1.

Understand the financial reporting environment

Financial Accounting: the process that culminates in the preparation of financial reports on the
enterprise for use by both internal and external parties
Managerial Accounting: is the process of identifying, measuring, analyzing, and communicating
financial info. Needed by management to plan, control, and evaluate a companys operations.
Financial Statements: (1) Income Statement, (2) Balance Sheet, (3) Statement of Cash Flows, and (4)
Statement of SE.
Financial Reporting: financial info. Other than formal financial statements; include news releases,
managements forecasts, and social or environmental impact statements.
Objective of financial reporting: provide financial info. About the reporting entity that is useful to
present and potential equity investors, lenders, and other creditors in decisions.
Investors and creditors are the primary users for general-purpose financial statements
Entity Perspective: companies are viewed as separate and distinct from their owners (present
shareholders)
Proprietary Perspective: a perspective that financial reporting should be focused only on the needs of
shareholders (not appropriate for financial reporting)
Stewardship: an ethic that embodies the responsible planning and management of resources. For
example, protecting a companys economic resources from unfavorable effects of economic factors,
such as price changes, and technological and social changes.
Decision-Usefulness Approach: investors are interested in financial reporting because it provides
information that is USEFUL for MAKING DECISIONS
Accrual-basis Accounting
Generally Accepted Accounting Principles (GAAP)
o Generally Accepted: means either that an authoritative accounting rule-making body has
established a principle of reporting in a given area or that over time a given practice has been
accepted as appropriate because of its universal application
2. Identify the major policy-setting bodies and their role in the standard-setting process.
Securities and Exchange Commission (SEC): develop and standardize financial information
presented to stockholders.
o Federal Agency
o Administers the Securities Exchange Act of 1934 and other acts
o Requires registrants to adhere to GAAP
o Relies on FASB to develop accounting standards
American Institute of Certified Public Accountants (AICPA): national professional organization of
practicing CPAs
o (1) Committee of Accounting Procedure (CAP): composed of practicing CPAs
Issued 51 Accounting Research Bulletins
Problem-by-problem approach failed
o (2) Accounting Principles Board (APB): Issued 31 ABP Opinions (the boards official
pronouncements)
o Have a Financial Reporting Executive Committee (FinREC): authorized to make public
statements on behalf of the AICPA on financial reporting matters.
Mission: to determine the AICPAs technical policies regarding financial reporting
standards, with the ultimate purpose of serving the public interest by improving
financial reporting.
Issues audit and accounting guides that provide specific directions on matters not
addressed by the FASB
o AICPAs Code of Professional Conduct: requires that members prepare financial statements
in accordance with GAAP

Rule 203 of the Code: Prohibits a member from expressing an unqualified opinion on
financial statements that contain a material departure from GAAP.
Financial Accounting Standards Board (FASB): mission is to establish and improve standards of
financial accounting and reporting for the guidance and education of the public, which includes
issuers, auditors, and users of financial information.
APB
FASB
18 members
*Smaller membership: consists of 7 members
Members volunteered their part-time work
*Full-time, remunerated membership; are well-paid,
full time members
Was a senior committee of the AICPA
*Greater autonomy: is not part of any single
professional organizationanswerable only to the
Financial Accounting Foundation
Members retained their private positions with firms,
*Increased independence: must sever all ties
companies, or institutions.
All members were required to be CPAs and members *Broader representation: Dont have to be CPA to be
of the AICPA
a member

Financial Accounting Foundation (FAF): selects members of the FASB and their Advisory Councils,
fund their activities, and exercise general oversight.
Financial Accounting Standards Advisory Council (FASAC): consults with the FASB on major
policy and technical issues and also help select task force members.
Development of a typical FASB pronouncement/ Due Process System of FASB:
o (1) Topics identified and placed on Boards agenda
o (2) Preliminary Views: Research and analysis conducted and preliminary views of pros and
cons issued
o (3) Public hearing on proposed standard
o (4) Exposure Draft: board evaluates research and public response and issues exposure draft
o (5) Accounting Standards Update/ Statements Board evaluates responses and changes
exposure draft, if necessary. Final standard issued.
2 Types of Pronouncements
o (1) Accounting Standard Updates: explains how the Codification has been amended
Emerging Issues Task Force (EITF): guidance within the Codification
A problem filter for the FASB
Provides implementation guidance within the framework of the Codification
to reduce diversity in practice on a timely basis
Was designed to minimize the need for the FASB to spend time and effort
addressing narrow implementation, application, or other emerging issues that
can be analyzed within existing GAAP.
o (2) Statements of Financial Accounting Concepts (SFAC): does NOT establish GAAP
FASB has issued 7 Statements of Financial Accounting Concepts (SFAC)
the series sets forth fundamental objectives and concepts that the Board uses in
developing future standards of financial accounting and concepts.
intends to form a cohesive set of interrelated conceptsa conceptual framework
that will serve as tools for solving existing and emerging problems in a consistent
manner
Pass through the same due process system as do standards updates
3. Explain the meaning of generally accepted accounting principles (GAAP) and the role of the
Codification for GAAP.

a. Generally Accepted Accounting Principles (GAAP): comes from FASB standards, APB
Opinions, and AICPA Research Bulletins.
b. FASB Codification: changed the way GAAP was documented, presented, and updated; integrates
and synthesizes existing GAAP
i. Created one level of GAAP, which is considered authoritative.
c. Financial Accounting Standards Board Codification Research System (CRS): an online real-time
database that provides easy access to the Codification
4. Describe major challenges in the financial reporting environment.
a. The Expectations Gap: what the public thinks accountants should do and what accountants think
they can do
b. Sarbanes-Oxley Act (SOX)
i. Established oversight board: Public Company Accounting Oversight Board (PCAOB)
ii. Stronger independence rules for auditors (rotating every 5 years)
iii. Audit committee composed of independent members and members with financial
expertise
iv. Section 404: Internal controlspublic companies have to attest to the effectiveness of
their internal controls over financial reporting
c. Financial Reporting Challenges
i. Nonfinancial measurements
ii. Forward-looking information
iii. Soft Assetscompanys intangibles such as brands
iv. Timeliness
v. Understandability
5. Compare the procedures related to financial accounting and accounting standards under GAAP
and IFRS
a. The need for one set of accounting standards because:
i. Multinational Corporations: companies view the entire world as their market
ii. Mergers and acquisitions
iii. Information Technology
iv. Financial Markets: are of international significance today