Intermediate Accounting I

1
Intermediate Accounting I

• Session 2
• Environment Structure
• The Accounting Process

2
Financial Accounting Model
(useful relevant)
Company
Users
F/S
Economic Decisions
Financial Impact
3
Current Considerations

• On-going Politicization of Standards
• Global Marketplace
• Investor Confidence
• Focus on Governance
• The Sarbanes-Oxley Act of 2002
• Changes in the CPA Profession

4
Standard Setting Process

• SEC (Securities and Exchange Commission)
• AICPA (Am. Institute of CPAs)
• FASB (Financial Acctg. Stds. Board)
• IASB (Intl. Acctg. Stds. Board)

5
Standard Setting Flow Chart
A Political Circle
-Creates SEC 1934
-Lobbies government
-Delegates standard setting
Pub. Cos.
standards
-Finances FASB indirectly
6
International Convergence

• International Accounting Standards Board (IASB)
• IAS mandatory in European Union-1/1/05
• Do you think convergence of standards is good or
  bad for financial statement users?

7
Investor Confidence Issues

• Shaken by the events of a few.
• Role of high quality financial reporting.
• Corporate governance is not an option
• What is. Is!
• Audit committees have serious responsibilities

8
Sarbanes-Oxley Act of 2002

• Major provisions
• Creation of the Public Company Accounting
  Oversight Board (PCAOB)
• Certification of financial statements by CEO and
  CFO
• Limits on non-audit services
• Audit partner rotation
• Limits on hiring due to conflict of interests
• Audit committees hire the external auditor
• Section 404 internal control assessment

9
Role of the Auditor

• Uses GAAS to ascertain the existence of GAAP
• GAAS Generally accepted auditing standards
• GAAP Generally accepted accounting principles

10
SFAC Schematic-I

• SFAC 1 OBJECTIVES OF FINANCIAL REPORTING
• Useful
• Cash Flow Prediction
• Economic Resource Information

(1 X 3)

• SFAC 2 QUALITATIVE CHARACTERISTICS
• (Understandibility)
• Primary
• Relevance
• Predictive
• Feedback/historical
• Timely
• Reliability
• Verifiable
• Repr. Faithfulness (WYSIWYG)
• Neutral
• Secondary
• Comparability
• Consistency
• Constraints
• Cost/Benefit
• Conservatism
• Materiality--SAB 99

• SFAC 5 RECOGNITION MEASUREMENTSFAC 7 CASH
  FLOWS P,V. MEASUREMENT
• Recognition
• Definition
• Measurability
• Relevance
• Reliability
• Measurement
• Unit
• Method
• Underlying Assumptions
• Economic entity
• Going concern
• Periodicity
• Stable monetary unit
• Principles
• Matching
• Realization
• Historical cost
• Full disclosure

4 2 (2 X 4)
(2 X 3) 2 3
11
SFAC Schematic-II

• SFAC 6 ELEMENTS OF FINANCIAL STATEMENTS
• Assets
• Liabilities
• Equity
• Investments by owners
• Distributions to owners
• Comprehensive income
• Revenue
• Expenses
• Gains
• Losses

10
12
Financial Statement Relationships
Stmt of Sharehldrs Eq.
Balance Sheet
Income Statement
Statement of Cash Flows
Current Assets Non- current Assets
Current Liabilities Long- term Debt Equity
Revenue Cost of Goods Sold (COGS) Gross
Margin Operating Exps. Net Income
Operating Cash Investing Cash Financing
Cash Change in Cash Beginning Cash Ending Cash
Beginning S/E Net Income Less
Dividends Ending S/E
13
Accounting (Bookkeeping) Cycle-modified

• Analyze Transaction
• Record and Post
• Summarize Accounts
• Unadjusted Trial Balance
• Adjusting Journal Entries (AJEs)
• Adjusted Trial Balance
• Prepare Income Statement
• Closing Entries
• Final Trial Balance
• Prepare Balance Sheet, SCF and SSE

14
Adjusting Journal Entries

• Accruals
• Prepayments
• Deferrrals
• Cost Expirations

15
Cash versus Accrual

• Cash basis when cash actually flows
• Accrual basis when earned or incurred