Intermediate accounting 13th kieso warfield chapter 01

Chapter 1-4 Securities and Exchange Commission American Institute of CPAs Financial Accounting Standards Board Changing role of the AICPA Financial Statements and Financial Reporting Pa

Chapter 1-1

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 the

standard-setting 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 rule-making process.

9. Understand issues related to ethics and financial accounting.

Learning Objectives

Learning Objectives

Chapter

1-4

Securities and Exchange Commission American Institute of CPAs

Financial Accounting Standards Board Changing role of the AICPA

Financial Statements and

Financial Reporting

Parties Involved in Standard Setting

Generally Accepted Accounting Principles

Issues in Financial Reporting

Financial Accounting and Accounting Standards Financial Accounting and Accounting Standards

Chapter

1-5 LO 1 Identify the major financial statements and other means of financial reporting..

Financial Statements and Financial Reporting

Financial Statements and Financial Reporting

Essential characteristics of accounting are:

(1) the identification , measurement , and

(2) economic entities to

(3) interested parties.

Balance Sheet Income Statement Statement of Cash

Flows Statement of Owners’ or Stockholders’ Equity Note Disclosures

Balance Sheet Income Statement Statement of Cash

Flows Statement of Owners’ or Stockholders’ Equity Note Disclosures

President’s letter Prospectuses, SEC Reporting News releases Forecasts Environmental Reports

Etc.

President’s letter Prospectuses, SEC Reporting News releases Forecasts Environmental Reports

Etc.

Financial Statements Additional Information Economic Entity

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

Financial Statements and Financial Reporting

Financial Statements and Financial Reporting

Chapter

1-7 LO 1 Identify the major financial statements and other means of financial reporting..

What is the purpose of information presented in

notes to the financial statements?

accepted accounting principles.

statements.

the totals of the financial statements.

comments.

Review

Financial Statements and Financial Reporting

Financial Statements and Financial Reporting

Chapter

1-8

Accounting and Capital Allocation

Accounting and Capital Allocation

Resources are limited Efficient use of resources often

determines whether a business thrives.

Resources are limited Efficient use of resources often

determines whether a business thrives.

Financial Reporting

Capital Allocation 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 Capital Allocation Process

c provides an efficient and liquid market for buying

and selling securities.

d All of the above.

Accounting and Capital Allocation

Accounting and Capital Allocation

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

Review

Chapter

1-10

Challenges Facing Financial Accounting

Challenges Facing Financial Accounting

Nonfinancial Measurements Forward-looking Information Soft Assets

Timeliness

LO 3 Describe some of the challenges facing accounting.

Chapter

1-11

Financial reporting should provide information that:

Financial reporting should provide information that:

(a) is useful to present and potential investors and creditors and

other users in making rational investment, credit, and similar decisions

(a) is useful to present and potential investors and creditors and

other users in making rational investment, credit, and similar decisions

(b) helps present and potential investors and creditors and other

users in assessing the amounts, timing, and uncertainty of

prospective cash receipts

(b) helps present and potential investors and creditors and other

users in assessing the amounts, timing, and uncertainty of

prospective cash receipts

(c) clearly portrays the economic resources of an enterprise, the

claims to those resources, and the effects of transactions, events, and circumstances that change its resources and

claims to those resources

(c) clearly portrays the economic resources of an enterprise, the

claims to those resources, and the effects of transactions,

events, and circumstances that change its resources and

claims to those resources

Objectives of Financial Accounting

Objectives of Financial Accounting

LO 4 List the objectives of financial reporting.

Chapter

1-12

All of the following are objectives of financial

reporting except to provide information

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.

Objectives of Financial Accounting

Objectives of Financial Accounting

LO 4 List the objectives of financial reporting.

Review

Chapter

1-13

Need to Develop Standards

Need to Develop Standards

Various users need financial

information

Various users

need financial

information

The accounting profession

has attempted to develop a

set of standards that are

generally accepted and

universally practiced.

Financial Statements

Balance Sheet Income Statement Statement of Stockholders’ Equity Statement of Cash Flows

Note Disclosure

Financial Statements

Balance Sheet Income Statement Statement of Stockholders’ Equity Statement of Cash Flows

Note Disclosure

Generally Accepted Accounting Principles

(GAAP)

Generally Accepted Accounting Principles

(GAAP)

LO 5 Explain the need for accounting standards.

