Conceptual Framework

Financial Accounting
Lecture 1
Year 2015
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Assignment Overview
Four (4) Hours Test
Three (3) Multiple Choice Testlets and One (1) Simulations Testlet
1 2 3 4
30 Multiple 30 Multiple 30 Multiple

7 Task-Based
Choice Choice Choice
Simulations
Questions Questions Questions
60 Points 40 Points

Chapter 1
Conceptual Framework, Standards,
Standard Setting and
Presentation of Financial Statements
(17%-23%)
Section 1
Accounting Standards and
Conceptual Frameworks
Standard Setting Bodies (FASB)
The standard setting bodies are set out below
» Established by the Securities Exchange Act in year

1934 SEC does not rate,
Securities and
1 » Has the legal authority to establish GAAP pass judgment on or
Exchange
» All public (listed) companies are subject to SEC make
Commission (SEC) » Ensure full and adequate disclosure by publicly traded recommendations
companies about companies
» SEC deferred to FASB to generate standards
Committee on » Was a part-time committee of the AICPA that 1939

2 Accounting broadcasted Accounting Research Bulletins (ARB),
Procedures (CAP) which determined GAAP from year 1939 until year
1959
1959
Accounting » Was a part-time committee of the AICPA that issued
3 Principles Board Accounting Principles Board Opinions (APBO) and
(APB) APB Interpretations, which determined GAAP from 1973

year 1959 until year 1973

Standard Setting Bodies (FASB) (Continued)
» Established in year 1973 to determine GAAP

» Generate accounting standards
» Seven full time members who serve for five-year terms
Financial
» In year 2009, FASB Accounting Standards 1973
4 Accounting
Codification became the single source of
Standards Board authoritative nongovernmental US GAAP.
(FASB) Accounting and reporting practices not included in
the codification are not GAAP
Ongoing Standard-Setting Process
» A majority vote of the board members is required to approve:

» Issuance of an Accounting Standards Update (or an Exposure Draft)
» Issuance of a Statement of Financial Accounting Concepts (or an Exposure Draft)
» Issuance of a Discussion Paper containing preliminary views of the FASB members
» Closure of a meeting to public observation

FASB Standard Process
The Board identifies financial reporting issues based on requests and/or recommendations from
1
stakeholders or through other means
The FASB decides whether to add a project to the technical agenda based on a staff-prepared
2
analysis of the issues
The Board deliberates at one or more public meetings the various reporting issues identified and
3 analyzed by the staff. The Board may also issue a Discussion Paper to obtain input in the early
stages of the project
The Board issues an Exposure Draft to solicit broad stakeholder input. The comment period length
4 depends upon the nature and complexity of the proposal, the amount of time stakeholders require
to consider and comment on the proposal, and the urgency of the need for a change
5 The Board may hold public roundtable meetings on the Exposure Draft
The staff analyzes comment letters, public roundtable discussions, and all other information
6 obtained through process activities. The Board redeliberates the proposal, carefully considering
input received, at one or more public meetings
The Board issues an Accounting Standards Update (ASU) describing amendments to the
7
Accounting Standards Codification®
8 The amendments are incorporated into the Codification

Securities and Exchange Commission (SEC)
» Sets the standards for companies that are required to report to the SEC
» Protect investors
» Maintain fair, orderly, and efficient markets for securities
» Facilitate capital formation
» The SEC has ultimate responsibility for setting the accounting standards
» Require periodic reporting of standardized information by companies with publicly traded securities
» To create the rules that publicly traded companies are required to follow in their financial reporting
» SoX 2002

Standard Setting Bodies (IASB)
» Established in year 2001

» Part of the IFRS foundation
International » 15 full time members and 2 part time members who are selected
1 Accounting to provide a mix of practical experience among auditors, users,
Standards Board etc.
(IASB) » The purpose of IASB is to develop a single set of high-quality
global accounting standards
International » Assist the IASB in establishing and improving accounting and

reporting standards
2 Financial Reporting
» Provides guidance on newly identified financial reporting issues
Interpretations
not addressed in the IFRSs and assists IASB in achieving
Committee (IFRIC) international convergence of accounting standards
» IASB adopted the International Accounting Standards, which are

