6-1 PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University...

6-1

PowerPoint Presentation by PowerPoint Presentation by Douglas CloudDouglas Cloud

Professor Emeritus of AccountingProfessor Emeritus of AccountingPepperdine UniversityPepperdine University

© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson,

the Star Logo, and South-Western are trademarks used herein under license.

Task Force Image Gallery clip art included in this electronic presentation is used with the

permission of NVTech Inc.

Task Force Image Gallery clip art included in this electronic presentation is used with the

permission of NVTech Inc.

F1366Full and Full and Fair Fair ReportingReporting

Financial AccountingA Bridge to Decision MakingA Bridge to Decision Making

Ingram and Albright

6th edition

6-2

ObjectivesObjectivesObjectivesObjectives

Once you have completed this chapter, you should be able to—

Once you have completed this chapter, you should be able to—

6-3

2. Describe how accounting standards are established in the United States.

3. Explain the purpose of the Financial Accounting Standards Board’s conceptual framework.


ContinuedContinuedContinuedContinued

1. Explain the purpose of accounting regulation.

6-4

4. Identify supplementary information to the financial statements in a corporate annual report.


5. Describe the purpose of internal controls and types of controls that should be evident in business organizations.

6-5

11ObjectiveObjectiveObjectiveObjective

Explain the purpose of accounting regulation.

6-6

Accounting regulations protect the interests of external decision makers by ensuring that:

The Purpose of Accounting RegulationsThe Purpose of Accounting RegulationsThe Purpose of Accounting RegulationsThe Purpose of Accounting Regulations

1) Information for evaluating the performance and financial condition of a business is available and

2) That the information is prepared according to specific guidelines.

6-7

These specific guidelines provide assurance that the information is reliable and comparable over time and

across companies.

These specific guidelines provide assurance that the information is reliable and comparable over time and

across companies.


6-8

The purchaser of a corporation’s stock needs assurance that the shares are reasonably priced and represent a

legitimate business.

The purchaser of a corporation’s stock needs assurance that the shares are reasonably priced and represent a

legitimate business.


6-9

To insure access to capital markets, the SEC requires corporations to

prepare accounting information in conformity with generally accepted

accounting principles (GAAP).

To insure access to capital markets, the SEC requires corporations to

prepare accounting information in conformity with generally accepted

accounting principles (GAAP).


6-10

The Securities Act of 1933 requires

most corporations to file registration statements before selling stock to

investors.

The Securities Act of 1933 requires

most corporations to file registration statements before selling stock to

investors.

Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations

6-11

The Securities Exchange Act of

1934 requires corporations to provide annual

financial reports to stockholders.

The Securities Exchange Act of

1934 requires corporations to provide annual

financial reports to stockholders.


6-12

The 1934 act also created the Securities and

Exchange Commission (SEC). The SEC is

responsible for overseeing external financial reporting

for publicly traded corporations.

The 1934 act also created the Securities and

Exchange Commission (SEC). The SEC is

responsible for overseeing external financial reporting

for publicly traded corporations.

Securities and Securities and Exchange Exchange

CommissionCommission

Securities and Securities and Exchange Exchange

CommissionCommission

Securities and Exchange

Commission


6-13


The Sarbanes-Oxley Act (SOX) was passed by Congress in 2002. This act, along with

subsequent regulations, affected the responsibilities of auditors, boards of

directors, and corporate managers with respect to financial reporting.

The Sarbanes-Oxley Act (SOX) was passed by Congress in 2002. This act, along with

subsequent regulations, affected the responsibilities of auditors, boards of

directors, and corporate managers with respect to financial reporting.

6-14


The primary purpose of SOX was to increase investor

confidence in the financial reports provided by

corporations.

The primary purpose of SOX was to increase investor

confidence in the financial reports provided by

corporations.

6-15


Further, SOX increased the responsibilities of corporate managers for producing reliable financial reports

and specified restrictions on the activities of auditors to increase their independence from the audit clients.

Further, SOX increased the responsibilities of corporate managers for producing reliable financial reports

and specified restrictions on the activities of auditors to increase their independence from the audit clients.

