Realize the growing importance and relevance of international accounting issues to the practice of accounting in the United States and understand the role of the IASB in international accounting standard setting.
Understand the significance of the FASB’s conceptual framework in outlining the qualities of good accounting information, defining terms such as asset and revenue, and providing guidance about appropriate recognition, measurement, and reporting.
Identify career opportunities related to accounting and financial reporting and understand the importance of personal ethics in the practice of accounting.
“ Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions — in making reasoned choices among alternative courses of action.”
( Statement of the Accounting Principles Board No. 4 , p. 8)
Management accounting deals with financial reporting for internal users- especially management.
Financial accounting focuses on creating and communicating financial information for external users.
Financial Reporting The balance sheet reports, as of a certain point in time, the resources of a company (the assets), the company’s obligations (the liabilities), and the equity of the owners. The income statement reports, for a specified interval, the net assets generated through business operations (revenues), the net assets consumed (the expenses), and the net income. The statement of cash flows reports, for a specified time period, the amount of cash generated and consumed by a company through operating, financing, and investing activities. Accounting estimates and judgments are outlined in the notes to financial statements.
In addition to the financial statements, the management of a company has a variety of other methods of communicating financial information to external users. Which ONE of the following is NOT one of those methods?
Sixty-day exposure period allows for public comment.
Committee studies public response to exposure draft and prepares final draft.
Board votes on final draft leads to either the issuance of a Statement of Financial Accounting Standard , a revised Exposure Draft, or abandonment of the project.
Emerging Issue Task Force In an effort to overcome the slow process of standard setting, in 1984 the FASB established the Emerging Issues Task Force (EITF) to assist the FASB in identifying the emerging issues that affect financial reporting.
In 2000, FASB issued Statements of Financial Accounting Concepts which addressed four major areas:
Objectives: What are the purposes of financial reporting?
Qualitative characteristics: What are the qualities of useful financial information?
Elements: What is an asset? A liability? A revenue? An expense?
Recognition, measurement, and reporting: How should the objectives, qualities and elements definitions be implemented?
Conceptual Framework of Accounting Objectives of Financial Reporting Qualitative Characteristics of Information Accounting Elements of Financial Statements Recognition and Measurement Concepts Assumptions Constraints Principles
Objectives of Financial Reporting Usefulness Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.
Objectives of Financial Reporting Understandability Financial reporting should provide information that is understandable to one who has a reasonable knowledge of accounting and business and who is willing to study and analyze the information presented.
Objectives of Financial Reporting Target Audience While there are many potential users of financial reports, the objectives are directed primarily toward investors and creditors.
Objectives of Financial Reporting Assessing Future Cash Flows Financial reporting should provide information that is useful in assessing amounts, timing, and uncertainty (risk) of prospective cash flows .
Objectives of Financial Reporting Evaluating Economic Resources Financial reporting should also provide information about an enterprise’s assets, liabilities, and owners’ equity to help investors, creditors, and others evaluate the financial strengths and weaknesses of the enterprise and its liquidity and solvency.
Objectives of Financial Reporting Primary Focus on Earnings Information about enterprise earnings, measured by accrual accounting, generally provides a better basis for forecasting future performance than does information about current cash receipts and disbursements.
Qualitative Characteristics of Accounting Information
Benefits greater than cost
Qualitative Characteristics of Accounting Information
Qualitative Characteristics of Accounting Information Benefits Greater Than Costs The information must be worth the time and research required to gather and interpret the information.
Qualitative Characteristics of Accounting Information Relevance
The information must “make a difference”. It must carry the qualities of:
Qualitative Characteristics of Accounting Information Reliability
The information must be relatively free from error and represent what it claims to represent. It must have:
Qualitative Characteristics of Accounting Information Comparability The information must be relatable to a benchmark or standard. Similar events must be accounted for in the same manner on the financial statements for different companies and for different periods.
Qualitative Characteristics of Accounting Information Materiality Is the item large enough to influence the decision of a user of information? This can never be summarized to a simple numerical benchmark so the accountant must make a judgment based on the company or industry data.
Qualitative Characteristics of Accounting Information Conservatism The concept of conservatism can be summarized as follows: When in doubt, recognize all losses but don’t recognize any gains.