Chapter

1-1
 CHAPTER 1
FINANCIAL ACCOUNTING AND
ACCOUNTING STANDARDS

Intermediate Accounting
13th Edition
Kieso, Weygandt, and
Warfield
Chapter
1-2
 Learning
Learning Objectives
Objectives
1. Identify the major financial statements and other means of
financial reporting.
2. Explain how accounting assists in the efficient use of scarce
resources.
3. Describe some of the challenges facing accounting.
4. List the objectives of financial reporting.
5. Explain the need for accounting standards.
6. Identify the major policy-setting bodies and their role in the
standard-setting process.
7. Explain the meaning of generally accepted accounting
principles (GAAP) and the role of the Codification for GAAP.
8. Describe the impact of user groups on the rule-making
process.
9. Understand issues related to ethics and financial accounting.
Chapter
1-3
 Financial
Financial Accounting
Accounting and
and Accounting
Accounting
Standards
Standards

Financial Generally Accepted

Parties Involved in Issues in Financial
Statements and Accounting
Standard Setting Reporting
Financial Reporting Principles

Accounting and Securities and FASB Codification Political environment

capital allocation Exchange Expectations gap
Challenges Commission
International
Objectives American Institute of accounting standards
CPAs
Need to develop Ethics
standards Financial Accounting
Standards Board
Changing role of the
AICPA

Chapter
1-4
 Financial
Financial Statements
Statements and
and Financial
Financial
Reporting
Reporting
Essential characteristics of accounting
are:
(1) the identification, measurement, and
communication of financial information
about
(2) economic entities to

(3) interested parties.

Chapter
1-5 LO 1 Identify the major financial statements and other means of financial
reporting..
 Financial
Financial Statements
Statements and
and Financial
Financial
Reporting
Reporting
Economic Entity Financial Statements Additional Information

Financial Balance Sheet President’s letter

Information
Income Statement Prospectuses,
Accounting?
Statement of Cash SEC Reporting
Identifies Flows
News releases
and Statement of
Forecasts
Measures Owners’ or
Stockholders’ Environmental
and Equity Reports

Communicat Note Disclosures Etc.

es
GAAP Not GAAP
Chapter
1-6 LO 1 Identify the major financial statements and other means of financial
reporting..
 Financial
Financial Statements
Statements and
and Financial
Financial
Reporting
Reporting
Review
What is the purpose of information presented in
notes to the financial statements?
a. To provide disclosure required by generally
accepted accounting principles.
b. To correct improper presentation in the
financial statements.
c. To provide recognition of amounts not included
in the totals of the financial statements.
d. To present management’s responses to
auditor comments.

Chapter
1-7 LO 1 Identify the major financial statements and other means of financial
reporting..
 Accounting
Accounting and
and Capital
Capital Allocation
Allocation

Resources are limited. Efficient use of resources often

determines whether a business thrives.
Illustration 1-1
Capital Allocation Process

Financial
Financial Users
Users Capital
Capital Allocation
Allocation
Reporting
Reporting
Information to help Investors, creditors, The process of
users with capital and other users determining how and
allocation decisions. at what cost money
is allocated among
competing interests.

Chapter
1-8 LO 2 Explain how accounting assists in the efficient use of scare
 Accounting
Accounting and
and Capital
Capital Allocation
Allocation

Review
An effective process of capital allocation is critical to
a healthy economy, which
a. promotes productivity.
b. encourages innovation.
c. provides an efficient and liquid market for
buying and selling securities.
d. All of the above.

Chapter
1-9 LO 2 Explain how accounting assists in the efficient use of scare
 Challenges
Challenges Facing
Facing Financial
Financial
Accounting
Accounting
Nonfinancial Measurements

Forward-looking Information

Soft Assets

Timeliness

Chapter
1-10 LO 3 Describe some of the challenges facing accounting.
 Objectives
Objectives of
of Financial
Financial Accounting
Accounting

Financial
Financialreporting
reportingshould
shouldprovide
provideinformation
informationthat:
that:
(a)
(a) is
is useful
useful to
to present
present and
and potential
potential investors
investors and
and creditors
creditors
and
and other
other users
users in
in making
making rational
rational investment,
investment, credit,
credit,
and
and similar
similar decisions.
decisions.
(b)
(b) helps
helps present
present and
and potential
potential investors
investors and
and creditors
creditors and
and
other
other users
users in
in assessing
assessing the
the amounts,
amounts, timing,
timing, and
and
uncertainty
uncertainty ofof prospective
prospective cash
cash receipts.
receipts.
(c)
(c) clearly
clearly portrays
portrays the the economic
economic resources
resources of of an
an
enterprise,
enterprise, thethe claims
claims to
to those
those resources,
resources, andand the
the
effects
effects of
of transactions,
transactions, events,
events, and
and circumstances
circumstances that
that
change
change its
its resources
resources and
and claims
claims to
to those
those resources.
resources.

