intermediate accounting

INTERMEDIATE INTERMEDIATE ACCOUNTINGACCOUNTING

14th EDITION

K. Fred SkousenEarl K. Stice

James D. Stice

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This electronic presentation prepared by

Douglas Cloud, Pepperdine University

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Task Force Clip Art Task Force Clip Art included included in this electronic presentation in this electronic presentation is used with the permission of is used with the permission of

New Vision Technology of New Vision Technology of Nepean Ontario, CanadaNepean Ontario, Canada

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FINANCIAL FINANCIAL REPORTINGREPORTING

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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.

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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.

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Learning Objectives Identify career opportunities related to

accounting and financial reporting in the fields of public accounting, corporate accounting, financial analysis, banking, and consulting.

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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).

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• 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.


Key features of this definition:

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• 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.


Key features of this definition:

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Users of Accounting Information

All parties interested in the financial health of a

company are called stakeholders.

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Users of Accounting Information

Internal users, Internal users, who who make decisions make decisions

directly affecting the directly affecting the internal operations internal operations of the enterprise.of the enterprise.

External users, External users, who make decisions who make decisions

concerning their concerning their relationship to the relationship to the

enterprise.enterprise.

Two major classifications of stakeholders

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InvestorsCommunity

Board of DirectorsManagementEmployees

Suppliers

EmployeesCreditors

Customers

Analysts

Government

Major Internal and External Stakeholder Groups

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Financial Reporting

The balance sheet reports, as of a certain

point in time, the resources of a

company (the assets), the company’s obligations (the

liabilities), and the equity of the owners.

The income statement reports, for a certain

interval, the net assets generated through

business operations (revenues), the net

assets consumed (the expenses), and the net

income.

The statement of cash flows reports, for a certain interval, the

amount of cash generated and consumed by a company through

operating, financing, and investing activities.

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Accounting estimates and judgments are

outlined in the notes to financial statements.

Financial Reporting

16Financial Statement Relationships

Balance Sheet 12/31/X0

Cash $ 80,000Other 4,550,000Total $4,630,000

Liabilities $2,970,000Stock 900,000R/E 760,000Total $4,630,000

Statement of Cash Flows

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

Statement ofRetained Earnings

R/E 12/31/X0 $ 760,000Net Income 864,600Dividends (400,000)R/E 12/31/X1 $1,224,600

Revenues $12,443,000Expenses 11,578,400Net Income $ 864,600

Income StatementCash $ 110,000Other 4,975,000Total $5,085,000

Liabilities $2,860,400Stock 1,000,000R/E 1,224,600Total $5,085,000

Balance Sheet 12/31/X1

17Relative Frequency of Audit Opinions (1998)

Companies

Unqualified 5,978

Unqualified With Explanatory Language 1,030

Qualified 6

No opinion 2

Adverse 0

Total 7,016

18Accounting Standard-Setting Organizations

FASAC FASB

FAF SEC

AcSEC

AICPA

IASC

IAPC

Other

EITF

GASAC GASB U.S. Gov't

19Securities and Exchange 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.

20U.S. Accounting Standard- Setting Bodies

Committee on Accounting Procedures

(CAP)Born: 1939Died: 1959

Pronouncements: Accounting Research Bulletins

21U.S. Accounting Standard- Setting Bodies

Accounting Principles

Board(APB)

Born: 1959Died: 1973

Pronouncements: APB Opinions

22U.S. Accounting Standards Setting Bodies

Financial Accounting

Standards Board(FASB)

Born: 1973Died:

Pronouncements: Statements of Financial Accounting Standards

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FASAC FASB

FAF SEC

AcSEC

AICPA

IASC

IAPC

Other

EITF

GASAC GASB U.S. Gov't

Accounting Standard-Setting Organizations

24Financial AccountingStandards 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.

Statement PreparersStatement Preparers• Financial Executives

Institute• IMA• Individual Corps

FASB

FASB Authority Sources-- Overview

Gov’t RegulatorsGov’t Regulators• SEC• State Boards

of Public Acct.

• American Acct.InstructorsInstructors

Association

AuditorsAuditors• AICPA• State societies of

CPAs• Major audit firms

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• Maintains power to regulate registrant companies.

Congress

FASB Authority Sources--SEC

SEC

FASB

Registrant Companies

27FASB Authority Sources-- 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.

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AICPAAICPA FASBFASBMembers of Members of the AICPAthe AICPA

Endorsement of FASB through Rule 203

GAAPContinuing Membership

FASB Authority Sources -- AICPA

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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.

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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).

FASB “Due Process”

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SEC Authoritative Literature

Financial Reporting ReleasesStaff Accounting BulletinsAccounting and Auditing

Enforcement ReleasesAccounting Series Releases

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What is GAAP?• Level A

– FASB Statements and Interpretations

– APB Opinions– CAP Accounting

Research Bulletins• Level B

– FASB Technical Bulletins– AICPA Industry Audit

and Accounting Guides– AICPA Statements of

Position

• Level C– Consensus Positions of

EITF– AICPA Practice Bulletins

• Level D– AICPA Accounting

Interpretations– FASB “Question and

Answer” guides– Other widely recognized

industry practices

33International Accounting Standards Committee

The International Accounting Standards Committee (ISAC) was

formed in 1973 to develop worldwide accounting standards.

The accounting standards produced by the International Accounting

Standards Committee are referred to as International Accounting

Standards (IASs).

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Conceptual Framework Overview

Objectivesof FinancialReporting

QualitativeCharacteristicsof Information

Accounting

Elementsof FinancialStatements

Recognition and Measurement Concepts

Assumptions Principles Constraints

35Objectives of Financial Reporting

Usefulness. Understandability. Target audience: investors and creditors. Assessing future cash flows. Evaluating economic resources. Primary focus on earnings.


UsefulnessUsefulness

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.


UnderstandabilityUnderstandability

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.


Target AudienceTarget Audience

While there are many potential users of financial reports, the objectives are directed

primarily toward investors and creditors.


Assessing Future Cash FlowsAssessing Future Cash Flows

Financial reporting should provide information that is useful in assessing

amounts, timing, and uncertainty (risk) of prospective cash flows.


Evaluating Economic ResourcesEvaluating Economic 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.


Primary Focus on EarningsPrimary Focus on 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.

42Qualitative Characteristics of 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

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Comparability Consistency

PredictiveValue

FeedbackValue Timeliness

Relevance

Verifiability Neutrality RepresentationalFaithfulness

Reliability

DecisionUsefulness

Understandability

Decision Makers

Qualitative Characteristics of Accounting Information

Benefits > Cost

Materiality

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What About Conservatism?

The concept of conservatism can be summarized as follows: When in doubt, recognize all losses but

don’t recognize any gains.

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Elements of Financial Statements

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

46Recognition andMeasurement Concepts

Assumptions Principles Constraints• Economic Entity• Going Concern• Arm’s-Length

Transactions• Monetary Unit• Periodicity

• Historical Cost• Revenue

Recognition• Matching• Full Disclosure

• Cost-Benefit• Materiality• Industry Practice• Conservatism

47Financial Statements v.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.

48Traditional Assumptions of the Accounting Model

• Economic entity.• Going concern.• Arm’s-length transactions.• Stable monetary unit.• Accounting period.

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Careers in Financial Accounting

• Public accounting.• Company

accounting.• User (analyst,

banker, consultant).

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The End