Chapter One

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Chapter 1
FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS
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Financial Statements and Financial Reporting

• What are the essential characteristics of
  accounting?
• Identify, measure, and communicate financial
  information.
• Information provided for economic entities
• Information communicated to interested parties

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Financial Statements and Financial Reporting

• Who are the interested parties?
• External parties to the entity including
  investors, potential investors, creditors, and
  government agencies
• Internal parties including managers and other
  employees
• Our focus in ACG 3131 is on accounting
  information reported to investors and creditors,
  considered capital providers and primary users

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Financial Statements and Financial Reporting

• How is financial information communicated to
  investors and creditors?
• Primarily through financial statements and
  related disclosure notes
• Balance Sheet
• Income Statement
• Statement of Cash Flows
• Statement of Stockholders Equity

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Financial Statements and Financial Reporting
Investors and creditors need financial
information to Determine how to allocate capital
resources to competing interests (i.e invest or
lend money to different companies) Effective
capital allocation is a key to a successful
market economy Promotes efficiency, innovation
and productivity in the market place
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Financial Statements and Financial Reporting

• It is important that the financial information
  provided to investors and creditors is useful
• What do primary users considered useful?
• Does information help assess a companys ability
  to generate net cash inflows.
• Will companys management be able to protect and
  enhance the capital providers investment (or be
  able to repay loan)

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Setting Accounting Standards
What are Generally Accepted Accounting Principles
(GAAP)? A common set of accounting standards and
procedures that have substantial authoritative
support and are universally practiced Without
standards, different entities would establish
their own accounting standards which would be
confusing, inconsistent, and lack comparability.
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Setting Accounting Standards

• What authoritative organizations have been
  instrumental in the development of GAAP?
• Securities and Exchange Commission (SEC)
• American Institute of Certified Public
  Accountants (AICPA)
• Financial Accounting Standards Board (FASB)

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Setting Accounting Standards

• Securities and Exchange Commission
• Established by federal government in 1933
• Oversight for accounting and reporting by public
  companies. Requires public companies to adhere
  to GAAP
• Encouraged public/private partnership in setting
  standards
• Has enforcement authority

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Setting Accounting Standards

• American Institute of CPAs
• 1. National professional organization
• 2. Established the following
• From 1939 to 1959, issued 51 Accounting Research
  Bulletins (ARBs) taking a problem-by-problem
  approach to standard setting
• From 1959 to 1973, issued 31 Accounting Principle
  Board Opinions, based on a principles approach
  to standard setting

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Setting Accounting Standards

• Financial Accounting Standards Board
• 1. Established in 1973 to improve standards of
  financial accounting and reporting
• 2. Differences between FASB and APB
• Full-time, paid members
• Greater autonomy and independence
• Broader representation on Board, not all members
  are required to be CPAs

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Setting Accounting Standards

• Financial Accounting Standards Board issues
  various pronouncements
• Standards, Interpretations, and Staff Positions
  all considered GAAP
• Financial Accounting Concepts conceptual
  framework to help solve existing and emerging
  problems not considered GAAP
• Emerging Issues Task Force accounting for new
  and unusual financial transactions, a problem
  filter for FASB not considered GAAP.

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Setting Accounting Standards

• Summary of principles that have substantial
  authoritative support and are the major sources
  of GAAP
• Standards, Interpretations, and Staff Positions
  (FASB) 1973 to current
• AICPA Accounting Principles Board Opinions
  1959 to 1973
• AICPA Accounting Research Bulletins 1939 to
  1959.

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Generally Accepted Accounting Principles

• 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
  considered non-authoritative
• Developed FASB Codification Research System (CRS)
  which is an online real-time database that
  provides easy access to the Codification

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Issues in Financial Reporting

• Expectation Gap what public thinks accountants
  should do versus what accountants think they can
  do
• Financial Reporting Challenges issues for the
  future include providing non-financial and
  forward-looking information to users
• Ethics in the Environment of Financial Accounting
• GAAP does not always provide an answer
• Doing the right thing is not always easy or
  obvious

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Issues in Financial Reporting

• International Accounting Standards
• Two sets of standards accepted for international
  use
• U.S. GAAP, issued by FASB, etc.
• International Financial Reporting Standards
  (IFRS) issued by the International Accounting
  Standards Board (IASB)
• Many similarities between the two standards,
  however, there is an ongoing effort to converge
  the two standards into one.