Chapter
1-11 LO 4 List the objectives of financial reporting.
 Objectives
Objectives of
of Financial
Financial Accounting
Accounting

Review
All of the following are objectives of financial
reporting except to provide information
a. About enterprise resources, claims to those
resources, and changes in them.
b. That is useful in investment and credit decisions.
c. About the management and major shareholders of
an enterprise.
d. That is useful in assessing cash flow prospects.

Chapter
1-12 LO 4 List the objectives of financial reporting.
 Need
Need to
to Develop
Develop Standards
Standards

Various users Financial Statements

need financial Balance Sheet
Income Statement
information Statement of Stockholders’
Equity
Statement of Cash Flows
Note Disclosure

The accounting profession

has attempted to develop Generally Accepted
a set of standards that are
Accounting Principles
generally accepted and
universally practiced. (GAAP)

Chapter
1-13 LO 5 Explain the need for accounting standards.
 Parties
Parties Involved
Involved in
in Standard
Standard Setting
Setting

Three organizations:
 Securities and Exchange Commission (SEC)

 American Institute of Certified Public

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

Chapter LO 6 Identify the major policy-setting bodies

1-14
and their role in the standard-setting
 Securities
Securities and
and Exchange
Exchange Commission
Commission

Established by federal government

Accounting and reporting for public companies

Securities
Securities Securities
Securities
Act
Act of
of 1933
1933 Act
Act of
of 1934
1934

Encouraged private standard-setting body

SEC requires public companies to adhere to
GAAP
SEC Oversight
Enforcement Authority
Chapter LO 6 Identify the major policy-setting bodies
1-15
and their role in the standard-setting
 American
American Institute
Institute of
of CPAs
CPAs

National professional organization

Established the following:

Committee
Committee on
on Accounting
Accounting Accounting
Accounting Principles
Principles Board
Board
Procedures
Procedures
 1939 to 1959  1959 to 1973
 Issued 51 Accounting  Issued 31 Accounting
Research Bulletins Principle Board
(ARBs) Opinions (APBOs)
 Problem-by-problem  Wheat Committee
approach failed recommendations
adopted in 1973

Chapter
1-16
[Link] LO 6
 Financial
Financial Accounting
Accounting Standards
Standards Board
Board
Wheat Committee’s recommendations resulted in the creation
of a the Financial Accounting Standards Board in 1973.

Financial Selects members of the FASB

Accounting Funds their activities
Foundation Exercises general oversight.

Financial Mission to establish and

Accounting improve standards of financial
Standards Board accounting and reporting.

Financial
Financial Accounting
Accounting
Standards
Standards Advisory
Advisory Consult on major policy issues.
Council
Council

Chapter LO 6 Identify the major policy-setting bodies

1-17
and their role in the standard-setting
 Financial
Financial Accounting
Accounting Standards
Standards Board
Board

Missions is to establish and improve standards of

financial accounting and reporting. Differences
between FASB and APB include:

Smaller Membership
Full-time, Remunerated Membership
Greater Autonomy
Increased Independence
Broader Representation
[Link]

Chapter LO 6 Identify the major policy-setting bodies

1-18
and their role in the standard-setting
 Financial
Financial Accounting
Accounting Standards
Standards Board
Board

Review
The first step taken in the establishment of a
typical FASB statement is
a. The board conducts research and analysis and a
discussion memorandum is issued.
b. A public hearing on the proposed standard is held.
c. The board evaluates the research and public
response and issues an exposure draft.
d. Topics are identified and placed on the board’s
agenda.

Chapter LO 6 Identify the major policy-setting bodies

1-19
and their role in the standard-setting
 Due
Due Process
Process

FASB relies on two basic premises:

(1) Responsive to entire economic community
(2) Operate in full view of the public

Step 1 = Topic placed on agenda

Step 2 = Research conducted and
Discussion Memorandum issued.
Step 3 = Public hearing
Step 4 = Board evaluates research,
public response and issues Exposure Draft
Step 5 = Board evaluates responses and
issues final Statement of Financial Accounting
Standard
Chapter LO 6 Identify the major policy-setting bodies
1-20
and their role in the standard-setting
 Types
Types of
of Pronouncements
Pronouncements

Issued by the FASB:

Standards, Interpretations, and Staff Positions.
Financial Accounting Concepts
Emerging Issues Task Force Statements

Chapter LO 6 Identify the major policy-setting bodies

1-21
and their role in the standard-setting
 Types
Types of
of Pronouncements
Pronouncements
CA1-11 (Accounting Pronouncements) Standard setting bodies have issued a
number of authoritative pronouncements. A list is provided on the left, below,
with a description of these pronouncements on the right.

