Professional Documents
Culture Documents
Accounting Standards
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the major financial statements and 6. Explain the meaning of generally
other means of financial reporting. accepted accounting principles (GAAP)
2. Explain how accounting assists in the and the role of the Codification for GAAP.
efficient use of scarce resources. 7. Describe the impact of user groups on the
3. Identify the objective of financial rule-making process.
reporting. 8. Describe some of the challenges facing
4. Explain the need for accounting financial reporting.
standards. 9. Understand issues related to ethics and
5. Identify the major policy-setting bodies financial accounting.
and their role in the standard-setting
1-1 process.
Financial Statements and Reporting
1-2 LO 1 Identify the major financial statements and other means of financial reporting.
Financial Statements and Reporting
Financial
Financial Balance
Balance Sheet
Sheet President’s
President’s letter
letter
Information
Information Income
Income Statement
Statement Prospectuses
Prospectuses
Accounting?
Accounting? Statement
Statement of
of Cash
Cash Reports
Reports filed
filed with
with
Identifies
Identifies Flows
Flows governmental
governmental
and agencies
agencies
Statement
Statement of
of Owners’
Owners’
Measures
Measures or
or Stockholders’
Stockholders’ News
News releases
releases
and
and Equity
Equity Forecasts
Forecasts
Communicates
Communicates Note
Note Disclosures
Disclosures Environmental
Environmental
impact
impact statements
statements
GAAP
Etc.
Etc.
1-3 LO 1 Identify the major financial statements and other means of financial reporting.
Financial Statements and Reporting
Question
What is the purpose of information presented in notes to the
financial statements?
1-4 LO 1 Identify the major financial statements and other means of financial reporting.
1 Financial Accounting and
Accounting Standards
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the major financial statements and 6. Explain the meaning of generally
other means of financial reporting. accepted accounting principles (GAAP)
2. Explain how accounting assists in the and the role of the Codification for GAAP.
efficient use of scarce resources. 7. Describe the impact of user groups on the
3. Identify the objective of financial rule-making process.
reporting. 8. Describe some of the challenges facing
4. Explain the need for accounting financial reporting.
standards. 9. Understand issues related to ethics and
5. Identify the major policy-setting bodies financial accounting.
and their role in the standard-setting
1-5 process.
Financial Statements and Reporting
1-6 LO 2 Explain how accounting assists in the efficient use of scare resources.
Accounting and Capital Allocation
Question
An effective process of capital allocation is critical to a healthy
economy, which
a. promotes productivity.
b. encourages innovation.
c. provides an efficient and liquid market for buying and
selling securities.
d. All of the above.
1-7 LO 2 Explain how accounting assists in the efficient use of scare resources.
IT’S THE ACCOUNTING
“It’s the accounting.” That’s what many investors seem to be saying these days.
Even the slightest hint of any accounting irregularity at a company leads to a
subsequent pounding of the company’s stock price. For example, the Wall Street
Journal has run the following headlines related to accounting and its effects on the
economy.
• Stocks take a beating as accounting woes spread beyond Enron.
• Quarterly reports from IBM and Goldman Sachs sent stocks tumbling.
• VeriFone finds accounting issues; stock price cut in half.
• Bank of America admits hiding debt.
• Facebook, Zynga, Groupon: IPO drops due to accounting, not valuation.
It now has become clear that investors must trust the accounting numbers, or they
will abandon the market and put their resources elsewhere. With investor
uncertainty, the cost of capital increases for companies who need additional
resources. In short, relevant and reliable financial information is necessary for
markets to be efficient.
1-8 LO 2 Explain how accounting assists in the efficient use of scare resources.
1 Financial Accounting and
Accounting Standards
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the major financial statements and 6. Explain the meaning of generally
other means of financial reporting. accepted accounting principles (GAAP)
2. Explain how accounting assists in the and the role of the Codification for GAAP.
efficient use of scarce resources. 7. Describe the impact of user groups on the
3. Identify the objective of financial rule-making process.
reporting. 8. Describe some of the challenges facing
4. Explain the need for accounting financial reporting.
standards. 9. Understand issues related to ethics and
5. Identify the major policy-setting bodies financial accounting.
and their role in the standard-setting
1-9 process.
Financial Statements and Reporting
Entity Perspective
Companies viewed as separate and distinct from their
owners.
Decision-Usefulness
Investors are interested in assessing the company’s
1. ability to generate net cash inflows and
2. management’s ability to protect and enhance the capital
providers’ investments.
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the major financial statements and 6. Explain the meaning of generally
other means of financial reporting. accepted accounting principles (GAAP)
2. Explain how accounting assists in the and the role of the Codification for GAAP.
efficient use of scarce resources. 7. Describe the impact of user groups on the
3. Identify the objective of financial rule-making process.
reporting. 8. Describe some of the challenges facing
4. Explain the need for accounting financial reporting.
standards. 9. Understand issues related to ethics and
5. Identify the major policy-setting bodies financial accounting.
and their role in the standard-setting
1-13 process.
