intermediate accounting lecture
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Chapter 1 Intermediate AccountingTRANSCRIPT
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The Environment of Financial Reporting
Chapter 1
COPYRIGHT 2010 South-Western/Cengage Learning
Intermediate AccountingIntermediate Accounting 11th edition 11th edition
Nikolai Bazley JonesNikolai Bazley Jones
An electronic presentationAn electronic presentationBy Norman SundermanBy Norman Sundermanand Kenneth Buchananand Kenneth BuchananAngelo State University
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31. Understand capital markets and decision making.
2. Know what is included in financial reporting.3. Explain generally accepted accounting
principles (GAAP) and the sources of GAAP.4. Identify the types of pronouncements issued
by the Financial Accounting Standards Board (FASB).
5. Understand how the FASB operates.
Objectives
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Objectives6. Describe the relationship between the
Securities and Exchange Commission (SEC) and the FASB.
7. Use ethical models for decision making about ethical dilemmas.
8. Understand creative and critical thinking.9. Describe the joint convergence project of the
FASB and the IASB (Appendix).10. Understand SEC reporting under U.S. GAAP
and IFRS (Appendix).
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5More Accountants NeededNew accounting rules pose
challenges for financial accounting and projections point to increased
hiring of accounting graduates.
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6Estimated Hiring Increase
Accounting firms of all sizes plan to increase future hiring.
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7Capital Markets
Companies need large amounts of capital for operations
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8Stock Exchange
Companies may obtain capital by issuing capital stock...
Capital Markets
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9Bank
Capital Markets
or by borrowing from lenders
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Capital Markets
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Accounting Information: Economic Activities and Decision Making
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1. Buy. A potential investor decides to purchase a particular security on the basis of communicated accounting information.
2. Hold. An actual investor decides to retain a particular security on the basis of communicated accounting information.
3. Sell. An actual investor decides to dispose of a particular security on the basis of communicated accounting information.
External and Internal Users
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Sources of Authority
Internal needs
Managerial AccountingFinancial Accounting
GAAP
Comparison of Financial and Managerial Accounting
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Time Frame of Reported Information
Present and future
Managerial Accounting
Primarily historical
Financial Accounting
Comparison of Financial and Managerial Accounting
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Scope
Total company
Financial Accounting
Individual departments, divisions, and total company
Managerial Accounting
Comparison of Financial and Managerial Accounting
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Type of Information
Primarily quantitative
Sales$275,240
Cost180,120
Gross mar. 95,120Expenses 80,120
Net inc. $15,000
Financial Accounting
Qualitative as well as quantitative
Materials usage is
unfavorable by $8,400.
Managerial Accounting
Comparison of Financial and Managerial Accounting
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Statement Format
Prescribed by GAAP; oriented toward investment
and credit decisions
Financial Accounting
Determined by company; focused upon specific decisions being made
Managerial Accounting
Comparison of Financial and Managerial Accounting
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Decision Focus
External
Financial Accounting
Internal
Managerial Accounting
Comparison of Financial and Managerial Accounting
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The companys accountants prepare both the financial and
the managerial accounting reports
and the information comes from the same information system.
Comparison of Financial and Managerial Accounting
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Financial reporting is the process of communicating
financial accounting information about a company
to external users.
Financial Reporting
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1. The balance sheet (or statement of financial position), which summarizes a companys financial position at a given date.
2. The income statement, which summarizes the results of a companys income-producing activities for a period of time.
3. The statement of cash flows, which summarizes a companys cash inflows and outflows for a period of time.
Companies present at least three major financial statements:
Financial Reporting
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A statement of changes in
stockholders equity is also included by many
companies.
Financial Reporting
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This statement summarizes the changes
in each item of stockholders equity for a
period.
Financial Reporting
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GAAP are the guidelines, procedures, and practices that a company is required to use in recording and reporting the accounting
information in its audited financial statements.
They are like laws and are the rules that must be followed in financial reporting.
Generally Accepted Accounting Principles (GAAP)
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Currently, there is no single document that includes all the accounting standards.
However, the FASB has released its FASB Accounting Standards Codification for verification by its constituents. When
finalized, this Codification will be electronic and will integrate and topically organize U.S.
accounting standards.