6-16

The Public Companies Accounting Oversight Board is responsible for

oversight of financial statement audits of publicly-traded corporations and the

establishment of auditing standards in the United States.


http://www.pcaobus.org/index.aspx

http://www.pcaobus.org/About_the_PCAOB/Contact.aspx

http://www.pcaobus.org/News_and_Events/index.aspx

6-17


The PCAOB reports to the Securities and Exchange

Commission (SEC), which appoints members to the five-

member PCAOB board.

6-18


SOX requires a certification from the chief executive officer and

chief financial officer along with the firm’s financial reports.

SOX requires a certification from the chief executive officer and

chief financial officer along with the firm’s financial reports.

6-19


The officers certify that the financial reports comply with requirements of Securities Exchange Act of 1934 and

contain information that fairly presents, in all material respects, the

financial condition and results of operations of the issuer.

The officers certify that the financial reports comply with requirements of Securities Exchange Act of 1934 and

contain information that fairly presents, in all material respects, the

financial condition and results of operations of the issuer.

6-20


SOX prohibits external auditors from providing

certain services to a client corporation.

SOX prohibits external auditors from providing

certain services to a client corporation.

6-21


• bookkeeping or other services relating to accounting records or financial statements of the audit client

• financial information systems design and implementation

• appraisal or evaluation services, fairness opinions or contribution-in-kind reports

• actuarial services

These prohibitions include:


6-22

Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations• internal audit outsourcing services• management functions or human resources• broker or dealer, investment advisor, or

investment banking services• legal services and expert services unrelated to

the audit• any other service that the accounting board

(PCAOB) determines, by regulation, is impermissible

6-23

22Describe how accounting standards are established in the United States.

ObjectiveObjectiveObjectiveObjective

6-24

Standard Setting OrganizationsStandard Setting OrganizationsStandard Setting OrganizationsStandard Setting Organizations

The Financial Accounting Standards Board (FASB) has been the primary organization for setting

accounting standards for businesses in the U.S. since 1973.

The Financial Accounting Standards Board (FASB) has been the primary organization for setting

accounting standards for businesses in the U.S. since 1973.

6-25

The Governmental Accounting Standards Board (GASB) sets

accounting standards for state and local governmental units.

The Governmental Accounting Standards Board (GASB) sets

accounting standards for state and local governmental units.


6-26


The General Accounting Office is the primary federal government agency

that oversees accounting in the

federal government.

The General Accounting Office is the primary federal government agency

that oversees accounting in the

federal government.

6-27


The International Accounting Standards Board (IASB) is an independent, privately-funded

accounting standard setter. The Board is committed to developing, in the public

interest, a single set of high quality, understandable, and enforceable global

accounting standards.

The International Accounting Standards Board (IASB) is an independent, privately-funded

accounting standard setter. The Board is committed to developing, in the public

interest, a single set of high quality, understandable, and enforceable global

accounting standards.

6-28

The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process1. Accounting issues are identified and evaluated for

consideration.

6-29

The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process

2. A discussion memorandum is issued and responses are solicited.

1. Accounting issues are identified and evaluated for consideration.

6-30



A discussion memorandum is a document that identifies accounting issues and alternative approaches to

resolving the issue.

A discussion memorandum is a document that identifies accounting issues and alternative approaches to

resolving the issue.


6-31

3. Public hearings are held.




6-32

3. Public hearings are held.4. An exposure draft is issued and responses are

solicited.




6-33


solicited.



An exposure draft is a document that describes a proposed accounting standard.

An exposure draft is a document that describes a proposed accounting standard.


6-34


solicited.



5. Additional public hearings are held as needed.


6-35


solicited.





An accounting standard is an official pronouncement establishing acceptable accounting

procedures or financial report content.

An accounting standard is an official pronouncement establishing acceptable accounting

procedures or financial report content.

6. A standard is issued.

6-36

7. Existing standards are reviewed and modified as needed.

6. A standard is issued.


solicited.





6-37

Exercise 6-4Exercise 6-4Exercise 6-4Exercise 6-4

Click button to skip exercise.

Identify the following:

a. The private sector organization currently responsible for setting financial accounting standards in the United States.

Press “Enter” or left click the mouse for the solution.

FASB

If you experience trouble making the button work, type 41 and press “Enter.”

