCapital MarketsCapital MarketsCapital MarketsAccounting Information: Economic Activities and Decision MakingExternal and Internal UsersComparison of Financial and Managerial AccountingFinancial ReportingFinancial ReportingFinancial ReportingFinancial ReportingGenerally Accepted Accounting Principles (GAAP)FASB Accounting Standards CodificationHierarchy of Sources of GAAPHierarchy of Sources of GAAPHierarchy of Sources of GAAPFASB Accounting Standards CodificationFASB Accounting Standards CodificationFASB Accounting Standards CodificationHistory of GAAP in the Private SectorCommittee on Accounting Procedure (CAP)Reasons for Forming the APBCriticisms of the APBStructure of FASBTypes of Pronouncements Issued by the FASBFASB Operating ProceduresOther Organizations Impacting GAAPOther Organizations Impacting GAAPOther Organizations Impacting GAAPOther Organizations Impacting GAAPOther Organizations Impacting GAAPOther Organizations Impacting GAAPParticipants in the Development of GAAPPrinciples of the AICPA Code of Professional ConductPrinciples of the AICPA Code of Professional ConductPrinciples of the AICPA Code of Professional ConductPrinciples of the AICPA Code of Professional ConductPrinciples of the AICPA Code of Professional ConductPrinciples of the AICPA Code of Professional ConductAn Ethicists Basic Approaches to Moral ReasoningCreative and Critical Thinking: Impact on Problem Solving

intermediate accounting lecture

Documents

capital marketscompanies

capital stock

particular security

large amounts of capital

sources of gaap

actual investor

future hiring

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