FASB Accounting Standards Codification
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A FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and APB Opinions and CAP (AICPA) Accounting Research Bulletins not superceded by actions of the FASB (as well as SEC releases such as Regulation S-X, Financial Reporting Releases, and Staff Accounting Bulletins for companies that file with the SEC)
ContinuedContinued
Hierarchy of Sources of GAAPCategories Authoritative Sources
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B FASB Technical Bulletins, and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides, and AICPA Statements of Position
C FASB Emerging Issues Task Force Consensus Positions, Topics discussed in Appendix D of EITF Abstracts, and, if cleared by the FASB, AICPA Practice Bulletins
ContinuedContinued
Hierarchy of Sources of GAAPCategories Authoritative Sources
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Hierarchy of Sources of GAAP
D FASB Qs and As (Implementation Guides), AICPA Accounting Interpretations, AICPA Industry and Audit Guides, and AICPA Statements of Position not cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry (e.g., AICPA Accounting Trends and Techniques)
Categories Authoritative Sources
There are electronic databases such as the FASB Financial Accounting Research
System (FARS) that include most accounting standards
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The Codification does not change GAAP. Instead, it reorganizes the many
pronouncements on U.S. GAAP into about 90 accounting topics, organized in a
consistent structure.
FASB Accounting Standards Codification
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The FASB expects the Codification to: Reduce the amount of time and effort needed to
solve an accounting research issue. Improve the usability of the accounting
literature, thereby reducing the chances of not complying with GAAP.
Provide real-time updates as new standards are issued.
FASB Accounting Standards Codification
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The FASB expects to approve the Codification in 2009. At that time, the Codification will
supercede all then-existing non-SEC standards. Once the Codification has been approved, the FASB will not issue separate
new pronouncements. Instead, any new standards will be structured in a way to
update the Codification.
FASB Accounting Standards Codification
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History of GAAP in the Private Sector
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Committee on Accounting Procedure (CAP)
In 1938, the AICPA formed the Committee on Accounting Procedure (CAP). This group issued pronouncements known as Accounting Research
Bulletins (ARB), but the CAP did not have authority to enforce its pronouncements and
application was optional. The CAP was criticized because its members were all CPAs and
application was optional, so the AICPA formed the Accounting Principles Board (APB) in 1959 to replace the Committee on Accounting Procedure.
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1. To alleviate criticism about the process of formulating accounting principles, which included wider representation.
2. To create a policy-making body whose rules would be binding on companies rather than optional.
The APB was comprised 17 to 21 The APB was comprised 17 to 21 members, selected primarily members, selected primarily
from the accounting profession.from the accounting profession.
Reasons for Forming the APB
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1. Independence. The members of the APB were part-time volunteers whose major responsibilities were to the business, governmental, or academic organizations employing them.
2. Representation. The public accounting firms and the AICPA were too closely associated with the development of accounting standards.
3. Response time. Emerging problems were not solved quickly enough by the part-time members of the APB.
Criticisms of the APB
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Structure of FASB
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1. Statements of Financial Accounting Standards2. Interpretations3. Staff Positions4. Technical Bulletins5. Statements of Financial Accounting
Concepts6. Other Pronouncements
Types of Pronouncements Issued by the FASB
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FASB Operating Procedures
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Other Organizations Impacting GAAP Securities and Exchange Commission (SEC) The SEC
is a governmental agency that has the legal authority to prescribe accounting principles and reporting practices for all corporations issuing publicly traded securities.
American Institute of Certified Public Accountants (AICPA) The AICPA is the professional organization for all certified public accountants in the United States. To be a member of the AICPA, an individual must have passed the Uniform CPA Examination, hold a CPA certificate, agree to abide by its bylaws and Code of Professional Ethics, and have 150 hours of higher education.
ContinuedContinued
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Other Organizations Impacting GAAP FASB Emerging Issues Task Force (EITF) The
primary objectives of the EITF are (1) to identify significant emerging accounting issues (i.e., unique transactions and accounting problems) that it feels the FASB should address and (2) to develop consensus positions on the implementation issues involving the application of standards.
International Accounting Standards Board (IASB) The IASB issues International Financial Reporting Standards (IFRS) and includes 12 full-time members (and 2 part-time members) from various countries. To date IASB has issued 49 Standards.
ContinuedContinued
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Governmental Accounting Standards Board (GASB) The GASBs responsibility is to establish financial accounting standards for certain state and local governmental entities.
Public Company Accounting Oversight Board (PCAOB) The PCAOB is a non-profit corporation that was created by Congress in the Sarbanes-Oxley Act of 2002. Its purpose is to protect the interests of investors by overseeing auditors of public companies in the preparation of informative, accurate, and independent audit reports for companies that sell securities to the public.
Other Organizations Impacting GAAP
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Cost Accounting Standards Board (CASB) The CASB is responsible only for negotiated federal contracts and subcontracts exceeding $500,000.
