1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods
Technical Bulletins provide answers to specific questions related to the application and implementation of FASB Statement or Interpretations, APB Opinions, and ARBs. Technical Bulletins do not alter GAAP; they merely provide guidance on questions related to existing GAAP.
Financial Accounting and Accounting Standards Chapter 1 Intermediate Accounting, 12th Edition Kieso, Weygandt, and Warfield Prepared by Coby Harmon, University of California, Santa Barbara
Identify the major financial statements and other means of financial reporting.
Explain how accounting assists in the efficient use of scarce resources.
Describe some of the challenges facing accounting.
List the objectives of financial reporting.
Explain the need for accounting standards.
Identify the major policy-setting bodies and their role in the standard-setting process.
Explain the meaning of generally accepted accounting principles.
Describe the impact of user groups on the standard-setting process.
Understand issues related to ethics and financial accounting.
Chapter 1 Learning Objectives
Financial Accounting and Accounting Standards Financial Statements and Financial Reporting
Accounting and Capital Allocation
The Need to Develop Standards
Parties Involved in Standard Setting Generally Accepted Accounting Principles Issues in Financial Reporting
Securities and Exchange Commission (SEC)
American Institute of Certified Public Accountants (AICPA)
Financial Accounting Standards Board (FASB)
Governmental Accounting Standards Board (GASB)
Changing Role of the AICPA
The Expectations Gap
International Accounting Standards
Characteristics of Accounting LO 1 Identify the major financial statements and other means of financial reporting . .
Essential characteristics of accounting are:
the identification , measurement , and communication of financial information about
economic entities to
interested parties .
Characteristics of Accounting Financial Information Accounting? Identifies and Measures and Communicates Balance Sheet Income Statement Statement of Cash Flows Statement of Owners’ or Stockholders’ Equity Note Disclosures President’s letter Prospectuses, SEC Reporting News releases Forecasts Environmental Reports Etc. GAAP Not GAAP Financial Statements Additional Information Economic Entity LO 1 Identify the major financial statements and other means of financial reporting . .
What is the purpose of information presented in notes to the financial statements?
Characteristics of Accounting LO 1 Identify the major financial statements and other means of financial reporting . . 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. Review
Accounting and Capital Allocation Resources are limited . Efficient use of resources often determines whether a business thrives. Financial Reporting Information to help users with capital allocation decisions. Users Investors, creditors, and other users Capital Allocation The process of determining how and at what cost money is allocated among competing interests. LO 2 Explain how accounting assists in the efficient use of scare resources. Illustration 1-1 Capital Allocation Process
An effective process of capital allocation is critical to a healthy economy, which
Accounting and Capital Allocation a. promotes productivity. b. encourages innovation. c. provides an efficient and liquid market for buying and selling securities. d. All of the above. LO 2 Explain how accounting assists in the efficient use of scare resources. Review
Objectives of Financial Accounting (a) that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. (b) to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. (c) about the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change its resources and claims to those resources. LO 4 List the objectives of financial reporting.
All of the following are objectives of financial reporting except to provide information
Objectives of Financial Accounting 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. LO 4 List the objectives of financial reporting. Review
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.
Statement of Stockholders’ Equity
Statement of Cash Flows
Generally Accepted Accounting Principles (GAAP) LO 5 Explain the need for accounting standards.
The first step taken in the establishment of a typical FASB statement is
Financial Accounting Standards Board 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. Review LO 6 Identify the major policy-setting bodies and their role in the standard-setting process.
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 LO 6 Identify the major policy-setting bodies and their role in the standard-setting process.
LO 6 Identify the major policy-setting bodies and their role in the standard-setting process.
Governmental Accounting Standards Board Created in 1984 to address state and local governmental reporting issues. LO 6 Financial Accounting Foundation Financial Accounting Standards Board Financial Accounting Standards Advisory Council Governmental Accounting Standards Board Governmental Accounting Standards Advisory Council http://www.gasb.org/
Generally Accepted Accounting Principles Those principles that have substantial authoritative support . Major sources of GAAP are:
FASB Standards, Interpretations, and Staff Positions
AICPA Accounting Research Bulletins
LO 7 Explain the meaning of generally accepted accounting principles.
FASB Statements, Interpretations, and Staff Positions APB Opinions CAP Accounting Research Bulletins Category A (Most Authoritative) FASB Technical Bulletins AICPA Industry Audit and Accounting Guides AICPA Statements of Position Category B FASB Emerging Issues Task Force AICPA AcSEC Practice Bulletins Category C AICPA Accounting Interpretations Category D (Least Authoritative) FASB Implementation Guides Recognized Industry Practices House of GAAP LO 7
Which of the following accounting pronouncements is the most authoritative?
Generally Accepted Accounting Principles a. FASB Statement of Financial Accounting Concepts. b. FASB Technical Bulletins. c. AICPA Accounting Principles Board Opinion. d. AICPA Statement of Position. LO 7 Explain the meaning of generally accepted accounting principles. Review
Issues in Financial 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. LO 8 Describe the impact of user groups on the standard-setting process.
FASB Preparers (e.g., FEI) Financial Community Government (SEC, IRS, other agencies) Industry Associations Business Entities CPAs and Accounting Firms AICPA (AcSEC) Academicians Investing Public Accounting standards, interpretations, and bulletins Standard Setting LO 8 Describe the impact of user groups on the standard-setting process. Illustration 1-5 User Groups that Influence Accounting Standards