The Environment of Financial Reporting

Chapter1

An electronic presentation by Norman Sunderman Angelo State University

An electronic presentation by Norman Sunderman Angelo State University

COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

Intermediate AccountingIntermediate Accounting 10th edition 10th edition

Nikolai Bazley JonesNikolai Bazley Jones

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More Accountants Needed

New accounting rules pose challenges for financial

accounting and projections point to increased hiring of

accounting graduates.

New accounting rules pose challenges for financial

accounting and projections point to increased hiring of

accounting graduates.

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Estimated Hiring Increase

Accounting firms of all sizes plan to increase future hiring.

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Companies need large amounts of capital for operations

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Companies may obtain capital by issuing capital stock...

Stock Exchange

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Bank

…or by borrowing from lenders

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Corporations

Financial InstitutionsInvestors

Borrow money

Sell stocks and bonds

Primary Market (e.g., individuals,

banks)

Secondary Market (e.g., New

York Stock Exchange)

Buy and sell stocks and

bonds

Capital Markets

Buy and sell stocks and bonds

Buy and sell stocks and bonds

Investors Investors

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Accumu-late

AccountingInformation

Communi-cate

External User

Internal User

External

Decision

MakingCompany’s Economic Activities

Impact

Impact

Accounting Information Economic Activities and

Decision Making

Internal Decisio

n 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 AuthoritySources of Authority

Internal needs

Managerial Accounting Financial Accounting

GAAP

Comparison of Financial and Managerial Accounting

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Time Frame of Reported InformationTime Frame of Reported Information

Present and future

Managerial Accounting

Primarily historical

Financial Accounting

Comparison of Financial and Managerial Accounting

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ScopeScope

Total company&

Segment reporting

Financial Accounting

Individual departments, divisions, and total company

Managerial Accounting

Comparison of Financial and Managerial Accounting

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Type of InformationType of Information

Primarily quantitative

Sales$275,240

Cost180,120

Gross mar. 95,120

Expenses 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 FormatStatement 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 FocusDecision Focus

External

Financial Accounting

Internal

Managerial Accounting

Comparison of Financial and Managerial Accounting

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The company’s accountants prepare both

the financial and the managerial accounting

reports…

The company’s accountants prepare both

the financial and the managerial accounting

reports…

…and the information comes from the same information system.

…and the information comes from the same information system.

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Financial reporting is the process of communicating

financial accounting information about a

company to external users.

Financial reporting is the process of communicating

financial accounting information about a

company to external users.

Financial Reporting

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A statement of changes in

stockholders’ equity also is included by many companies.

A statement of changes in

stockholders’ equity also is included by many companies.

Financial Reporting

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This statement summarizes the

changes in each item of stockholders’

equity for a period.

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.

Generally Accepted Accounting Principles (GAAP)

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A. FASB Statements of Financial Accounting Standards and Interpretations, FASB Staff Positions, FASB Statement 133 Implementation Issues, APB Opinions, and CAP (AICPA) Accounting Research Bulletins, (as well as SEC releases such as regulation S-X, Financial Reporting releases, and Staff Accounting Bulletins for companies that file with the SEC)

ContinuedContinuedContinuedContinued

Hierarchy of Sources of GAAP

Categories 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 and if cleared by the FASB, AICPA Practice Bulletins

ContinuedContinuedContinuedContinued

Hierarchy of Sources of GAAP

Categories Authoritative Sources

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Hierarchy of Sources of GAAP

D. FASB Q’s and A’s (Implementation Guides), AICPA Accounting Interpretations, 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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1938

CAP formed

CAP issued

51 ARBs

1959

APB formed

APB issued 31 Opinions

1973

FASB formed

Present

FASB issued 154 Statements

of Standards as of 10/05

History of GAAP in Private Sector

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Committee on Accounting Procedure (CAP)

In 1938, the AICPA formed the Committee on Accounting Procedure. 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 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.

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 APB

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Financial Accounting Standards Advisory

Council (approximately 30 members)

Financial Accounting Standards Board

(7 members)

Appoint, fund, and oversee

Advise

Financial Accounting Foundation (16-member board

of trustees)

ContinuedContinuedContinuedContinued

Structure of FASB

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Task Forces of the Standards Board

(including Emerging Issues Task Force)

Appoint

Consult

Support

Administrative Staff

Research and Technical Staff Consult

Structure of the FASB

Financial Accounting Standards Board

(7 members)

Financial Accounting Standards Board

(7 members)

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Statements of Financial Accounting Standards

InterpretationsTechnical BulletinsStatements of Financial Accounting

ConceptsOther Pronouncements

Types of Pronouncements Issued by the FASB

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Identify Topic

Appoint Task Force

Conduct Research

Issue Discussion

Memorandum or Invitation to

Comment

Issue Exposure

Draft

ContinuedContinuedContinuedContinued

Deliberate on Findings

Hold Public Hearings

FASB Operating Procedures

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Modify Exposure

Drafts

Vote (simple

majority)

Issue Exposure

Draft

Hold Public

Hearings

From previous

page

Issue Statement

FASB Operating Procedures

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ResponsibilitiesResponsibilities

In carrying out their responsibilities as

professionals, members should exercise sensitive professional judgment in

all their activities.

In carrying out their responsibilities as

professionals, members should exercise sensitive professional judgment in

all their activities.

Principles of the AICPA Code of Professional Conduct

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The Public InterestThe 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.

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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IntegrityIntegrity

To maintain and broaden public confidence,

members should perform all professional

responsibilities with the highest sense of 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 IndependenceObjectivity 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.

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 CareDue Care

A member should observe the profession’s technical and ethical standards, strive continually to improve

competence and the quality of services, and discharge the

professional responsibility to the best of the member’s ability.

A member should observe the profession’s technical and ethical standards, strive continually to improve

competence and the quality of services, and discharge the

professional responsibility to the best of the member’s ability.

Principles of the AICPA Code of Professional Conduct

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Scope and Nature of ServiceScope 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.

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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Chapter1

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