Chapter

1-14

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)

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Chapter

1-15

Securities Act of 1933

Securities Act of 1933 Act of 1934 Act of 1934 Securities Securities

Securities and Exchange Commission

Securities and Exchange Commission

Established by federal government Accounting and reporting for public companies

Encouraged private standard-setting body SEC requires public companies to adhere to GAAP SEC Oversight

Enforcement Authority

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Chapter

1-16

American Institute of CPAs

American Institute of CPAs

National professional organization Established the following:

LO 6

Committee on Accounting Procedures

Committee on Accounting Procedures

Accounting Principles Board

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/

Chapter

1-17

Financial Accounting Standards Board

Financial Accounting Standards Board

Wheat Committee’s recommendations resulted in the creation of a the Financial Accounting Standards Board Financial Accounting Standards Board in 1973.

Financial Accounting Foundation

Financial Accounting Foundation

Selects members of the FASB Funds their activities

Exercises general oversight.

Financial Accounting Standards Board

Financial Accounting Standards Board

Financial Accounting Standards Advisory

Council

Financial Accounting Standards Advisory

Council

Mission to establish and improve standards of financial accounting and reporting.

Consult on major policy issues.

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Chapter

1-18

Missions is to establish and improve standards of

financial accounting and reporting Differences between FASB and APB include:

Financial Accounting Standards Board

Financial Accounting Standards Board

Smaller Membership Full-time, Remunerated Membership Greater Autonomy

Increased Independence Broader Representation

http://www.fasb.org/

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Chapter

1-19

The first step taken in the establishment of a typical FASB statement is

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.

Financial Accounting Standards Board

Financial Accounting Standards Board

Review

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Chapter

1-20

FASB relies on two basic premises:

(1) Responsive to entire economic community

(2) Operate in full view of the public

Due Process

Due Process

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

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Standards, Interpretations, and Staff Positions.

Financial Accounting Concepts Emerging Issues Task Force Statements

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Chapter

1-22

Types of Pronouncements

Types of Pronouncements

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

number of authoritative pronouncements A list is provided on the left, below, with a description of these pronouncements on the right.

Chapter

1-23

The AICPA established the Accounting Standards Executive

Committee (AcSEC):

 Audit and Accounting Guides

 Statements of Position (SOP)

 Practice Bulletins

Changing Role of AICPA

Changing Role of AICPA

LO 6

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.

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Chapter

1-24

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

LO 7 Explain the meaning of generally accepted accounting principles

(GAAP) and the role of the Codification for GAAP.

Chapter

1-25

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles

LO 7 Explain the meaning of generally accepted accounting principles

(GAAP) and the role of the Codification for GAAP.

Illustration 1-4

GAAP Documents

Chapter

1-26

Which of the following accounting pronouncements is the most authoritative?

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles

Review

LO 7 Explain the meaning of generally accepted accounting principles

(GAAP) and the role of the Codification for GAAP.

Chapter

1-27

Issues in Financial Reporting

Issues in Financial Reporting

Standard Setting in a Political Environment

Accounting standards are as much a product of

political action as they are of careful logic or

empirical findings

LO 8 Describe the impact of user groups on the rule-making process

Financial Community

Industry Associations

Standard Setting

User Groups that Influence Accounting Standards

LO 8 Describe the impact of user groups on the rule-making process

Issues in Financial Reporting

Issues in Financial Reporting

False

LO 8 Describe the impact of user groups on the rule-making process

Chapter

1-30

Issues in Financial Reporting

Issues in Financial Reporting

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)

LO 8 Describe the impact of user groups on the rule-making process

Chapter

1-31

Issues in Financial Reporting

Issues in Financial Reporting

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 be

served if only one set of GAAP

is used.

LO 8 Describe the impact of user groups on the rule-making process

Chapter

1-32

Issues in Financial Reporting

Issues in Financial Reporting

LO 9 Understand issues related to ethics and financial accounting

often helps to be fluent in abbreviations and acronyms.

Instructions:

Presented below is a list of common accounting acronyms

Identify the term for which each acronym stands, and provide

a brief definition of each term.

(a) AICPA (e) FAF (i) CPA

(b) CAP (f) FASAC (j) FASB

(c) ARB (g) SOP (k) SEC

(d) APB (h) GAAP (l) IASB

Chapter

1-33

Issues in Financial Reporting

Issues in Financial Reporting

Ethics in the Environment of Financial Accounting

In accounting, we frequently encounter ethical

Chapter

1-34

Diversity in Practice

 iGAAP includes the standards, referred to as International

Financial Reporting Standards (IFRS), developed by the IASB

 Differences between U.S GAAP and iGAAP exist because of

different user needs

 iGAAP tends to be simpler and less stringent than U.S GAAP

 Regulators have recently eliminated the need for foreign

companies that trade shares in U.S markets to reconcile their accounting with U.S GAAP.

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