International nowadays being updated into IFRSs
3 Financial Reporting » IASB issues IFRS and related documents, including the
Standards (IFRS) Conceptual Framework for Financial Reporting, exposure drafts,
etc.
» IFRS includes IAS, IFRIC, SIC and IFRS

Standard Setting Bodies (IASB) (Continued)
» A discussion paper is published by the IASB as its first publication on a major new topic (Not
required)
» After receiving and reviewing comments on the discussion paper, IASB prepares an Exposure
Draft
» The publication of the Exposure Draft is required
» At least 9 members of the IASB must approve an Exposure Draft for issuance
» After IASB receives public comments on the draft, IASB analyzes and then re-deliberates on
the issue
» IFRS is then approved by at least 9 members of the IASB

Standard Setting Bodies (GASB)
Governmental » The GASB is to establish accounting

1 Accounting and reporting standards for activities
Standards Board and transactions of state and local
(GASB) governmental entities
» An advisory task force of outside experts is appointed

» Existing literature on the subject is studied and additional research is conducted or
commissioned if necessary
» A discussion document for public comment setting forth the issues being addressed and
possible solutions is published
» An Exposure Draft of a proposed standard for public comment is broadly distributed
» Public hearings and forums on its due process documents are conducted
» The staff analyzes comment letters and any other information, and the board re-deliberates
the proposed provisions
» The board issues and Accounting Standards Update describing amendments to the
Codification of Governmental Accounting and Financial Reporting Standards

International Convergence of Accounting Standards
A single set of high-quality international accounting standards that companies could use for both
domestic and cross-border financial reporting
In order to achieve this goal, the FASB and the IASB cooperated for several years to improve both
US GAAP and IFRS and to eliminate differences between the two (2) sets of standards

Conceptual Framework for Both GAAP and IFRS
The conceptual framework describes the basic concepts that underlie the preparation and
presentation of financial statements for external users
It is the basic reasoning for GAAP, but not GAAP itself
Some of the ideas in this section are not consistent with current accounting practices
The FASB has created a conceptual framework called Statements of Financial Accounting Concepts
(SFAC) that serves as a basis for all FASB pronouncements
IMP
The SFAC are not GAAP (Provides guidance to the FASB, enabling it to resolve new and emerging
issues and to provide consistent pronouncements that are based on the conceptual framework rather
than on personal opinions of the standard-setters)
Provides guidance to the FASB, enabling it to resolve new and emerging issues and to provide consistent
pronouncements that are based on the conceptual framework rather than on personal opinions of the standard-
setters

General Purpose Financial Reporting
The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to the primary users of general purpose financial reports in making
decisions about providing resources to the reporting entity
The difference between Managerial Accounting and Financial Reporting is that Managerial
Accounting is for internal users whereas Financial Reporting is for external users
Financial information needed by the primary users include information about the resources of the
entity, claims against the entity and how efficient and effective the entity's management is
The primary users of Financial Reporting are set out below
1 2 3 4
Tax Banks and

Shareholders Employees
Authorities Lenders
5 6 7 8
SEC for Listed

Investors Suppliers Customers
Companies

Qualitative Characteristics of Useful Financial
Information
The ″Fundamental Qualitative Characteristics″ of useful information are set out below
» Predictive Value ( used to predict future outcome)

1 Relevance » Confirming Value (Provides feedback)
» Materiality
Faithful » Completeness (Primary financial statements and notes)

2 Representation » Neutrality (Free from bias)
» Free from Error (Does not mean perfect)
The abovementioned qualitative characteristics are enhanced by

1 2 3 4
Comparability Verifiability Timeliness Understandibility


Recognition, Measurement and Disclosure
The process of incorporating an item into a company's financial statements. Must meet four criteria:
1 2 3 4
The item is
The item meets
measurable with The item has The information
the definition of
sufficient relevance is reliable
an element
reliability
All four criteria are subject to two constraints
1 Cost-benefit
2 Materiality

Disclosure
Companies follow a practice of providing information that is of sufficient importance to influence the judgment
and decisions of an informed user. The information about the entity’s financial position, income, cash flows,
and investments is available in three places:
1 2 3
The main body The notes to the As

of the financial financial supplementary
statements statements information

Financial Statements
A full set of financial statements comprises of the elements set out below
1 2 3
Statement of
Statement of
Income Other
Financial
Statement Comprehensive
Position
Income
4 5 6
Statement of
Cash Flow
Shareholders Notes
Statement
Equity
Summary of
Significant
Disclosures
Accounting
Policies

