This document provides an overview of financial accounting and reporting. It defines accounting and outlines its key features. It discusses the users of accounting information like investors, creditors, and managers. It describes the key financial statements - the balance sheet, income statement, and statement of cash flows. It also discusses the roles of auditors, the SEC, FASB, GASB, EITF, AICPA, AAA, IRS and IASB in establishing accounting standards and ensuring compliance. It concludes with a definition of GAAP as the standards recognized by the SEC for preparing financial statements for public companies.

1. Stice | Stice | Skousen
Intermediate Accounting,17E
Financial Reporting
PowerPoint presented by: Douglas Cloud
Professor Emeritus of Accounting, Pepperdine
University
© 2010 Cengage Learning

2. Definition 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, par. 40.
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3. Key Features of this Definition
Accounting—
• Provides a vital service in today’s business
environment.
• Is concerned primarily with quantitative
financial information that is used in
conjunction with qualitative evaluations in
making judgments.
• Information is used in making decisions
about how to allocate scarce resources.
• Information is intended to be useful in
making economic decisions about the
future.
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4. Users of Accounting Information
• Stockholders are all parties
interested in the financial health of a
company.
• Internal users make decisions that
directly affect the internal operations
of the enterprise.
• External users make decisions
concerning their relationship to the
enterprise.
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5. External Funding
1. Management accounting is
concerned primarily with financial
reporting for internal users, especially
management.
2. Financial accounting focuses on the
development and communication of
financial information for external
users.
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6. Creditors need
information about
the profitability Investors (both
and stability of the existing
company to decide stockholders and
whether to lend potential investors)
money to the need information
company and, if concerning the
so, what interest safety and
rate to charge. profitability of their
investment.
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7. 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.
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8. Financial Reporting
The income
statement reports,
for a certain interval,
the net assets
generated through
business operations
(revenues), the net
assets consumed
(the expenses), and
the difference (net
income).
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9. Financial Reporting
The statement of
cash flows reports,
for a certain
interval, the amount
of cash generated
and consumed by a
company through
operating, financing,
and investing
activities.
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10. Financial Reporting
Accounting estimates and
judgments are outlined in
the notes to financial
statements.
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11. Auditor’s Role
• Auditors, working independently of a
company’s management and internal
accountants, examine the financial
statements.
• They issue an auditor’s opinion
about the fairness of the statements
and their adherence to proper
accounting principles.
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12. Securities Exchange
Commission (SEC)
• 1929 stock market crash blamed on
nonstandard accounting.
• 1933 Securities Act established SEC to
standardize accounting.
• Created to protect the interests of investors
by ensuring full and fair disclosure.
• Granted legal authority to establishing
GAAP.
• Has tended to defer setting GAAP to the
accounting profession.
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13. Financial Accounting
Standards Board (FASB)
• The private-sector body responsible for the
establishment of U.S. accounting standards
(also known as GAAP).
• Five full-time members are drawn from a
variety of backgrounds—auditing, corporate
accounting, financial services, and academia.
• Members are required to sever all connections
with their firms or institutions prior to
assuming membership on the Board.
• Appointment of new members is done by the
Financial Accounting Foundation (FAF).
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14. Governmental Accounting
Standards Board (GASB)
The FAF is also responsible for
selecting and supporting members
of GASB. The GASB was
established in 1984 and sets
financial accounting standards for
state and local government
entities.
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15. The Standard-Setting Process
• The major functions of the FASB are to
study accounting issues and to establish
accounting standards.
• These standards are published as
Statements of Financial Accounting
Standards.
• The FASB has also issued Statements of
Financial Accounting Concepts that
provide a framework within which specific
accounting standards can be developed.
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16. FASB “Due Process”
1. FASB staff assembles background information.
2. The Board holds public meetings before a
decision is made to add a project to the FASB’s
formal agenda.
 After more study and further hearings, the
Board often issues a report summarizing its
Preliminary Views.
 Interested parties are invited to comment either
in writing or orally at a public hearing.
 After comments from interested parties have
been evaluated, the Board meets as many times
as necessary to resolves the issues.
(continues) 1-16