The Need To Develop Standards
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the major financial statements and 6. Explain the meaning of generally
other means of financial reporting. accepted accounting principles (GAAP)
2. Explain how accounting assists in the and the role of the Codification for GAAP.
efficient use of scarce resources. 7. Describe the impact of user groups on the
3. Identify the objective of financial rule-making process.
reporting. 8. Describe some of the challenges facing
4. Explain the need for accounting financial reporting.
standards. 9. Understand issues related to ethics and
5. Identify the major policy-setting bodies financial accounting.
and their role in the standard-setting
1-15 process.
Parties Involved In Standard Setting
Three organizations:
Securities and Exchange Commission (SEC).
American Institute of Certified Public Accountants (AICPA).
Financial Accounting Standards Board (FASB).
Securities
SecuritiesAct
Actof
of Securities
SecuritiesAct
Actof
of http://www.sec.gov/
1933
1933 1934
1934
Encouraged private standard-setting body.
SEC requires public companies to adhere to GAAP.
SEC Oversight.
Enforcement Authority.
LO 5 Identify the major policy-setting bodies and
1-17
their role in the standard-setting process.
Parties Involved In Standard Setting
1-18 LO 5
Parties Involved In Standard Setting
Financial
Financial Accounting
Accounting
Standards
Standards Advisory
Advisory Consult on major policy issues.
Council
Council
1-19 LO 5
Financial Accounting Standards Board
Smaller Membership.
Full-time, Remunerated Membership.
Greater Autonomy.
Increased Independence.
http://www.fasb.org/
Broader Representation.
Question
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.
Illustration 1-3
The Due Process
System of the
FASB
Types of Pronouncements
Accounting Standards Updates.
Financial Accounting Concepts.
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the major financial statements and 6. Explain the meaning of generally
other means of financial reporting. accepted accounting principles (GAAP)
2. Explain how accounting assists in the and the role of the Codification for GAAP.
efficient use of scarce resources. 7. Describe the impact of user groups on the
3. Identify the objective of financial rule-making process.
reporting. 8. Describe some of the challenges facing
4. Explain the need for accounting financial reporting.
standards. 9. Understand issues related to ethics and
5. Identify the major policy-setting bodies financial accounting.
and their role in the standard-setting
1-24 process.
Generally Accepted Accounting Principles
Illustration 1-4
GAAP Documents
Question
Which of the following accounting pronouncements is the most
authoritative?
a. FASB Statement of Financial Accounting Concepts.
b. FASB Technical Bulletins.
c. AICPA Accounting Principles Board Opinion.
d. AICPA Statement of Position.
FASB Codification
Goal in developing the Codification is to provide in one place all
the authoritative literature related to a particular topic.
Creates one level of GAAP, which is considered authoritative.
All other accounting literature is considered non-authoritative.
1-29 LO 6
Generally Accepted Accounting Principles
Illustration 1-5
FASB Codification
Framework
1-30 LO 6
1 Financial Accounting and
Accounting Standards
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the major financial statements and 6. Explain the meaning of generally
other means of financial reporting. accepted accounting principles (GAAP)
2. Explain how accounting assists in the and the role of the Codification for GAAP.
efficient use of scarce resources. 7. Describe the impact of user groups on the
3. Identify the objective of financial rule-making process.
reporting. 8. Describe some of the challenges facing
4. Explain the need for accounting financial reporting.
standards. 9. Understand issues related to ethics and
5. Identify the major policy-setting bodies financial accounting.
and their role in the standard-setting
1-31 process.
Issues in Financial Reporting
Illustration 1-6
GAAP in a Political Environment User Groups that
Influence the Formulation
of Accounting Standards
GAAP is as
much a product
of political
action as they
are of careful
logic or
empirical
findings.
Expectation GAAP
What the public thinks accountants should do vs. what
accountants think they can do.
Difficult to close in light of accounting scandals.
Sarbanes-Oxley Act (2002).
Public Company Accounting Oversight Board
(PCAOB).
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the major financial statements and 6. Explain the meaning of generally
other means of financial reporting. accepted accounting principles (GAAP)
2. Explain how accounting assists in the and the role of the Codification for GAAP.
efficient use of scarce resources. 7. Describe the impact of user groups on the
3. Identify the objective of financial rule-making process.
reporting. 8. Describe some of the challenges facing
4. Explain the need for accounting financial reporting.
standards. 9. Understand issues related to ethics and
5. Identify the major policy-setting bodies financial accounting.
and their role in the standard-setting
1-35 process.
Issues in Financial Reporting
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the major financial statements and 6. Explain the meaning of generally
other means of financial reporting. accepted accounting principles (GAAP)
2. Explain how accounting assists in the and the role of the Codification for GAAP.
efficient use of scarce resources. 7. Describe the impact of user groups on the
3. Identify the objective of financial rule-making process.
reporting. 8. Describe some of the challenges facing
4. Explain the need for accounting financial reporting.
standards. 9. Understand issues related to ethics and
5. Identify the major policy-setting bodies financial accounting.
and their role in the standard-setting
1-38 process.
Issues in Financial Reporting
http://www.iosco.org/
1-50 LO 10
Hierarchy of IFRS
Companies first look to:
Any U.S. incorporation of IFRS in GAAP will occur over several years.
1-53 LO 10
IFRS SELF-TEST QUESTIONS