(d)
(f)

(c)

(e)
(a)
(b)

Chapter LO 6 Identify the major policy-setting bodies

1-22
and their role in the standard-setting
 Changing
Changing Role
Role of
of AICPA
AICPA

The AICPA established the Accounting Standards

Executive Committee (AcSEC):
 Audit and Accounting Guides

 Statements of Position (SOP)

 Practice Bulletins

AICPA and AcSEC no longer issues authoritative accounting

guidance for public companies.
PCAOB oversees the development of auditing standards.
AICPA continues to develop and grade the CPA
examination.
Chapter LO 6 Identify the major policy-setting LO
bodies
6
1-23
and their role in the standard-setting
 Generally
Generally Accepted
Accepted Accounting
Accounting
Principles
Principles
Those principles that have substantial
authoritative support.

Major sources of GAAP are:

FASB Standards, Interpretations, and Staff Positions
APB Opinions
AICPA Accounting Research Bulletins

Chapter LO 7 Explain the meaning of generally accepted accounting

1-24
principles (GAAP) and the role of the Codification
 Generally
Generally Accepted
Accepted Accounting
Accounting
Principles
Principles
Illustration 1-4
GAAP Documents

Chapter LO 7 Explain the meaning of generally accepted accounting

1-25
principles (GAAP) and the role of the Codification
 Generally
Generally Accepted
Accepted Accounting
Accounting
Principles
Principles
Review
Which of the following accounting pronouncements
is the most authoritative?
a. FASB Statement of Financial Accounting Concepts.
b. FASB Technical Bulletins.
c. AICPA Accounting Principles Board Opinion.
d. AICPA Statement of Position.

Chapter LO 7 Explain the meaning of generally accepted accounting

1-26
principles (GAAP) and the role of the Codification
 Issues
Issues in
in Financial
Financial Reporting
Reporting

Standard Setting in a Political

Environment
Accounting standards are as much a product of
political action as they are of careful logic or
empirical findings.

Chapter
1-27 LO 8 Describe the impact of user groups on the rule-making
 Standard
Standard Illustration 1-6
Business User Groups that Influence
Setting
Setting BusinessEntities
Entities Accounting Standards

CPAs
CPAsand
and Financial
Financial
Accounting
AccountingFirms
Firms Community
Community

AICPA
AICPA(AcSEC) Preparers
(AcSEC) FASB
FASB Preparers
(e.g.,
(e.g.,FEI)
FEI)

Government
Government
Academicians
Academicians (SEC,
(SEC,IRS,
IRS,other
other
agencies)
agencies)

Investing Industry
InvestingPublic
Public Industry
Associations
Associations
Accounting standards,
interpretations, and bulletins
Chapter
1-28 LO 8 Describe the impact of user groups on the rule-making
 Issues
Issues in
in Financial
Financial Reporting
Reporting

Review:
All those who serve on the FASB must be
Certified Public Accountants.

False

Chapter
1-29 LO 8 Describe the impact of user groups on the rule-making
 Issues
Issues in
in Financial
Financial Reporting
Reporting

Expectation Gap
What the public thinks accountants should do vs.
what accountants think they can do.

Difficult to close
Sarbanes-Oxley Act (2002)
Public Company Accounting Oversight Board
(PCAOB)

Chapter
1-30 LO 8 Describe the impact of user groups on the rule-making
 Issues
Issues in
in Financial
Financial Reporting
Reporting

International Accounting Standards

Two sets of standards accepted for international
use:
U.S. GAAP, issued by the FASB
International Financial Reporting Standards
(IFRS), issued by the IASB

FASB and IASB recognize

that global markets will best
be served if only one set of
GAAP is used.

Chapter
1-31 LO 8 Describe the impact of user groups on the rule-making
 Issues
Issues in
in Financial
Financial Reporting
Reporting

CA1-9 (GAAP Terminology): With accounting and

finance, it often helps to be fluent in abbreviations and
acronyms.
Instructions:
Presented below is a list of common accounting
acronyms. Identify the term for which each acronym
stands, and provide a brief definition of each term.
(a) AICPA (e) FAF (i) CPA
(b) CAP (f) FASAC (j) FASB
(c) ARB (g) SOP (k) SEC
(d) APB (h) GAAP (l) IASB

Chapter
1-32 LO 9 Understand issues related to ethics and financial
 Issues
Issues in
in Financial
Financial Reporting
Reporting

Ethics in the Environment of Financial

Accounting
In accounting, we frequently encounter ethical
dilemmas.
GAAP does not always provide an answer
Doing the right thing is not always easy or
obvious

Chapter
1-33 LO 9 Understand issues related to ethics and financial
 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.
 iGAAP tends to be simpler and less stringent than U.S.
GAAP.
 Regulators have recently eliminated the need for foreign
companies that trade shares in U.S. markets to reconcile
Chapter
1-34 their accounting with U.S. GAAP.
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Chapter
1-35