Categories of Concepts
Assumptions
1 Entity Assumption » Separate corporation, division
Going Concern
2 » Will continue to operate in the foreseeable future
Assumption
Monetary Unit » Assume that money is an appropriate measurement unit

3 Assumption
Periodicity
4 » Economic activity can be divided into meaningful time periods
Assumption

Categories of Concepts (Continued)
Going concern assessment includes (It shall be evaluated on an interim and annual basis)
Ready access to financial

History of profitable operation
resources
Current and expected

Debt repayment schedule
profitability

Principles
Revenue
» Revenue should be recognized when it is earned and
1 Recognition
when it is realized or realizable
Principle
» Expenses against revenues / Accrual Accounting

2 Matching Principle
» Period Cost Vs Product Cost
Full Disclosure
3 » Completeness
Principle
4 Measurement » Completeness

Assumptions / Measurement
1 Historical Cost » Property, Plant and Equipment
2 Current Cost » Inventory
3 Net Realizable Value » Accounts Receivable
Current Market
4 » Marketable Securities
Value
Present Value of
5 » Long-term Debts and Bonds
Future Cash Flows
6 Replacement Cost » The amount of cash that would be paid to replace and asset
currently

An enterprise should prepare its financial statements, except for cash flow information, under the
accrual basis of accounting
Accrual basis / Matching principle
Revenues Expenses
Cash Basis When Collected When Paid
Accrual Basis When Recognized When Incurred


» Recognize revenues/gains when the earnings process is

complete
Conservatism » Recognized expenses/losses immediately
Principle
» Recognize revenues/gains when the earnings process is
complete
» Recognized expenses/losses immediately

Elements of Financial Statements (SOFP / SOCI)
Comprehensive » Net Income plus Other Comprehensive Income

Income
Revenues
» Operating
Income Statement
Expenses
Gains
» Non-Operating
Losses

Elements of Financial Statements (SOFP / SOCI)
(Continued)
Assets
Balance Sheet
Liabilities
Equity » Residual Interest – What is left over for owners

(Net Assets)
Investments by
Owners
» Excluded from Income Statement
Distribution to
Owners

Using Cash Flow Information and Present Value in
Accounting Measurements
Provides more detail on appropriate measurement techniques for assets and liabilities
The objective of present value when used in accounting measurements should be to estimate fair value
of an asset or liability
The expected cash flow approach to present value is a more effective measurement tool than the
traditional present value measurement, which uses a single set of estimated cash flows and a single
interest rate

Section 2
Balance Sheet
The Balance Sheet
1 2 3
Balance sheet
Uses
A moment in accounts are
proprietary
time permanent
theory
accounts
The elements of the balance sheet are set out below
Assets Liabilities Equity
Current assets will be Current liabilities will The remaining

converted into cash or be settled through the balance of assets after
sold or consumed use of current assets the subtraction of all
within 12 months or or by the creation of liabilities.

within one operating other current liabilities It is the portion of the
cycle if the operating company’s assets
cycle is longer than 12 owned by and owed to
months the owners

The Balance Sheet (Continued)
Uses Limitations
• Many assets are not reported on the balance

• Provides a basis for computing rates of return, sheet
evaluating the capital structure of the business, • Values of some assets measured at historical
and predicting a company's future cash flows cost
• Helps users to assess the company's liquidity, • Judgments and estimates are used in
financial flexibility, solvency and risk determining many of the items reported in the
balance sheet

Section 3
Income Statement
Uses of Income Statement
Helps users of the financial statements to predict future cash flows, as follows:
Helps users evaluate the company's past performance and to compare it to the performance of its
1
competitors
2 Provides a basis for predicting future performance
3 Helps users assess the risk or uncertainty of achieving future cash flows

Limitations of Income Statement
1 Assumptions and judgment are used
2 Income is impacted by the accounting methods used
3 Items that cannot be measured reliably are not reported in the income statement
4 The income statement is limited to reporting events that produce reportable revenues and expenses

Income Statement
» An amount expended for items such as capital assets,

1 Cost services and merchandise received. Cost is the actual amount
paid for something
2 Unexpired Costs » Are costs that will expire in future periods and be charged
against revenues from future periods
Unexpired Costs Expired Costs

(Asset) (Expense)
Inventory COGS
Prepaid Cost of
Insurance Expense
Insurance
NBV of Fixed Depreciation

Assets Expense
Unexpired Cost of Amortization

Patents Expense

Income Statement (Continued)
» Revenues are reported at their gross amounts (less

1 Gross Concept discounts and returns)
» Expenses are reported at their gross amounts
» Gains and losses are reported at their net amounts (i.e.

