Environment and Theoretical Structure of Financial Accounting

1
Environment and Theoretical Structure of
Financial Accounting

• Sid Glandon, DBA, CPA
• Associate Professor of Accounting

2
Financial Accounting

• Financial reporting is the process of providing
  relevant financial information to third-party
  users
• Investors
• Creditors
• Financial intermediaries

3
Capital Markets

• Primary markets
• Debt and equity instruments are sold based on
  anticipated cash flows
• Interest
• Dividends
• Capital gains
• Secondary market
• Investors trade

4
Accrual vs. Cash Accounting

• Accrual accounting provides a more realistic
  representation of periodic financial results

5
Financial Statements

• Balance Sheet
• Statement of Income
• Statement of Cash Flows
• Statement of Shareholders Equity
• Notes to the Financial Statements

6
Standards

• Establishment of accounting standards is a
  political process
• Standards setting bodies
• Committee on Accounting Procedures
• Accounting Principles Board
• Financial Accounting Standards Board

7
Financial Accounting and Reporting Standards

• Securities and Exchange Commission
• American Institute of Certified Public
  Accountants (AICPA)
• Committee on Accounting Procedures (CAP)
• Accounting Principles Board (APB)
• Financial Accounting Standards Board (FASB)

8
Financial Reporting Reform

• Public Company Accounting Reform and Investor
  Protection Act of 2002 Sarbanes-Oxley (SOX)
• Public Company Accounting Oversight Board (PCAOB)
• Standards setting body for publicly traded
  companies and their auditors

9
Conceptual Framework

• Statements of Financial Accounting Concepts
• 1 Objectives of Financial Reporting
• 2 Qualitative Characteristics of Accounting
  Information
• 6 Elements of Financial Statements
• 5 Recognition and Measurement in Financial
  Statements

10
Objectives of Financial Reporting

• Provide information
• Useful for decision making
• Helps in predicting cash flows
• About economic resources, claims to resources and
  changes in resources and claims

11
Qualitative Characteristics

• Understandability (user-specific quality)
• Decision Usefulness (overriding objective)
• Primary qualities
• Relevance
• Predictive value
• Feedback value
• Timeliness
• Reliability
• Verifiability
• Neutrality
• Representational faithfulness
• Secondary
• Comparability
• Consistency
• Materiality

12
Constraints

• Cost effectiveness
• Materiality
• Conservatism

13
Elements of Financial Statements

• Assets
• Liabilities
• Equity
• Investments by owners
• Revenues
• Gains
• Expenses
• Losses
• Comprehensive income

14
Recognition and Measurement

• Recognition
• Item is an element that is measurable, relevant
  and reliable
• Measurement
• Unit of measurement
• Attribute to be measured
• Historical cost
• Net realizable value
• Present value of future cash flows

15
Recognition and Measurement Concepts

• Assumptions
• Economic entity
• Going concern
• Perodicity
• Monetary unit
• Principles
• Historical cost
• Realization
• Matching
• Full disclosure

16
AICPA Code of Ethics

• Preamble, self-discipline
• Responsibilities, sensitive professional and
  moral judgments
• Public Trust, serve the public interest
• Integrity, highest sense of integrity
• Objectivity and Independence, objective and
  independent in fact and appearance
• Due Care, professionals technical and ethical
  standards
• Scope and Nature of Services, qualified to provide

17
Model for Ethical Decisions

• Step 1, Determine the facts of the situation
• Step 2, Identify the ethical issue and the
  stakeholders
• Step 3, Identify the values related to the
  situation
• Step 4, Specify the alternative courses of action
• Step 5, Evaluate the courses of action in terms
  of their consistency with the values identified
• Step 6, Identify the consequences of each
  possible course of action
• Step 7, Make your decision and take any indicated
  action