Chapter 1-1

What is Financial Accounting?What is Financial Accounting?What is Financial Accounting?What is Financial Accounting?

“Language of Business”:

(1) the identification, measurement, and communication of financial information about

(2) economic entities to

(3)(3) interestedinterested partiesparties.

Chapter 1-2

Accounting and Capital Allocation Accounting and Capital Allocation Accounting and Capital Allocation Accounting and Capital Allocation

Resources are limited. Efficient use of resources often determines whether a business thrives. Resources are limited. Efficient use of resources often determines whether a business thrives.

Financial Financial

ReportingReporting

Financial Financial

ReportingReporting

Information to help Information to help

users with capital users with capital

allocation decisions.allocation decisions.

UsersUsersUsersUsers

Primarily Investors & Primarily Investors &

creditors (present creditors (present

and potential)and potential)

Capital AllocationCapital AllocationCapital AllocationCapital Allocation

The process of The process of

determining how and determining how and

at what cost money at what cost money

is allocated among is allocated among

competing interests.competing interests.

Chapter 1-3

Overall ObjectiveOverall ObjectiveOverall ObjectiveOverall Objective

Provide decision useful information

1. ability to generate net cash inflows

a) Assess -Solvency, Liquidity, Profitability, &

Risk

2. management’s ability to protect and

enhance the capital providers’

investments

a) Assess the stewardship of Managers -

ROA

b) Control of Management-Determination of

compensation awards

Chapter 1-4

Financial Information

Accounting?

Identifies

and

Measures

and

Communicat

es

Financial Information

Accounting?

Identifies

and

Measures

and

Communicat

es

Balance Sheet

Income Statement

Statement of Cash Flows

Statement of Owners’ or

Stockholders’ Equity

Note Disclosures

Balance Sheet

Income Statement

Statement of Cash Flows

Statement of Owners’ or

Stockholders’ Equity

Note Disclosures

President’s letter

Prospectuses,

SEC Reporting

News releases

Forecasts

Environmental Reports

Etc.

President’s letter

Prospectuses,

SEC Reporting

News releases

Forecasts

Environmental Reports

Etc.

GAAPGAAP Not GAAPNot GAAP

Financial StatementsFinancial Statements Additional InformationAdditional InformationEconomic EntityEconomic Entity

GAAP information limitsGAAP information limitsGAAP information limitsGAAP information limits

Chapter 1-5

Parties Involved in Standard SettingParties Involved in Standard SettingParties Involved in Standard SettingParties Involved in Standard Setting

Three organizations:Three organizations:

• Securities and Exchange Commission (SEC)• American Institute of Certified Public

Accountants (AICPA)• Financial Accounting Standards Board (FASB)

Chapter 1-6

Securities Securities Act of 1933Act of 1933Securities Securities

Act of 1933Act of 1933Securities Securities

Act of 1934Act of 1934Securities Securities

Act of 1934Act of 1934

1. Securities and Exchange 1. Securities and Exchange CommissionCommission

1. Securities and Exchange 1. Securities and Exchange CommissionCommission

Established by federal government

Accounting and reporting for public companies

Encouraged private standard-setting body

SEC requires public companies to adhere to GAAP

SEC Oversight

Enforcement Authority

Chapter 1-7

2. American Institute of CPAs2. American Institute of CPAs2. American Institute of CPAs2. American Institute of CPAs

National professional organization

Established the following:

Committee on Committee on Accounting Accounting ProceduresProcedures

Committee on Committee on Accounting Accounting ProceduresProcedures

Accounting Accounting Principles BoardPrinciples Board

Accounting Accounting Principles BoardPrinciples Board

1939 to 1959 Issued 51 Accounting

Research Bulletins (ARBs)

Problem-by-problem approach failed

1959 to 1973 Issued 31 Accounting

Principle Board Opinions (APBOs)

http://www.aicpa.org/

Chapter 1-8

2. American Institute of CPAs2. American Institute of CPAs2. American Institute of CPAs2. American Institute of CPAs

AICPA and Accounting Standards Executive Committee AcSEC (established by AICPA) no longer issues authoritative accounting and audit guidance for public companies.

