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Transcript of The Environment of Financial Reporting C hapter 1 An electronic presentation by Norman Sunderman...
The Environment of Financial Reporting
Chapter1
An electronic presentation by Norman Sunderman Angelo State University
An electronic presentation by Norman Sunderman Angelo State 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.
Intermediate AccountingIntermediate Accounting 10th edition 10th edition
Nikolai Bazley JonesNikolai Bazley Jones
2
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3
More Accountants Needed
New accounting rules pose challenges for financial
accounting and projections point to increased hiring of
accounting graduates.
New accounting rules pose challenges for financial
accounting and projections point to increased hiring of
accounting graduates.
4
Estimated Hiring Increase
Accounting firms of all sizes plan to increase future hiring.
5
Companies need large amounts of capital for operations
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Companies may obtain capital by issuing capital stock...
Stock Exchange
7
Bank
…or by borrowing from lenders
8
Corporations
Financial InstitutionsInvestors
Borrow money
Sell stocks and bonds
Primary Market (e.g., individuals,
banks)
Secondary Market (e.g., New
York Stock Exchange)
Buy and sell stocks and
bonds
Capital Markets
Buy and sell stocks and bonds
Buy and sell stocks and bonds
Investors Investors
9
Accumu-late
AccountingInformation
Communi-cate
External User
Internal User
External
Decision
MakingCompany’s Economic Activities
Impact
Impact
Accounting Information Economic Activities and
Decision Making
Internal Decisio
n 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
11
Sources of AuthoritySources of Authority
Internal needs
Managerial Accounting Financial Accounting
GAAP
Comparison of Financial and Managerial Accounting
12
Time Frame of Reported InformationTime Frame of Reported Information
Present and future
Managerial Accounting
Primarily historical
Financial Accounting
Comparison of Financial and Managerial Accounting
13
ScopeScope
Total company&
Segment reporting
Financial Accounting
Individual departments, divisions, and total company
Managerial Accounting
Comparison of Financial and Managerial Accounting
14
Type of InformationType of Information
Primarily quantitative
Sales$275,240
Cost180,120
Gross mar. 95,120
Expenses 80,120
Net inc. $15,000
Financial Accounting
Qualitative as well as quantitative
Materials usage is
unfavorable
by $8,400.
Managerial Accounting
Comparison of Financial and Managerial Accounting
15
Statement FormatStatement Format
Prescribed by GAAP; oriented toward investment
and credit decisions
Financial Accounting
Determined by company; focused upon specific decisions being made
Managerial Accounting
Comparison of Financial and Managerial Accounting
16
Decision FocusDecision Focus
External
Financial Accounting
Internal
Managerial Accounting
Comparison of Financial and Managerial Accounting
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The company’s accountants prepare both
the financial and the managerial accounting
reports…
The company’s accountants prepare both
the financial and the managerial accounting
reports…
…and the information comes from the same information system.
…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 is the process of communicating
financial accounting information about a
company to external users.
Financial Reporting
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A statement of changes in
stockholders’ equity also is included by many companies.
A statement of changes in
stockholders’ equity also is included by many companies.
Financial Reporting
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This statement summarizes the
changes in each item of stockholders’
equity for a period.
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.
Generally Accepted Accounting Principles (GAAP)
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A. FASB Statements of Financial Accounting Standards and Interpretations, FASB Staff Positions, FASB Statement 133 Implementation Issues, APB Opinions, and CAP (AICPA) Accounting Research Bulletins, (as well as SEC releases such as regulation S-X, Financial Reporting releases, and Staff Accounting Bulletins for companies that file with the SEC)
ContinuedContinuedContinuedContinued
Hierarchy of Sources of GAAP
Categories 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 and if cleared by the FASB, AICPA Practice Bulletins
ContinuedContinuedContinuedContinued
Hierarchy of Sources of GAAP
Categories Authoritative Sources
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Hierarchy of Sources of GAAP
D. FASB Q’s and A’s (Implementation Guides), AICPA Accounting Interpretations, 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
25
1938
CAP formed
CAP issued
51 ARBs
1959
APB formed
APB issued 31 Opinions
1973
FASB formed
Present
FASB issued 154 Statements
of Standards as of 10/05
History of GAAP in Private Sector
26
Committee on Accounting Procedure (CAP)
In 1938, the AICPA formed the Committee on Accounting Procedure. 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 in 1959 to replace the Committee on Accounting Procedure.
27
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.
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 APB
28
Financial Accounting Standards Advisory
Council (approximately 30 members)
Financial Accounting Standards Board
(7 members)
Appoint, fund, and oversee
Advise
Financial Accounting Foundation (16-member board
of trustees)
ContinuedContinuedContinuedContinued
Structure of FASB
29
Task Forces of the Standards Board
(including Emerging Issues Task Force)
Appoint
Consult
Support
Administrative Staff
Research and Technical Staff Consult
Structure of the FASB
Financial Accounting Standards Board
(7 members)
Financial Accounting Standards Board
(7 members)
30
Statements of Financial Accounting Standards
InterpretationsTechnical BulletinsStatements of Financial Accounting
ConceptsOther Pronouncements
Types of Pronouncements Issued by the FASB
31
Identify Topic
Appoint Task Force
Conduct Research
Issue Discussion
Memorandum or Invitation to
Comment
Issue Exposure
Draft
ContinuedContinuedContinuedContinued
Deliberate on Findings
Hold Public Hearings
FASB Operating Procedures
32
Modify Exposure
Drafts
Vote (simple
majority)
Issue Exposure
Draft
Hold Public
Hearings
From previous
page
Issue Statement
FASB Operating Procedures
33
ResponsibilitiesResponsibilities
In carrying out their responsibilities as
professionals, members should exercise sensitive professional judgment in
all their activities.
In carrying out their responsibilities as
professionals, members should exercise sensitive professional judgment in
all their activities.
Principles of the AICPA Code of Professional Conduct
34
The Public InterestThe 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.
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.
Principles of the AICPA Code of Professional Conduct
35
IntegrityIntegrity
To maintain and broaden public confidence,
members should perform all professional
responsibilities with the highest sense of integrity.
To maintain and broaden public confidence,
members should perform all professional
responsibilities with the highest sense of integrity.
Principles of the AICPA Code of Professional Conduct
36
Objectivity and IndependenceObjectivity 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.
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.
Principles of the AICPA Code of Professional Conduct
37
Due CareDue Care
A member should observe the profession’s technical and ethical standards, strive continually to improve
competence and the quality of services, and discharge the
professional responsibility to the best of the member’s ability.
A member should observe the profession’s technical and ethical standards, strive continually to improve
competence and the quality of services, and discharge the
professional responsibility to the best of the member’s ability.
Principles of the AICPA Code of Professional Conduct
38
Scope and Nature of ServiceScope 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.
A member in public practice should observe the
Principles of the CPC in determining the scope and
nature of services to be provided.
Principles of the AICPA Code of Professional Conduct
39
Chapter1
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