Internal Revenue Service (IRS) The IRS administers the Internal Revenue Code enacted by Congress.
American Accounting Association (AAA) The AAA is an organization primarily of academics and practicing accountants.
Other Organizations Impacting GAAP
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Financial Executives International (FEI) The FEI consists primarily of high-level financial executives (such as financial vice-presidents, treasures, and controllers) of major corporations. The FEI publishes a monthly journal called the Financial Executive.
Institute of Management Accountants (IMA) The primary focus of the IMA is on management accounting and financial accounting issues. The IMA publishes a monthly journal called Strategic Finance.
Other Organizations Impacting GAAP
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CFA Institute (CFAI) Members of the CFAI are financial analysts who use accounting information in various investment management and security analysis decisions.
Other Organizations Impacting GAAP
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Participants in the Development of GAAP
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Responsibilities
In carrying out their responsibilities as
professionals, members should exercise sensitive professional
and moral judgments in all their activities.
Principles of the AICPA Code of Professional Conduct
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The Public Interest
Members should accept the obligation to act in a way that will serve the public interest, honor the
public trust, and demonstrate commitment to professionalism.
Principles of the AICPA Code of Professional Conduct
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Integrity
To maintain and broaden public confidence, members
should perform all professional responsibilities
with the highest sense of integrity.
Principles of the AICPA Code of Professional Conduct
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Objectivity and Independence
A member should maintain objectivity and be free from conflicts of interest in discharging professional responsibilities. A member in public
practice should be independent in fact and appearance.
Principles of the AICPA Code of Professional Conduct
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Due Care
A member should observe the professions technical and ethical standards, strive continually to
improve competence and the quality of services, and discharge the
professional responsibility to the best of the members ability.
Principles of the AICPA Code of Professional Conduct
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Scope and Nature of Service
A member in public practice should observe the Principles of
the CPC in determining the scope and nature of services to
be provided.
Principles of the AICPA Code of Professional Conduct
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1. The utilitarian model, which evaluates actions based on the greatest good for the greatest number.
2. The rights model, which embraces actions that protect individual moral rights.
3. The justice model, which emphasizes a fair distribution of benefits and burdens.
An Ethicists Basic Approaches to Moral Reasoning
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Creative and Critical Thinking: Impact on Problem Solving
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IFRS and U.S. GAAPMany companies have become globalized. Currently, U.S. corporations are subject to the accounting standards established by the FASB, while foreign corporations are subject to international financial reporting standards (IFRS) established by the IASB or by accounting standards set by their national accounting standards board. These differences in accounting standards have led to differences among U.S. and foreign corporations financial statements. These differences, in turn, have made it difficult for investors and creditors to make valid comparisons across corporations and to make effective buy-sell-hold decisions in the U.S. and foreign capital markets.
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IFRS and U.S. GAAP
To resolve this issue, FASB and the IASB entered into an agreement to develop high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. To achieve this compatibility, the Boards agreed to work together to achieve short-term convergence on a number of individual differences between U.S. and international accounting standards.
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Chapter 1
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The Environment of Financial ReportingPrinting PowerPointObjectivesObjectivesMore Accountants NeededEstimated Hiring IncreaseCapital MarketsCapital MarketsCapital MarketsAccounting Information: Economic Activities and Decision MakingExternal and Internal UsersComparison of Financial and Managerial AccountingFinancial ReportingFinancial ReportingFinancial ReportingFinancial ReportingGenerally Accepted Accounting Principles (GAAP)FASB Accounting Standards CodificationHierarchy of Sources of GAAPHierarchy of Sources of GAAPHierarchy of Sources of GAAPFASB Accounting Standards CodificationFASB Accounting Standards CodificationFASB Accounting Standards CodificationHistory of GAAP in the Private SectorCommittee on Accounting Procedure (CAP)Reasons for Forming the APBCriticisms of the APBStructure of FASBTypes of Pronouncements Issued by the FASBFASB Operating ProceduresOther Organizations Impacting GAAPOther Organizations Impacting GAAPOther Organizations Impacting GAAPOther Organizations Impacting GAAPOther Organizations Impacting GAAPOther Organizations Impacting GAAPParticipants in the Development of GAAPPrinciples of the AICPA Code of Professional ConductPrinciples of the AICPA Code of Professional ConductPrinciples of the AICPA Code of Professional ConductPrinciples of the AICPA Code of Professional ConductPrinciples of the AICPA Code of Professional ConductPrinciples of the AICPA Code of Professional ConductAn Ethicists Basic Approaches to Moral ReasoningCreative and Critical Thinking: Impact on Problem Solving