Intermediate Accounting

Seventeenth Edition

Kieso ● Weygandt ● Warfield

Chapter 1
Financial Accounting and
Accounting Standards
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Preview of Chapter 1

Financial Reporting Environment

• Accounting and capital allocation

• Objective of financial reporting
• Need to develop standards
Parties Involved in Standard-Setting
• Securities and Exchange Commission
• American Institute of CPAs
• Financial Accounting Standards Board
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Preview of Chapter 1

Generally Accepted Accounting Principles

• FASB Codification
Major Challenges in Financial Reporting
• Political environment
• Expectations gap
• Financial reporting issues
• International accounting standards
• Ethics

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Learning Objective 1
Describe the Financial Reporting
Environment

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 Financial Reporting Environment
Essential characteristics of accounting are:

(1) the identification, measurement, and

communication of financial information about
(2) economic entities to
(3) interested parties.

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 Financial Reporting Environment
Economic Entity Financial Statements Additional Information

Financial Balance Sheet President’s letter

Information Income Statement Prospectuses
Accounting? Statement of Cash Reports filed with
Identifies Flows governmental agencies
and Statement of Owners’ News releases
Measures or Stockholders’ Equity
Forecasts
and Note Disclosures
Environmental impact
Communicates statements
Etc.
GAAP

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 Financial Reporting Environment
Accounting and Capital Allocation

Resources are limited. Efficient use of resources often

determines whether a business thrives.

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 Financial Reporting Environment
Objectives of Financial Reporting
Provide financial information about the reporting entity
that is useful to
• present and potential equity investors,
• lenders, and
• other creditors in making decisions about providing
resources to the entity.

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 Objective of Financial Accounting
General-Purpose Financial Statements
• Provide financial reporting information to a wide
variety of users
• Provide the most useful information possible at the
least cost
Equity Investors and Creditors
• Primary users for general-purpose financial
statements

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 Objective of Financial Accounting cont.
Entity Perspective
• Companies viewed as separate and distinct from their
owners
Decision-Usefulness
Investors are interested in assessing the company’s
1. ability to generate net cash inflows and
2. management’s ability to protect and enhance the
capital providers’ investments.

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 The Need to Develop Standards
Financial Statements
Various users •• Balance
Balance Sheet
Sheet
need financial •• Income
Income Statement
Statement
information •• Statement
Statement of
of Stockholders’
Stockholders’ Equity
Equity
•• Statement
Statement of
of Cash
Cash Flows
Flows
•• Note
Note Disclosure
Disclosure

The accounting profession

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

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Learning Objective 2
Identify the Major Policy-Setting Bodies and
Their Role in the Standard-Setting Process

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 Parties Involved in Standard Setting
Three organizations:

• Securities and Exchange Commission (SEC)

• American Institute of Certified Public Accountants
(AICPA)
• Financial Accounting Standards Board (FASB)

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 Parties Involved in Standard Setting
Securities and Exchange Commission (SEC)
• Established by federal government
• Securities Exchange Act of 1934
• Accounting and reporting for public companies
• Encouraged private standard-setting body
• SEC requires public companies to adhere to GAAP
• SEC Oversight
• Enforcement Authority

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 Parties Involved in Standard Setting
American Institute of Certified Public Accountants
(AICPA)

• National professional organization

• Established the following:

Committee on Accounting Procedures

• 1939 to 1959
• Issued 51 Accounting Research Bulletins (ARB s)
• Problem-by-problem approach failed

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 Parties Involved in Standard Setting
American Institute of Certified Public
Accountants (AICPA)

Accounting Principles Board

• 1959 to 1973
• Issued 31 Accounting Principle Board Opinions (APBOs)
• Wheat Committee recommendations adopted in 1973

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 Parties Involved in Standard Setting
Financial Accounting Standards Board (FASB)
Wheat Committee’s recommendations resulted in FASB.
Differences between FASB and APB include:
• Smaller Membership
• Full-time, Remunerated Membership
• Greater Autonomy
• Increased Independence
• Broader Representation

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 Financial Accounting Standards Board
(1 of 3)

Organizational Structure for Setting Accounting

Standards
Financial Accounting Foundation
Purpose: To select members of the FASB and their
Advisory Councils, fund their activities, and exercise
general oversight.

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 Financial Accounting Standards Board
(2 of 3)

Organizational Structure for Setting Accounting

Standards
Financial Accounting Standards Staff and Task
Board (FASB) Forces
Purpose: To establish and improve Purpose: To assist
standards of financial accounting and Board on reporting
reporting for the guidance and issues by performing
education of the public, including research, analysis, and
issuers, auditors, and users of financial writing functions.
information.

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 Financial Accounting Standards Board
(3 of 3)

Organizational Structure for Setting Accounting

Standards
Financial Accounting Standards Advisory
Council (FASAC)
Purpose: To consult on major policy issues, technical
issues, project priorities, and selection and organization
of task forces.

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 Financial Accounting Standards Board
Due
Process

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 Financial Accounting Standards Board
Types of Pronouncements

Accounting Standards Updates Financial Accounting

Concepts

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Learning Objective 3
Explain the Meaning of Generally Accepted
Accounting Principles (GAAP) and the Role
of the Codification for GAAP

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 Generally Accepted Accounting
Principles
Principles that have substantial authoritative support.

Major sources of GAAP:

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

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 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
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 Generally Accepted Accounting
Principles
FASB Codification
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.
The Codification and the related CRS provide a topically
organized structure, subdivided into topic, subtopics,
sections, and paragraphs, using a numerical index system.
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 ILLUSTRATION 1.4
FASB Codification Framework

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Learning Objective 4
Describe Major Challenges in the Financial
Reporting Environment

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 Major Challenges in Financial Reporting
GAAP in a Political Environment
GAAP is as much a product of political action as it is of
careful logic or empirical findings.

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 GAAP in a Political Environment

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 Major Challenges in Financial Reporting
Expectation GAAP
What the public thinks accountants should do vs. what
accountants think they can do.
• Difficult to close in light of accounting scandals
• Sarbanes-Oxley Act
• Public Company Accounting Oversight Board
(PCAOB)

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 Major Challenges in Financial Reporting
Financial Reporting Issues
• Nonfinancial measurements
• Forward-looking information
• Soft assets
• Timeliness
• Understandability

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 Major Challenges in Financial
Reporting
Current Environment
International Accounting Standards
Two sets of standards accepted for international use:
• U.S. GAAP issued by the FASB
• International Financial Reporting Standards (I FRS)
issued by the International Accounting Standards
Board (IASB)

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 Major Challenges in Financial 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

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