INTERMEDIATE

ACCOUNTING
14th EDITION

K. Fred Skousen
Earl K. Stice
James D. Stice
 2

This electronic
presentation
prepared by
Douglas Cloud,
Pepperdine
University
 3

Task
Task Force
Force Clip
Clip Art
Art included
included
in
in this
this electronic
electronic presentation
presentation
isis used
used with
with the
the permission
permission of of
New
New Vision
Vision Technology
Technology of of
Nepean
Nepean Ontario,
Ontario, Canada
Canada
 4

FINANCIAL
REPORTING
 5
Learning Objectives
 Describe the purpose of financial reporting
and identify the primary financial statements.
 Explain the function of accounting standards
and describe the role of the FASB in setting
these standards in the United States.
 Recognize the importance to financial
reporting of the SEC, AICPA, AAA, and IRS.
 6
Learning Objectives
 Realize the growing importance and relevance of
international accounting issues to the practice of
accounting in the United States and understand the
role of the IASC in international accounting standard
setting.
 Understand the significance of the FASB’s
conceptual framework in outlining the qualities of
good accounting information, defining terms such as
asset and revenue, and providing guidance about
appropriate recognition, measurement, and reporting.
 7
Learning Objectives
 Identify career opportunities related to
accounting and financial reporting in the
fields of public accounting, corporate
accounting, financial analysis, banking, and
consulting.
 8
Definition for Accounting

“Accounting is a service activity. Its

function is to provide quantitative
information, primarily financial in nature,
about economic entities that is intended to
be useful in making economic decisions--
in making reasoned choices among
alternative courses of action.” (APB 4.40).
 9
Definition for Accounting
Key features of this definition:
• Accounting provides a vital service in
today’s business environment.
• Accounting is concerned primarily
with quantitative financial information
that is used in conjunction with
qualitative evaluations in making
judgments.
 10
Definition for Accounting
Key features of this definition:
• Accounting information is used in making
decisions about how to allocate scarce
resources.
• Although accountants place much emphasis
on reporting what has already occurred, this
past information is intended to be useful in
making economic decisions about the
future.
 11

Users of Accounting Information

All
All parties
parties interested
interested in
in
the
the financial
financial health
health of
of aa
company
company are are called
called
stakeholders.
stakeholders.
 12

Users of Accounting Information

Two major classifications of stakeholders

Internal
Internal users,
users, who
who
make
make decisions
decisions
directly
directly affecting the External
affecting the External users,
users,
internal operations
internal operations who
who make
make decisions
decisions
of the enterprise.
of the enterprise. concerning
concerning their
their
relationship
relationship to
to the
the
enterprise.
enterprise.
Major Internal and External 13

Stakeholder Groups

Investors
Government Community
Board of Directors
Analysts Management Suppliers
Employees
Customers Employees
Creditors
 14

Financial Reporting
The
The balance
balance sheetsheet
reports,
reports, asasThe
of aaincome
of
The certain statement
certain
income statement
point
point in reports,
in time, thefor
the
reports, aa certain
forThe
time, Thecertain
statement
statement of of cash
cash
interval,
resources of aa the
of
interval,
resources the net
net
flowsassets
assets
reports,
flows reports, for
for aa
company
company (the (thegenerated
assets), through
assets),
generated through
certain
certain interval,
interval, the
the
the business
business operations
the company’s
company’s operations
amount
amount of of cash
cash generated
generated
obligations (revenues),
(the
(revenues), the
the net
obligations (the andnet
and consumed
consumed by by aa
liabilities),assets
liabilities), and
assets consumed
and theconsumed
the (the
company(the through
company through
equity
equity of expenses),
of the
the owners.
expenses), and
and
owners.operating,the
the net
netfinancing,
operating, financing, and
and
income.
income.investing
investing activities.
activities.
 15

Financial Reporting
Accounting
Accounting estimates
estimates and
and
judgments
judgments areare outlined
outlined in
in
the
the notes
notes to
to financial
financial
statements.
statements.
 Financial Statement 16

Relationships
Statement of Cash Flows
Cash From Op $ 973,000
Cash From Inv (1,188,000)
Cash From Fin 245,000
Net Increase $ 30,000
Beg. Cash 80,000
End. Cash $ 110,000