17. FASB “Due Process”
 From these meetings, the Board developes an
Exposure Draft of a statement that includes
specific recommendations for financial and
accounting reporting.
 At the end of the exposure period, 30 days or
longer, all comments are viewed by the staff
and the Board.
 Further deliberation by the Board leads to
either the issuance of a Statement of
Financial Accounting Standards (if at least
three of the members approve), a revised
Exposure Draft, or abandonment of the project.
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18. Emerging Issue Task Force
In an effort to overcome the
methodical, sometimes slow,
nature of the standard setting
process, in 1984 the FASB
established the Emerging Issues
Task Force (EITF). The EITF
assists the FASB in the early
identification of emerging issues
that affect financial reporting.
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19. Securities and Exchange
Commission (SEC)
• Created by an act of Congress in
1934.
• Primary role is to regulate the
issuance and trading of securities by
corporations to the general public.
• Requires companies to furnish various
financial statements and to have their
external financial statements audited
by independent accountants.
(continues)
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20. Securities and Exchange
Commission (SEC)
• It is vitally interested in financial
reporting and the development of
accounting standards.
• It brings to the Board’s attention
emerging problems that need to be
addressed and sends observers to meet
with the EITF.
• It occasionally issues Staff Accounting
Bulletins (SABs), which are SEC staff
interpretations.
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21. American Institute of Certified
Public Accountants (AICPA)
• It is the professional organization of
practicing certified public accountants
(CPAs) in the United States.
• It is responsible for preparing and
grading the Uniform CPA Examination.
(continues)
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22. American Institute of Certified
Public Accountants (AICPA)
• It is concerned with maintaining the
integrity of the profession through its
Code of Professional Conduct and
through a quality control program,
which includes a process of peer
review of CPA firms conducted by
other CPAs.
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23. American Accounting
Association (AAA)
• The AAA is an organization of
accounting professors.
• It sponsors national and regional
meetings where accounting professors
discuss technical research and share
teaching techniques and materials.
• It organizes working committees of
professors to study and comment on
accounting standards issues.
(continues) 1-23

24. American Accounting
Association (AAA)
• The AAA publishes a number of
academic journals, including The
Accounting Review and Accounting
Horizons.
• It motivates and facilitates curriculum
revision to keep pace with the changes
in the accounting profession.
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25. Internal Revenue Service (IRS)
• The IRS has the primary goal of
equitably collecting revenue.
• Although not the same, there are
many areas where tax and financial
accounting are closely related.
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26. What is GAAP?
(continues)
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27. What is GAAP?
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28. International Accounting
Standards Board (IASB)
• Formed in 1973 to develop worldwide
accounting standards.
• Similar to FASB, IASB develops proposals,
circulates these among interested
organizations, receives feedback, and then
issues a final pronouncement.
• Board members are representatives from
the United States, the United Kingdom,
France, Sweden, China, Australia, South
Africa, and Japan.
(continues)
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29. International Accounting
Standards Board (IASB)
• Accounting standards issued by the IASB
are referred to as International Financial
Reporting Standards (IFRSs) if issued
since to 2001 and International
Accounting Standards (IASs) if issued
prior to 2001.
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30. Conceptual Framework
• A strong theoretical foundation is essential
if accounting practice is to keep pace with a
changing business environment.
• The conceptual framework plays a vital
role in the development of new standards
and in the revision of previously issued
standards.
• A conceptual framework provides a guide
for future practice.
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31. Concepts Statements
• In 2000, FASB issued seven 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?
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32. 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.
Statement of Financial Accounting Concepts No. 1, par. 34.
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33. 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.
Statement of Financial Accounting Concepts No. 1, par. 34.
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34. Objectives of Financial
Reporting
Target Audience:
Investors and Creditors
While there are many potential
users of financial reports, the
objectives are directed primarily
toward investors and creditors.
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35. 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.
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36. Objectives of Financial
Reporting
Evaluating Economic Resources
Financial reporting should also
provide information about a
company’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. 1-36