2 Net Concept proceeds less NBV)

Income Statement (Continued)
The Income Statement shows the performance of a Company over a certain period of time and indicates
whether the assets of a Company have been productive
» The presentation order of the elements of the Statement of Comprehensive Income is

set out below
Income(Loss) from
I Continuing Individual items before tax, then total
Operations reported Net of Tax
Statement
Income
Income(Loss) from
D Discontinued Net of Tax
Operations
E Extraordinary Items
Earnings
Retained
Cumulative Effect of » A change from one acceptable method of

A Changes in accounting to another is acceptable when the
Accounting Principle new method presents the financial

statements more fairly than the old method

Income from Continuing Operations
Report operating revenues and expenses

1 Multiple Step Income separately from non-operating revenues
Statement and expenses and other gains and losses
Total expenses (including tax expense)

2 Single Step Income are subtracted from total revenues D
Statement
E

Multi-Step Income Statement
Sales or service revenues
− Cost of goods sold (COGS)
= Gross profit
− Selling, general, and administrative expenses
= Operating income
+ Interest and dividend income
− Interest expense
+/− Non-operating gains/(losses)
= Income from continuing operations before provision for
income tax
− Provision for income taxes on continuing operations
= Income from continuing operations
+/− Gain/(loss) from operations of discontinued Component X
including gain/(loss) on disposal of $XXXX
+/− Income tax benefit or (income tax expense) on discontinued

Component X
= Net income

Other Income Items
1 2 3 4
Unusual Intra-period Non-

Discontinued
Gains and Tax controlling
Operations
Losses Allocation Interests
Gains and losses that A disposal of a The reporting of The portion of the
the firm shows 1.Component or group income taxes within equity in the
separately. of components, one period on the subsidiary that is not
Are ordinary gains and 2.That represents a income statement. owned by the parent.
losses and they are strategic shift that
part of income from has or will have a Taxes must be In a consolidated
operations major effect on the allocated between income statement, net
entity’s operations income from income must be
and financial results. continuing operations allocated between the
and discontinued controlling interest
operations (the parent) and the
non-controlling
interest

Income from Discontinued Operations
A component of an entity is a part of an entity for which operations and cash flows can be clearly
distinguished
A component is classified as ″Held for Sale″ when ALL of the following criteria are met
1 Management commits to a plan to sell the component
2 The component is available for sale for immediate sale in its present condition
3 An active program to locate a buyer has been initiated
4 The sale of the component is probable and the sale is expected to be complete within one year
5 The sale of the component is being actively marketed

Actions required to complete the sale make it unlikely that significant changes to the plan will be
6
made or that plan will be withdrawn

Income from Discontinued Operations (Continued)
The results of operations of a component of an entity or a group of components of an

entity, or a business or nonprofit activity will be reported in discontinued operations if
it
1 2 3
If the disposal
represents a strategic
Is classified as Held shift that will have a
Has been disposed of
for Sale major effect on
operations and
financial results

Income from Discontinued Operations (Continued)
The types of items included in results of discontinued operations are set out below
1 2 3
Gain or Loss on
Results of Operations Impairment Loss of
Disposal of the
of the Component the Component
Component
A component classified as Held for Sale is measured at the lower of its carrying amount
or fair value less costs to sell. Costs to sell are the incremental direct costs to transact
the sale
Future operating losses expected to be incurred as part of an exit or disposal activity

are recognized in the period(s) incurred

Extraordinary Items
An extraordinary item is something that is both unusual and infrequent
The definition of an extraordinary item under US GAAP is that extraordinary items are
transactions and other events that are
1 2 3
Of a character
Not expected to recur
significantly different
Material in Nature in the foreseeable
from the typical
future
business activities
4
Not normally
considered in
evaluating the
ordinary operating
results of an
enterprise