Balance Sheet 12/31/X0 Balance Sheet 12/31/X1

Income Statement
Cash $ 80,000
Revenues $12,443,000 Cash $ 110,000
Other 4,550,000
Expenses 11,578,400 Other 4,975,000
Total $4,630,000
Net Income $ 864,600 Total $5,085,000
Liabilities $2,970,000
Liabilities $2,860,400
Stock 900,000 Statement of Stock 1,000,000
R/E 760,000 Retained Earnings R/E 1,224,600
Total $4,630,000
R/E 12/31/X0 $ 760,000 Total $5,085,000
Net Income 864,600
Dividends (400,000)
R/E 12/31/X1 $1,224,600
 Relative Frequency of 17

Audit Opinions (1998)

Companies

Unqualified 5,978
Unqualified With Explanatory Language 1,030
Qualified 6
No opinion 2
Adverse 0
Total 7,016
 Accounting Standard-Setting 18

Organizations

FAF SEC AICPA Other

GASAC GASB FASAC FASB AcSEC U.S. Gov't IAPC

EITF IASC
 Securities and Exchange 19

Commission (1934-present)
 1929 stock market crash blamed on
nonstandard accounting.
 1934 Securities Act established SEC to
standardize accounting.
 Created to protect the interests of investors
by ensuring full and fair disclosure.
 Granted legal authority to dictate GAAP.
 Has tended to defer setting GAAP to the
accounting profession.
U.S. Accounting Standard- 20

Setting Bodies

Committee on
Accounting
Procedures
(CAP)
Born: 1939
Died: 1959
Pronouncements:
Accounting Research
Bulletins
U.S. Accounting Standard- 21

Setting Bodies

Accounting
Principles
Board
(APB)
Born: 1959
Died: 1973
Pronouncements:
APB Opinions
U.S. Accounting Standards 22

Setting Bodies

Financial
Accounting
Standards Board
(FASB)
Born: 1973
Died:
Pronouncements:
Statements of
Financial Accounting
Standards
 Accounting Standard-Setting 23

Organizations

FAF SEC AICPA Other

GASAC GASB FASAC FASB AcSEC U.S. Gov't IAPC

EITF IASC
 Financial Accounting 24

Standards Board (1973-present)

 Seven full-time members comprise this independent
body.
 Issues Statements of Financial Accounting Standards.
 Determines GAAP by “due process.”
 Works within the conceptual framework.
 FASB Authority Sources-- 2
5

Overview

Gov’t Regulators Instructors

• SEC • American Acct.
• State Boards Association
of Public Acct.

FASB

Statement Preparers Auditors

• Financial Executives • AICPA
Institute • State societies of
• IMA CPAs
• Major audit firms
• Individual Corps
 26
FASB Authority Sources--SEC

• Maintains power to regulate

registrant companies.

Congress SEC

FASB
Registrant
Companies
 FASB Authority Sources-- 27

AICPA
 Provides authority to the FASB through its Code of
Professional Conduct Rule 203.
 AICPA members must show that client financial statements
comply with FASB pronouncements (GAAP).
 AICPA grants continuing membership to its members who
comply with Rule 203.
 FASB Authority Sources -- 28

AICPA

Endorsement of FASB through Rule 203

AICPA
AICPA Continuing FASB
FASB
Membership Members
Membersof
of GAAP
the
theAICPA
AICPA
 29
FASB “Due Process”
 Topic or project added to agenda.
 Task force assembled to study topic.
 Research and analysis performed by FASB
technical staff.
 Discussion Memorandum drafted and released.
 Public hearing, usually 60 days later, is held.
 30
FASB “Due Process”
 Board analyzes and evaluates public response.
 Exposure Draft prepared and released.
 Sixty-day exposure period allows for public
comment.
 Committee studies public response to exposure
draft and prepares final draft.
 Board votes on final draft (5-2 margin required for
passage).
 31
SEC Authoritative Literature

 Financial Reporting Releases

 Staff Accounting Bulletins
 Accounting and Auditing
Enforcement Releases
 Accounting Series Releases
 32
What is GAAP?
• Level A • Level C
– FASB Statements and – Consensus Positions of
Interpretations EITF
– APB Opinions – AICPA Practice Bulletins
– CAP Accounting • Level D
Research Bulletins – AICPA Accounting
• Level B Interpretations
– FASB Technical Bulletins – FASB “Question and
– AICPA Industry Audit Answer” guides
and Accounting Guides – Other widely recognized
– AICPA Statements of industry practices
Position
International Accounting 33