37. Objectives of Financial
Reporting
Primary Focus on Earnings
Information about company
earnings, measured by accrual
accounting, generally provides a
better basis for forecasting future
performance than does
information about current cash
receipts and disbursements.
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38. Qualitative Characteristics of
Accounting Information
Benefits Greater Than Costs
The information must be worth
more than the cost of producing
it.
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39. Qualitative Characteristics of
Accounting Information
Relevance
The information must “make a
difference.” It must carry the
qualities of:
• Feedback value
• Predictive value
• Timeliness
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40. Qualitative Characteristics of
Accounting Information
Relevance
Relevant information normally
provides both feedback value
and predictive value at the
same time.
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41. Qualitative Characteristics of
Accounting Information
Relevance
Timeliness is essential for
information to “make a
difference” because if the
information becomes available
after the decision is made, it
isn’t of much use.
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42. Qualitative Characteristics of
Accounting Information
Reliability
The information must be relatively
free from error and represent what
it claims to represent. It must
have:
• Verifiability
• Representational faithfulness
• Neutrality
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43. Qualitative Characteristics of
Accounting Information
Reliability
Verifiability implies consensus.
Representational faithfulness
means that there is agreement
between a measurement and the
economic activity or item that is
being measured. Neutrality is
similar to the concept of fairness.
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44. Qualitative Characteristics of
Accounting Information
Comparability
The information must be
relatable to a benchmark or
standard. The comparison may
be with data for other firms or
it may be with similar
information for the same firm
but for other periods of time.
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45. Qualitative Characteristics of
Accounting Information
Materiality
Is the item large enough to
influence the decision of a user of
information? Quantitative
guidance concerning materiality
is lacking, so managers and
accountants must exercise
judgment in determining whether
an item is material.
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46. 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.
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47. Recognition
• Recognition—Taking all the estimates and
judgments into one number and using that
number to make a journal entry.
• Recognition Criteria—For an item to be
formally recognized, it must meet one of the
definitions of the elements of the financial
statements.
– For example, revenue must meet the
definition of revenue to be recorded and
reported on the income statement.
• Disclosure—Skipping the journal entry and
just relying on the note to convey the
information to users. 1-47

48. Measurement
Five measurement attributes are:
1. Historical cost
2. Current replacement cost
3. Fair value
4. Net realizable value
5. Present (or discounted) value
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49. Reporting
Included in the recommended set of
general-purpose financial statements are
reports that show the following:
• Financial position at the end of the
period
• Earnings (net income) for the period
• Cash flows during the period
• Investments by and distributions to
owners during the period
• Comprehensive income for the period
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50. Reporting
Comprehensive income differs
from earnings in that it includes
unrealized gains and losses not
recognized in the income
statement.
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51. Full Disclosure Principle
For financial statements to be
most effective, all relevant
information should be presented
in an unbiased, understandable,
and timely manner. This is
sometimes referred to as the full
disclosure principle.
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52. Traditional Assumptions
The FASB conceptual framework is
influenced by five basic assumptions.
1. Economic entity
2. Going concern
3. Arm’s-length transactions
4. Stable monetary unit
5. Accounting period
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53. Traditional Assumptions of
the Accounting Model
Economic Entity
The business enterprise is viewed
as a specific economic entity
separate and distinct from its
owners and any other business
unit.
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54. Traditional Assumptions of
the Accounting Model
Going Concern
In the absence of evidence to the
contrary, the entity is viewed as a
going concern. In other words, it
is assumed that the enterprise
will last indefinitely.
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55. Traditional Assumptions of
the Accounting Model
Arm’s-Length Transactions
Transactions are assumed to
occur between independent
parties, each of which is capable
of protecting its own interests.
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56. Traditional Assumptions of
the Accounting Model
Stable Monetary Unit
The stable monetary unit
assumption allows for the
ignoring of changes in the dollar’s
purchasing power resulting from
inflation.
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57. Traditional Assumptions of
the Accounting Model
Accounting Period
Because accounting information
is needed on a timely basis, the
life of a business is divided into
specific accounting periods,
usually one year.
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58. Careers in Financial
Accounting
Public Accounting
Pubic accountants do not work for a
single business enterprise. Rather,
they provide a variety of services for
many different individuals and
business clients.
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59. Careers in Financial
Accounting
Corporate Accounting
A large business enterprise employs
financial accountants who are
primarily concerned with external
financial reporting, management
accountants who are primarily
concerned with internal financial
reporting, and tax accountants.
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60. Careers in Financial
Accounting
User (Analyst, Banker, Consultant)
Many students take accounting in
preparation for becoming a user of
financial statements. Credit
analysts, investment bankers,
brokers, and business consultants
need a strong working knowledge of
accounting as well as strong skills
in information technology.
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