6-38



b. The private sector organization currently responsible for setting state and local governmental accounting standards in the United States.

GASB


6-39



c. The organization that exists to influence the development of international accounting standards.

IASB


6-40

Identify the following:d. The federal agency that oversees

accounting at the federal government.GAO


e. The organization responsible for the enforcement of financial accounting standards in the United States.

SECPress “Enter” or left click the mouse for the solution.

6-41

33Explain the purpose of the Financial Accounting Standards Board’s conceptual framework.


6-42

The FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual Framework

The FASB conceptual framework is a set of objectives, principles, and

definitions to guide the development of new accounting standards.

The FASB conceptual framework is a set of objectives, principles, and

definitions to guide the development of new accounting standards.

6-43


The FASB conceptual framework includes The FASB conceptual framework includes four major components:four major components:

1. Objectives of financial reporting2. Qualitative characteristics of accounting

information3. Elements of financial statements4. Recognition and measurement in

financial statements

6-44


To be relevant, information should be timely and have

predictive or feedback value.

To be relevant, information should be timely and have

predictive or feedback value.

6-45


To be reliable, information should faithfully represent

economic events and should be verifiable and neutral.

To be reliable, information should faithfully represent

economic events and should be verifiable and neutral.

6-46

44Identify supplementary information to the financial statements in a corporate annual report.


6-47

Corporate annual reports Corporate annual reports usually include:usually include:


a letter from the president or chief executive officer of the company

a description of the company’s products and business activities

6-48



a summary of selected business data

Financial data, such as financial statements for a number of years

Financial data, such as financial statements for a number of years

An example of such data is shown in the next slide.

An example of such data is shown in the next slide.

6-49

Summary Business

Data from a Corporate

Report

2002 2003 2004 2005 2006

6-50

Corporate Annual Reports Corporate Annual Reports Usually Include:Usually Include:


a discussion by management of the company’s performance

This section, known as management’s discussion and analysis (MD&A) explains important events

and changes in performance during the years presented in the financial statements.

This section, known as management’s discussion and analysis (MD&A) explains important events

and changes in performance during the years presented in the financial statements.

6-51

Typical issues considered in the MD&A include the following: a comparison of operating results among

the data provided in the company’s income statement

liquidity and cash flows as indicated by cash and short-term investments and the statement of cash flows

major business risks


6-52

Typical issues considered in the MD&A include the following: financial risks such as foreign currency

exchange rates, equity security prices, and interest rate changes on debt securities

changes in accounting methods used by the company

subsequent events

6-53



financial statements

Notes to financial statements describe how some of the numbers were computed and

provide additional information about items reported in the statements.

Notes to financial statements describe how some of the numbers were computed and

provide additional information about items reported in the statements.

notes to the financial statements

6-54

a statement of management responsibilities for the financial statements

Management is responsible for preparing statements and related information that fairly reports the

business activities of a corporation.

Management is responsible for preparing statements and related information that fairly reports the

business activities of a corporation.



6-55

an audit report

An audit involves a detailed, systematic investigation of a company’s accounting records and procedures for the purpose of

determining the reliability of financial reports.

An audit involves a detailed, systematic investigation of a company’s accounting records and procedures for the purpose of

determining the reliability of financial reports.



6-56

Attestation occurs when an auditor affirms the fairness of financial

statements and other information. It provides public notice of the auditors’

belief about the fairness of the accompanying financial information.

Attestation occurs when an auditor affirms the fairness of financial

statements and other information. It provides public notice of the auditors’

belief about the fairness of the accompanying financial information.

The Auditors’ ReportThe Auditors’ ReportThe Auditors’ ReportThe Auditors’ Report

6-57

An unqualified opinion states that the auditor believes that the

financial statements fairly present the company’s actual economic events for the period covered by

the audited statements.

An unqualified opinion states that the auditor believes that the

financial statements fairly present the company’s actual economic events for the period covered by

the audited statements.


6-58

Auditing standards include procedures used in conducting an

audit to help auditors form an opinion about the fairness of the

audited statements.

Auditing standards include procedures used in conducting an

audit to help auditors form an opinion about the fairness of the

audited statements.


6-59


Click button to skip exercise.