Government oversight preferred following Sarbanes Oxley Act

PCAOB oversees the development of auditing standards.

AICPA continues to develop and grade the CPA examination and issue industry guides.

Chapter 1-9

3. Financial Accounting Standards 3. Financial Accounting Standards BoardBoard

3. Financial Accounting Standards 3. Financial Accounting Standards BoardBoard

Wheat Committee’s recommendations resulted in the creation of the Financial Accounting Standards Board Financial Accounting Standards Board in 1973.

Financial Financial Accounting Accounting FoundationFoundation

Financial Financial Accounting Accounting FoundationFoundation

Selects members of the FASB Funds their activities Exercises general oversight.

Financial Financial Accounting Accounting

Standards BoardStandards Board

Financial Financial Accounting Accounting

Standards BoardStandards Board

Financial Financial Accounting Accounting Standards Standards

Advisory CouncilAdvisory Council

Financial Financial Accounting Accounting Standards Standards

Advisory CouncilAdvisory Council

Mission to establish and improve standards of financial accounting and reporting.

Consult on major policy issues.

Chapter 1-10

Missions is to establish and improve standards of Missions is to establish and improve standards of financial accounting and reporting. Differences financial accounting and reporting. Differences between FASB and APB include:between FASB and APB include:

3. Financial Accounting Standards 3. Financial Accounting Standards BoardBoard

3. Financial Accounting Standards 3. Financial Accounting Standards BoardBoard

Smaller Membership

Full-time, Remunerated Membership

Greater Autonomy

Increased Independence

Broader Representationhttp://www.fasb.org/

Chapter 1-11

FASB Statements, FASB Statements, Interpretations, and Interpretations, and

Staff PositionsStaff Positions

FASB Statements, FASB Statements, Interpretations, and Interpretations, and

Staff PositionsStaff PositionsAPB OpinionsAPB OpinionsAPB OpinionsAPB Opinions CAP Accounting CAP Accounting

Research BulletinsResearch BulletinsCAP Accounting CAP Accounting

Research BulletinsResearch Bulletins

Category ACategory A (Most Authoritative)(Most Authoritative)

FASB Technical Bulletins

FASB Technical Bulletins

AICPA Industry Audit and Accounting

Guides

AICPA Industry Audit and Accounting

Guides

AICPA Statements of Position

AICPA Statements of Position

Category B

FASB Emerging Issues Task ForceFASB Emerging Issues Task Force AICPA AcSEC Practice BulletinsAICPA AcSEC Practice Bulletins

Category C

AICPA Accounting Interpretations

AICPA Accounting Interpretations

Category D (Least Authoritative)

FASB Implementation Guides

FASB Implementation Guides

Recognized Industry Practices

Recognized Industry Practices

Old House of GAAPOld House of GAAPOld House of GAAPOld House of GAAP

LO 7LO 7

Chapter 1-12

New Codification for GAAP New Codification for GAAP New Codification for GAAP New Codification for GAAP

Codification provides, in one place, all authoritative literature by topic

Chapter 1-13

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.

FASB Codification

Generally Accepted Accounting Generally Accepted Accounting PrinciplesPrinciples

Generally Accepted Accounting Generally Accepted Accounting PrinciplesPrinciples

FASB has developed the Financial

Accounting Standards Board Codification

Research System (CRS). CRS is an online

real-time database that provides easy

access to the Codification.

Chapter 1-14

Generally Accepted Accounting Generally Accepted Accounting PrinciplesPrinciples

Generally Accepted Accounting Generally Accepted Accounting PrinciplesPrinciples

Illustration 1-5FASB Codification Framework

Chapter 1-15

Diversity in Practice

iGAAP includes the standards, referred to as International Financial Reporting Standards (IFRS), developed by the IASB.

Differences between U.S. GAAP and iGAAP exist because of different: user needs, political pressures, and perhaps time

Norwalk Agreement – convergence of standards

iGAAP tends to be simpler and less stringent than U.S. GAAP.

SEC recently eliminated the need for foreign companies that trade shares in U.S. markets to reconcile IFRS accounting with U.S. GAAP.