Financial Statements and Reporting
Accounting and Capital Allocation
Resources are limited. Efficient use of resources often
determines whether a business thrives.
Illustration 1-1
Capital Allocation Process
1-1
LO 2 Explain how accounting assists in the efficient use of scare resources.
Financial Statements and Reporting
Objectives of Financial Reporting
Provide financial information about the reporting entity
that is useful to
present and potential equity investors, lenders, and creditors
in making decisions in their capacity as capital providers
Investors are interested in assessing the companys
1. ability to generate net cash inflows and
2. managements ability to protect and enhance the capital
providers investments.
.
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LO 3 Identify the objectives of financial reporting.
The Need To Develop Standards
Various users
need financial
information
The accounting profession has
attempted to develop a set of
standards that are generally
accepted and universally
practiced.
1-3
Financial Statements
Balance
Balance Sheet
Sheet
Income
Income Statement
Statement
Statement
Statement of
of Stockholders
Stockholders Equity
Equity
Statement
Statement of
of Cash
Cash Flows
Flows
Note
Note Disclosure
Disclosure
Generally
Generally Accepted
Accepted
Accounting
Accounting Principles
(GAAP)
(GAAP)
LO 4 Explain the need for accounting standards.
Parties Involved In Standard Setting
Three organizations:
1-4
Securities and Exchange Commission (SEC).
American Institute of Certified Public Accountants (AICPA).
Financial Accounting Standards Board (FASB).
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Parties Involved In Standard Setting
Securities and Exchange Commission (SEC)
Established by federal government.
Accounting and reporting for public companies.
Securities
SecuritiesAct
Act of
of
1933
1933
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Securities
SecuritiesAct
Act of
of
1934
1934
Encouraged private standard-setting body.
SEC requires public companies to adhere to GAAP.
SEC Oversight.
Enforcement Authority.
[Link]
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Parties Involved In Standard Setting
American Institute of CPAs (AICPA)
National professional organization
Established the following:
Committee on Accounting
Procedures
Accounting Principles
Board
1939 to 1959
Issued 51 Accounting Research
Bulletins (ARBs)
Problem-by-problem approach
failed
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[Link]
1959 to 1973
Issued 31 Accounting Principle
Board Opinions (APBOs)
Wheat Committee
recommendations adopted in
1973
LO 5
Parties Involved In Standard Setting
Financial Accounting Standards Board (FASB)
Wheat Committees recommendations resulted in creation of FASB.
Financial
Financial
Accounting
Accounting
Foundation
Foundation
Financial
Financial
Accounting
Accounting
Standards
Standards Board
Board
Financial
Financial Accounting
Accounting
Standards
Standards Advisory
Advisory
Council
Council
1-7
Selects members of the FASB.
Funds their activities.
Exercises general oversight.
Oversees GASB too
Mission to establish and improve
standards of financial accounting
and reporting.
Consult on major policy issues.
LO 5
Financial Accounting Standards Board
Illustration 1-3
The Due Process
System of the
FASB
1-8
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Generally Accepted Accounting Principles
Illustration 1-4
GAAP Documents
1-9
LO 6 Explain the meaning of generally accepted accounting principles
(GAAP) and the role of the Codification for GAAP.
Generally Accepted Accounting Principles
FASB Codification
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 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.
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LO 6
FASB Codification: Generally Accepted Accounting Principles
Our access:[Link] ID: AAA52294, PW: W6FyT6y
Illustration 1-5
FASB Codification
Framework
User ID:
AAA52294
Password:
W6FyT6y
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LO 6
Issues in Financial Reporting
GAAP in a Political Environment
Illustration 1-6
User Groups that
Influence the Formulation
of Accounting Standards
GAAP is as
much a product
of political
action as they
are of careful
logic or
empirical
findings.
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LO 7 Describe the impact of user groups on the rule-making process.
Issues in Financial Reporting
Expectation GAAP
What the public thinks accountants should do vs. what
accountants think they can do.
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Difficult to close in light of accounting scandals.
Sarbanes-Oxley Act (2002).
Public Company Accounting Oversight Board
(PCAOB).
LO 7 Describe the impact of user groups on the rule-making process.
Issues in Financial Reporting
Financial Reporting Challenges
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Non-financial measurements.
Forward-looking information.
Soft assets.
Timeliness
Understandability
LO 8 Describe some of the challenges facing financial reporting.
Issues in Financial Reporting
Ethics in the Environment of Financial
Accounting
In accounting, we frequently encounter ethical dilemmas.
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GAAP does not always provide an answer.
Doing the right thing is not always easy or obvious.
LO 9 Understand issues related to ethics and financial accounting.
STEPS IN SOLVING AN ETHICAL DILEMMA
1.
Recognize the ethical situation and the
issues involved
2.
Identify the stakeholders and the
responsibilities of the parties involved.
3.
4.
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Identify and weigh the alternatives
SELECT THE OPTIMAL SOLUTION
Issues in Financial Reporting
International Accounting Standards
Two sets of standards accepted for international use:
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U.S. GAAP, issued by the FASB.
International Financial Reporting Standards (IFRS),
issued by the IASB.
LO 8 Describe some of the challenges facing financial reporting.
International Standard-Setting Organizations:
International Accounting Standards Board (IASB)
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Issues International Financial Reporting Standards
(IFRS).
Standards used on most foreign exchanges.
Standards used by foreign companies listing on U.S.
securities exchanges.
IFRS used in over 115 countries.
Also use earlier IAS statements.
LO 10 Compare the procedures related to financial accounting
and accounting standards under GAAP and IFRS.
RELEVANT FACTS
IFRS tends to be simpler in its accounting and disclosure requirements; some
people say more principles-based. GAAP is more detailed; some people say
more rules-based. This difference in approach has resulted in a debate about
the merits of principles-based versus rules-based standards.
The SEC allows foreign companies that trade shares in U.S. markets to file their
IFRS financial statements without reconciliation to GAAP.
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Otherwise, foreign companies must file schedule 20-F, reconciling in country
numbers to GAAP.
LO 10 Compare the procedures related to financial accounting
and accounting standards under GAAP and IFRS.
International Organization of Securities
Commissions (IOSCO)
Does not set accounting standards.
Dedicated to ensuring that global
markets can operate in an efficient
and effective basis.
[Link]
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LO 10 Compare the procedures related to financial accounting
and accounting standards under GAAP and IFRS.
ON THE HORIZON
Financial statements prepared according to IFRS have become an important
standard around the world for communicating financial information to investors
and creditors. The SEC and the FASB are working with their international
counterparts to achieve the goal of a single set of high-quality financial
reporting standards for use around the world. While there are still many
bumps in the road to the establishment of one set of worldwide standards, we
are optimistic that this goal can be achieved, which will be of value to all.
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LO 10 Compare the procedures related to financial accounting
and accounting standards under GAAP and IFRS.