Extraordinary Items
Examples of Extraordinary Items
1 2 3
The damage of a
A prohibition of a
plant due to an An expropriation of a
product line by a
infrequent plant by the
newly enacted law or
earthquake, flood, Government
regulation
etc.
4
Certain gains or losses from
extinguishment of long-term
debt, provided they are not
part of the entity’s recurring

operations, and thus
infrequent and unusual

Accounting Changes
Accounting changes are broadly classified as
1 2 3
Changes in Changes in Changes in

Accounting Estimate Accounting Principle Accounting Entity
Prospectively Retrospectively and Restate Retrospectively and Restate
• Changes in the lives of fixed • GAAP to GAAP

assets • IFRS to IFRS
• Write downs of obsolete • Only if GAAP or IFRS
inventory require or if the alternative
• Settlement of litigation principle is preferable and

• Changes in accounting more fairly presents the
estimates that are information
inseparable from a change
in estimate

Three Methods of Accounting
1 2 3
Retrospective Prospective
Restatement
Application Adjustment
Used for changes in Used for changes in Used for correction of

accounting principles estimates and errors in previously
and changes in changes in estimates issued financial
reporting entity effected by change in statements
principle

Change in Accounting Principle
It is a change from one accepted GAAP method to another accepted GAAP method
Common examples: Inventory and Long-term contracts
The new principle must be preferable to the old method from the standpoint of financial
reporting. In period of change, must disclose
Explanation of why
The reason for the
The change the new method is
change
preferable
SEC requires the company's independent auditor to write a "preferability letter"

Must indicate whether or not the change is to an acceptable alternative that, in the
auditors judgment, is preferable

Change in Accounting Principle (Continued)
There are three adjustments that need to be made
For periods before the presented periods

1
The cumulative effect of the change to the new accounting principle

• on periods prior to those presented
• shall be reflected in the carrying amounts of assets and liabilities
• as of the beginning of the first period presented
2 To beginning retained earnings
An offsetting adjustment, if any, shall be made to the opening balance of retained

earnings for that period.
This adjusts beginning retained earnings for the effect of the change on all prior
periods
3 To each presented period
Financial statements for each individual prior period presented

are adjusted to reflect the effects of applying the new accounting principle to that
specific period

Direct and Indirect Effects
Direct effects are required by any company making a specific accounting change
Indirect effects are specific to the change within a specific company
Newly issued accounting standards generally give guidance for how to account for the
transition to the new standard
Impracticability of Retrospective
The retrospective method should not be used when it is impractical to do so
Must have made a reasonable, but unsuccessful, effort to do so
Doing so would require making unsubstantiated assumptions about management

decisions in the past
Significant estimates are required to be made, but are not able to be reasonably made
• Nature of change and why the new method is preferable.

• Method of applying the change.

• Description of prior period information that has been retrospectively adjusted.
• Effect of the change on net income.
• Indirect effects are described and amounts given

Change in Reporting Entity
Occurs when
Consolidated financial
There is a change in
statements prepared
the companies that
in place of individual
are consolidated
financial statements
Done with the retrospective method as just outlined


Correction of an Error
Correction of an Error Includes
1 2 3 4 5
Mathematiocal Estimated Misaapplication Cost – Asset

Non-GAAP Mistakes of GAAP Mistake
Changes
A change from Mathematical Changes in Mistakes in Incorrect

an accounting mistakes such estimates due application of classification of
principle which as the to errors or an accounting a cost as an
is not generally miscalculation inappropriate principle expense rather
accepted to an of depreciation assumptions in than an asset or
accepted expense preparing the vice versa
principle original
estimates

Change in Estimate
As time passes, more and better information becomes available that shows a previous
estimate was not accurate
Depreciation
Bad debts Warranty costs
estimates
Accounted for Prospectively
• No changes to prior period accounts or to beginning retained earnings

• Accounted for in the current period and future periods
Essentially stop, gather the new estimate and continue accounting from that point with
the new information
Should be explained in the notes to the financial statements.