Standards Committee
The
The
The accounting
Theaccounting standards
Internationalstandards
International produced
Accounting
produced
Accounting
by
by the
the International
Standards
Standards Committee
International
Committee Accounting
(ISAC)
(ISAC) was
Accounting was
Standards
formed
Standards
formed Committee
in
in 1973
1973 to
Committee toare referred
referred to
develop
are
develop to
as
as International
worldwide
International
worldwide Accounting
accounting
accounting standards.
Accounting
standards.
Standards
Standards (IASs).
(IASs).
 34
Conceptual Framework Overview

Objectives
of Financial
Reporting

Qualitative Elements
Characteristics of Financial
of Information Statements
Accounting

Recognition and Measurement Concepts

Assumptions Principles Constraints

 Objectives of Financial 35

Reporting
 Usefulness.
 Understandability.
 Target audience: investors and creditors.
 Assessing future cash flows.
 Evaluating economic resources.
 Primary focus on earnings.
 Objectives of Financial 36

Reporting
Usefulness
Usefulness

Financial reporting should provide

information that is useful to present and
potential investors and creditors and
other users in making rational
investment, credit, and similar decisions.
 Objectives of Financial 37

Reporting
Understandability
Understandability

Financial reporting should provide

information that is understandable to one
who has a reasonable knowledge of
accounting and business and who is
willing to study and analyze the
information presented.
 Objectives of Financial 38

Reporting
Target
Target Audience
Audience

While there are many potential users of

financial reports, the objectives are directed
primarily toward investors and creditors.
 Objectives of Financial 39

Reporting
Assessing
Assessing Future
Future Cash
Cash Flows
Flows

Financial reporting should provide

information that is useful in assessing
amounts, timing, and uncertainty (risk) of
prospective cash flows.
 Objectives of Financial 40

Reporting
Evaluating
Evaluating Economic
Economic Resources
Resources

Financial reporting should also provide

information about an enterprise’s assets,
liabilities, and owners’ equity to help
investors, creditors, and others evaluate the
financial strengths and weaknesses of the
enterprise and its liquidity and solvency.
 Objectives of Financial 41

Reporting
Primary
Primary Focus
Focus on
on Earnings
Earnings

Information about enterprise earnings,

measured by accrual accounting, generally
provides a better basis for forecasting
future performance than does information
about current cash receipts and
disbursements.
Qualitative Characteristics of 42

Accounting Information
Primary Qualities
A. Relevance
1. Predictive Value
2. Feedback Value
3. Timeliness
B. Reliability
1. Verifiability
2. Representational
Faithfulness
3. Neutrality
Secondary Qualities
A. Comparability
B. Consistency
Qualitative Characteristics of 43

Accounting Information
Decision
Makers

Benefits > Cost

Understandability

Decision
Usefulness
Relevance Reliability

Predictive Feedback Timeliness Verifiability Neutrality Representational

Value Value Faithfulness

Comparability Consistency

Materiality
 44
What About Conservatism?

The
The concept
concept ofof conservatism
conservatismcan can
be
be summarized
summarized as as follows:
follows: When
When
in
in doubt,
doubt, recognize
recognize allall losses
losses but
but
don’t
don’t recognize
recognize anyany gains.
gains.
 45
Elements of Financial Statements

• Assets
• Liabilities
• Equity
• Investment
• Distribution
• Comprehensive Income
• Revenues
• Expenses
• Gains
• Losses
 Recognition and 46

Measurement Concepts

Assumptions Principles Constraints

• Economic Entity • Historical Cost • Cost-Benefit
• Going Concern • Revenue • Materiality
• Arm’s-Length Recognition • Industry Practice
Transactions • Matching • Conservatism
• Monetary Unit • Full Disclosure
• Periodicity
 Financial Statements v. 47

Financial Reporting
A “full set of financial statements” is necessary to
meet the objectives of financial reporting. Included
in the recommended set of general-purpose financial
statements are reports that show:
 Financial position at the end of the period.
 Earnings (net income) for the period.
 Cash flows during the period.
 Investments by and distributions to owners
during the period.
 Comprehensive income for the period.
 Traditional Assumptions of the 48

Accounting Model
• Economic entity.
• Going concern.
• Arm’s-length transactions.
• Stable monetary unit.
• Accounting period.
 49
Careers in Financial Accounting

• Public accounting.
• Company
accounting.
• User (analyst,
banker, consultant).
 50

The End