Quick Transport Company owns a large fleet of trucks that move freight throughout the country. Some of these trucks cost hundreds of thousands of dollars and are operated for 15 years or more before being replaced. The company issues long-term debt to pay for most of its equipment.


If you experience trouble making the button work, type 63 and press “Enter.”

6-60


The company’s fiscal year ends on June 30. For each fiscal year, the company prepares financial reports that include estimates of its results of operations for the year. How do the operations of Quick illustrate the periodic measurement and going concern principles of accounting?


6-61

Quick uses periodic measurements because decision makers cannot wait until all transactions of the company are completed before making decisions. The periodic measurements include estimates because all transactions of the company have not been completed at the end of the fiscal period.

Quick uses periodic measurements because decision makers cannot wait until all transactions of the company are completed before making decisions. The periodic measurements include estimates because all transactions of the company have not been completed at the end of the fiscal period.



6-62

Quick is a going concern because it has an indefinite life. This life is sufficiently long that it can engage in long-term transactions, such as issuing long-term debt and purchasing long-term assets. It expects to continue in business to use these assets and repay the debt. It measures its performance periodically to provide information to decision makers.

Quick is a going concern because it has an indefinite life. This life is sufficiently long that it can engage in long-term transactions, such as issuing long-term debt and purchasing long-term assets. It expects to continue in business to use these assets and repay the debt. It measures its performance periodically to provide information to decision makers.


6-63

55Describe the purpose of internal controls and types of controls that should be evident in business organizations.


6-64

Management PhilosophyManagement PhilosophyManagement PhilosophyManagement Philosophy

A strong system of internal controls begins with a

management philosophy that encourages appropriate security

and behavior in a company.

A strong system of internal controls begins with a

management philosophy that encourages appropriate security

and behavior in a company.

6-65

Management PhilosophyManagement PhilosophyManagement PhilosophyManagement Philosophy

Top management ensure that procedures are

developed to monitor and enforce control policies.

Top management ensure that procedures are

developed to monitor and enforce control policies.

6-66

CCoonndduuc c tt

CCooddee

Business EthicsBusiness EthicsBusiness EthicsBusiness Ethics

Management should create a code of ethics and other documents

that establish company policy and inform

employees of acceptable and expected behavior.

Management should create a code of ethics and other documents

that establish company policy and inform

employees of acceptable and expected behavior.

6-67

Business EthicsBusiness EthicsBusiness EthicsBusiness Ethics

A major purpose of internal controls is to

ensure compliance with laws and regulations.

A major purpose of internal controls is to

ensure compliance with laws and regulations.

6-68

Computer System ControlsComputer System ControlsComputer System ControlsComputer System Controls

Internal controls should be built into computer information systems to protect a company’s information

resources from unauthorized access, improper use, and destruction.

Internal controls should be built into computer information systems to protect a company’s information

resources from unauthorized access, improper use, and destruction.

6-69

Computer System ControlsComputer System ControlsComputer System ControlsComputer System Controls

Users should have appropriate identification and passwords to

log onto networks or to use network resources.

Users should have appropriate identification and passwords to

log onto networks or to use network resources.

6-70

Human Resources ControlsHuman Resources ControlsHuman Resources ControlsHuman Resources Controls

Conducting background checks to identify employees who have a history of improper behavior.

Maintaining a good training program to ensure employee development and maintenance of skills.

Hiring qualified employees who have the appropriate skills for a particular job.

6-71

Human Resources ControlsHuman Resources ControlsHuman Resources ControlsHuman Resources Controls

An important control involves segregation of duties so that an

employee does not have access to resources and information that would

make it easy for the employee to misuse those resources.

An important control involves segregation of duties so that an

employee does not have access to resources and information that would

make it easy for the employee to misuse those resources.

6-72

Physical ControlsPhysical ControlsPhysical ControlsPhysical Controls Merchandise and materials can be secured

in warehouses or display cases. Merchandise can be tagged electronically

to make shoplifting or theft difficult. Surveillance equipment can monitor

important resources. Cash registers, vaults, and safety deposit

boxes can be used to secure financial resources.

6-73

THE ENDTHE END

CCHAPTERHAPTER 6 6

6-1 PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University...

Documents

Transcript of 6-1 PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University...