Explanation should give the reason for the revision of the estimate and state the effects
of the change on:

• current income from continuing operations,
• net income, and
• for public companies, earnings per share

Change in Estimate (Continued)
X Company buys a truck for $90,000. The truck is expected to last 10 years. During the
third year, X Company realizes that the truck is only going to last a total of 5 years. The
truck is depreciated on the straight-line basis and has no estimated salvage value
Depreciation Schedule Illustration
Year Depreciation
Original
1 $9,000 ($90,000/10)
2 $9,000 ($90,000/10)
3 $24,000 ($72,000/3)
New Estimate
4 $24,000 ($72,000/3)
5 $24,000 ($72,000/3)
$90,000

Disclosure Issues
Prior period restated balances are marked as "Restated" at the top of each column
The term "Restatement" must be used to describe the effect of the error
The nature of the error also needs to be disclosed, as well is the impact of it
Unadjusted Retained earnings, beginning of the period xxx

+/− cumulative effect of retrospective changes in accounting principles xxx
+/− cumulative effect of retrospective changes in reporting entity xxx
+/− cumulative effect of restatement due to error corrections xxx
Adjusted Retained earnings, beginning of the period xxx
+ net income (or – net loss) xxx
− losses from share transactions (xxx)
− dividends declared (xxx)
Retained earnings, end of the period XXX

Section 4
Comprehensive Income
Statement of Comprehensive Income
All items of income and

expenses recognized in a
period must be presented
either:
A statement
displaying
components of P&L
(separate income
statement)
Single SOCI Two Statements
A second statement
beginning
with P&L and
displaying
components of OCI

Statement of Comprehensive Income (Continued)
Comprehensive income includes all transactions of the company except for those
transactions that are made with the owners of the company
Comprehensive income includes everything on the income statement plus some things
that do not appear on the income statement
May be presented as
A single statement with the As two separate, but

income statement consecutive statements
Must be presented in two sections, It must present

net income and other comprehensive income. • Total net income and the components of net
It must present income in the statement of net income; and
• Total net income along with the components that • Total other comprehensive income and the
make up net income; and components of other comprehensive income in a
• A total amount for the other comprehensive statement of other comprehensive income that
income along with the components that make up immediately follows the statement of net income
other comprehensive income
The items above may be shown as either

• Net of tax, or
• Before related tax effects with one amount shown for the aggregate income tax expense or
benefit related to the total of other comprehensive income

Comprehensive income is the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources
Net Income + Other Comprehensive Income = Comprehensive Income
1 2 3
Unrealized Gains
Pension Foreign Currency
and Losses
Adjustments Items
(AFS Securities)
4 5
Effective Portion Revaluation

Cash Flow Surplus
Hedges (IFRS Only)

Illustration 1
Year Ended 31 Before Tax Tax (Expense) Net of Tax

December 2014 Amount Benefit Amount
Exchange differences
on translating foreign X (X) X
operations
FVOCI (X) X (X)
Gain of property
X (X) X
revaluations
Actuarial losses on
defined benefit pension (X) X (X)
plans
Share of OCI of
X X
associates
Other Comprehensive
X (X) X
Income

Illustration 2
Year Ended 31 December 2014 2013

Exchange differences on translating
X (X)
foreign operations
FVOCI (X) X
Gain of property revaluations X X

Actuarial losses on defined benefit
(X) (X)
pension plans
Share of OCI of associates X X
Other Comprehensive Income X (X)
Income tax relating to components of

(X) X
other comprehensive income
Other Comprehensive Income for

X (X)
the Year

Other Comprehensive on BS
Accumulated other comprehensive income is a line in the equity section of the balance
sheet that includes these items that are not reflected on the income statement
1 Foreign currency translation adjustments
2 Unrealized holding gains and losses on available-for-sale securities
Subsequent decreases or increases in the fair value of available-for-sale securities previously

3 written down as impaired
4 The effective portion of gains and losses on derivative instruments that are designated as, and
qualify as, cash flow hedges
5 The effective portion of gains and losses on foreign currency transactions that are designated as
economic hedges of a net investment in a foreign entity
6 Gains or losses associated with pension or other postretirement benefits

7 Prior service costs or credits associated with pension or other postretirement benefits
8 Transition assets or obligations associated with pension or other postretirement benefits
If no OCI items, Company is not required to prepare a statement of other comprehensive income

Section 5
Statement of Changes in Equity
Statement of Changes in Equity
» Reports the changes in each account in the stockholders equity section of the balance sheet and in total
stockholders equity during the year
» Also reconciles the beginning balance in each account with the ending balance
Statement of Changes in Stockholders’ Equity
Accumu-
Additional lated Other
Preferred Common Paid-in Retained Comprehen-
Stock Stock Capital Earnings sive Income Total
Balance, December 31, Year 1 100 1,650 5,310 3,540 0 10,600

Net income 3,689 3,689
Preferred dividends declared (5) (5)
Common dividends declared (1,000) (1,000)
Issuance of common stock ___ 20 260 _____ ____ 280
Balance, December 31, Year 2 100 1,670 5,570 6,224 0 13,564
Net income 2,125 2,125
Preferred dividends declared (5) (5)
Common dividends declared (500) (500)

Issuance of common stock 15 210 225
Comprehensive income ___ _____ _____ _____ 1,500 1,500
Balance, December 31, Year 3 100 1,685 5,780 7,844 1,500 16,909

Section 6
Statement of Cash Flows
Overview
 The primary purpose of SOCF is to provide information about the company's historical changes in cash and cash
equivalents in a statement which classifies cash flows during the period from operating, investing and financing
activities
 The standard aims to give users of financial statements a basis to evaluate the entity's ability to generate cash and
cash equivalents and its needs to utilize those cash flows
Classification of Cash Flows
Income
Generally
Statement Generally
Operating Investing Financing Long-Term
Items and Long-Term
Activities Activities Activities Liabilities and
Working Assets
Equity Items
Capital

Preparing Statement of Cash Flows
SOCF permits two methods of reporting cash flows from ordinary activities
Direct method
(Accounting standards
encourage but do or Indirect method
not require the use of direct
method)

Uses of Statement of Cash Flows
1 Ability of the company to generate positive future cash flows to meet its obligations as they come
due and to pay dividends
2 Reasons for differences between net income and net cash inflows and outflows
3 Effect of investing and financing transactions on the company’s financial position; and
4 Company need for external financing.


Limitations of Statement of Cash Flows
1 Does not show how a company achieved some of its cash flows
Indirect method does not provide specific amounts of cash flows for operating activities – only
2
adjustments to net income

Section 7
The Notes to the Financial Statements
The Notes to the Financial Statements
The notes to the financial statements are considered an integral part of the financial statements but are not
a financial statement
The purpose of the notes is to provide informative disclosures that are required by U.S. GAAP
In order for an item to be recognized in the financial statements, it must be a

Basic Element Relevant and Reliable Measurable

Common Policy Requirements
Depreciation method(s) Information on amortization

used of intangibles
Accounting for the

Inventory pricing recognition of profit on long-
term construction contracts
Recognition of revenue from

franchising and leasing
operations

Commonly Used Notes
Inventory and Property, Creditor claims and Equity Contingencies and

Plant and Equipment holders’ claims Commitments
Deferred taxes, pensions,

Fair values Accounting changes
and leases
Doubt as to going concern Subsequent events Related Parties


Section 8
SEC Reporting Requirements
SEC Reporting Requirements
SEC is the ultimate authority for accounting and reporting standards
They have delegated this – currently to FASB
The SEC requires U.S. registrants’ financial statements to
Be audited by an
independent CPA
Conform to U.S. registered with the
GAAP Public Company
Accounting Oversight
Board (PCAOB)

Ongoing Reporting Requirements
8-K 10-Q 10-K
Report material events

that are not reported in Quarterly report Annual report
other forms

Ongoing Reporting Requirements (Continued)
8-K
Used by U.S. filers to report material events that are not reported in other Forms
Must be filed with the SEC within 4 business days of the event
Material Events on 8-K
Bankruptcy or receivership
Acquisition or disposition of a significant amount of assets not in the ordinary course of business
Event that accelerates or increases a direct financial obligation or obligation under an off-BS
arrangement
Costs associated with exit or disposal activities
Material impairments
Changes in the entity’s certifying accountant (auditor)
Amendments to Articles of Incorporation or Bylaws or change in the fiscal year

Ongoing Reporting Requirements (Continued)
10-Q
The quarterly report filed with the SEC, and it must be filed for the first three quarters of
the year within 40 days after the end of the first three fiscal quarters for both large
accelerated filers and accelerated filers, (45 days for all other companies).
Do not need to be audited by an independent accountant, but they are reviewed
10-K
The annual report to the SEC filed by U.S. companies
The 10-K annual report must be filed with the SEC within 60 days after the end of the
fiscal year for large accelerated filers, 75 days after the end of the fiscal year for
accelerated filers, and 90 days after the end of the fiscal year for all others
Must be audited by an independent auditor registered with the PCAOB
Must be accompanied by a statement of management that management is responsible for

creating and maintaining adequate internal controls

The company’s auditor must report on and attest to management’s assessment of the
effectiveness of the internal controls

MD&A Section
In the MD&A section in SEC filings, companies must provide a narrative explanation of
their financial statements and accompanying footnotes
Should cover its business as a whole, and should include a discussion of various
segments or other subdivisions to the extent that management deems such disclosure
to be appropriate to an understanding of the company's entire operations
Liquidity and Off-Balance Disclosure of

Results of
Capital Sheet Contractual
Operations
Resources Arrangements Obligations
MD&A rules expressly require disclosure of certain forward-looking information.

Management must remember that forward looking information may be deemed to be
“alive” and the company may have a duty to update the disclosure as circumstances
change

Section 9
Segmental Reporting
Segment Reporting
The objective of segment reporting is to provide information on the business

activities and the economic environment of a company to help users of the
financial statements
1 2 3 Make more
Better Better assess its informed
understand the prospects for judgments
enterprise’s future net cash abount the
performance flows enterprise as a
whole
Financial statements for public business enterprises must report information about
a company’s
1 2 3 2
Operating Products and Major

Geographic Areas
Segments Services Customers

Segment Reporting (Continued)
It is important to note that transactions between the segments of an enterprise are NOT eliminated in a
consolidation between the parent company and subsidiaries
Segment reporting applies to public companies only
A corporate headquarters or certain functional departments may not earn revenues or may earn
revenues that are only incidental to the activities of the enterprise would not be operating segments
Quantitative thresholds for reportable segments
1 2
10 % ”Size” Test
75 % ”Reporting
(Must only meet
Sufficiency” Test
one)
If the total of external revenue reported by

Assets Revenues Profit or operating segments constitutes less than 75% of
Loss external revenue, additional operating segments

need to be identified as reportable segments,
even if they do not meet the 3 mentioned tests,
until at least 75% of external revenue is included
in reportable segments

Thank you

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Financial Accounting

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30 Multiple 30 Multiple 30 Multiple

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The standard setting bodies are set out below

» Established by the Securities Exchange Act in year

Committee on » Was a part-time committee of the AICPA that 1939

(APB) APB Interpretations, which determined GAAP from 1973

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» Established in year 1973 to determine GAAP

Ongoing Standard-Setting Process

» A majority vote of the board members is required to approve:

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8 The amendments are incorporated into the Codification

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» Maintain fair, orderly, and efficient markets for securities

» Facilitate capital formation

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» Established in year 2001

International » Assist the IASB in establishing and improving accounting and

» IASB adopted the International Accounting Standards, which are

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Ongoing Standard-Setting Process

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Governmental » The GASB is to establish accounting

Ongoing Standard-Setting Process

» An advisory task force of outside experts is appointed

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It is the basic reasoning for GAAP, but not GAAP itself

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The primary users of Financial Reporting are set out below

Tax Banks and

SEC for Listed

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» Predictive Value ( used to predict future outcome)

Faithful » Completeness (Primary financial statements and notes)

The abovementioned qualitative characteristics are enhanced by

Comparability Verifiability Timeliness Understandibility

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All four criteria are subject to two constraints

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The main body The notes to the As

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1 Entity Assumption » Separate corporation, division

Monetary Unit » Assume that money is an appropriate measurement unit

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Ready access to financial

Current and expected

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» Expenses against revenues / Accrual Accounting

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1 Historical Cost » Property, Plant and Equipment

2 Current Cost » Inventory

3 Net Realizable Value » Accounts Receivable

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Accrual basis / Matching principle

Cash Basis When Collected When Paid

Accrual Basis When Recognized When Incurred

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» Recognize revenues/gains when the earnings process is

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