3. 3
Task Force Clip Art included
Task Force Clip Art included
in this electronic presentation
in this electronic presentation
is used with the permission of
is used with the permission of
New Vision Technology of
New Vision Technology of
Nepean Ontario, Canada
Nepean Ontario, Canada
5. 5
Learning Objectives
1. Describe the purpose of financial reporting
and identify the primary financial
statements.
2. Explain the function of accounting standards
and describe the role of the FASB in setting
these standards in the United States.
3. Recognize the importance to financial
reporting of the SEC, AICPA, AAA, and
IRS.
Continued
Continued
6. 6
Learning Objectives
4. See the growing importance and relevance of
international accounting issues to the practice
of accounting in the United States and
understand the role of the ISAC in
international accounting standard setting.
5. 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.
Continued
Continued
7. 7
Learning Objectives
6. Identify career opportunities related to
accounting and financial reporting in the
fields of public accounting, corporate
accounting, financial analysis, banking, and
consulting.
8. 8
Definition for 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. 40)
9. 9
Definition for Accounting
Key features of this definition:
• Accounting provides a vital service in
today’s business environment.
• Accounting is concerned primarily
with quantitative financial information
that is used in conjunction with
qualitative evaluations in making
judgments.
Continued
Continued
10. 10
Definition for Accounting
Key features of this definition:
• Accounting information is used in
making decisions about how to
allocate scarce resources.
Economists and
Economists and
environmentalists
environmentalists
remind us constantly
remind us constantly
that we live in a world
that we live in a world
with limited resources.
with limited resources.
11. 11
Definition for Accounting
Key features of this definition:
• Although accountants place much
emphasis on reporting what has
already occurred, this past information
is intended to be useful in making
economic decisions about the future.
12. 12
Users of Accounting Information
All parties interested in
All parties interested in
the financial health of a
the financial health of a
company are called
company are called
stakeholders.
stakeholders.
13. 13
Users of Accounting Information
Two major classifications of stakeholders
Internal users, who
Internal users, who
make decisions
make decisions
directly affecting the External users,
directly affecting the External users,
internal operations who make decisions
internal operations who make decisions
of the enterprise.
of the enterprise. concerning their
concerning their
relationship to the
relationship to the
enterprise.
enterprise.
14. Major Internal and External
14
Stakeholder Groups
Investors
Government Community
Board of Directors
Analysts Management Suppliers
Employees
Customers Employees
Creditors
15. 15
Financial Reporting
The balance sheet
The balance sheetThe income
The income
reports, as of a certain
reports, asstatement reports, for
of a certain
statement reports, for
point in time, the The statement of cash
point in time, the The statement of cash
a specified interval,
a of a
specified interval,
resources of a
resources the net assets reports, for a
flows
the net assets reports, for a
flows
company (the assets),specified time period, the
company (the assets), through time period, the
specified
generated through
generated
the company’s amount of cash generated
the company’s operations cash generated
business amount of
business operations
obligations (the
obligations (the and net
and consumed by a
(revenues), the consumed by a
(revenues), the net
liabilities), and the
liabilities), and consumed (the through
assets the company
assets consumed (the through
company
equity of the owners.operating, financing, and
equity of the owners.and the netfinancing, and
expenses), operating,
expenses), and the net
income.investing activities.
income.investing activities.
16. 16
Financial Reporting
Accounting estimates
Accounting estimates
and judgments are
and judgments are
outlined in the notes to
outlined in the notes to
financial statements.
financial statements.
17. Financial Statement 17
Relationships
Statement of Cash Flows
Cash From Op $ 973,000
Cash From Inv (1,188,000)
Cash From Fin 245,000
Net Increase $ 30,000
Beg. Cash 80,000
End. Cash $ 110,000
Balance Sheet 12/01/05 Balance Sheet 12/31/05
Income Statement
Cash $ 80,000
Revenues $12,443,000 Cash $ 110,000
Other 4,550,000
Expenses 11,578,400 Other 4,975,000
Total $4,630,000
Net Income $ 864,600 Total $5,085,000
Liabilities $2,970,000
Liabilities $2,860,400
Stock 900,000 Statement of Stock 1,000,000
R/E 760,000 Retained Earnings R/E 1,224,600
Total $4,630,000
Total $5,085,000
R/E 12/31/04 $ 760,000
Net Income 864,600
Dividends (400,000)
R/E 12/31/05 $1,224,600
18. 18
Auditors
Auditors issue an
Auditors issue an
auditor’s opinion
auditor’s opinion Auditors working
Auditors working
about the fairness
about the fairness independently of
independently of
of the statements
of the statements a company’s
a company’s
and their
and their management and
management and
adherence to
adherence to internal
internal
proper accounting
proper accounting accountants
accountants
principles.
principles. examine the
examine the
financial
financial
statements.
statements.
19. 19
Auditor’s Opinion
Unqualified opinion—In the opinion of the auditor, the
financial statements are presented in accordance with
GAAP.
Qualified opinion—In the opinion of the auditor,
except for the effects of the qualified item, the financial
statement are presented in conformity with GAAP.
No opinion—The auditor does not express an opinion
about the financial statements.
Adverse—In the opinion of the auditor, the financial
statements do not present information in conformity
with GAAP.
20. Relative Frequency of 20
Audit Opinions (2000)
Companies
Unqualified 5,651
Unqualified With Explanatory Language 1,506
Qualified 4
No opinion 2
Adverse 1
Total 7,164
21. Accounting Standard–Setting
21
Organizations
FAF SEC AICPA Other
GASAC GASB FASAC FASB AcSEC U.S. Gov't IAPC
EITF IASC
22. Financial Accounting22
Standards Board
Committee on
Accounting
Procedures
(CAP)
Born: 1939
Died: 1959
Pronouncements:
Accounting
Research Bulletins
25. Financial Accounting25
Standards Board
1) Seven full-time members comprise
this independent body.
2) Issues Statements of Financial
Accounting Standards.
3) Determines GAAP by “due
process.”
4) Works within the Conceptual
Framework.
26. FASB Authority Sources—
Overview
Gov’t Regulators Instructors
• SEC • American Acct.
• State Boards Association
of Public Acct.
FASB
Statement Preparers Auditors
• Financial Executives • AICPA
Institute • State societies of
• IMA CPAs
• Major audit firms
• Individual Corps
27. 27
FASB Authority Sources—SEC
Congress SEC
FASB
Registrant
Companies
28. FASB Authority Sources --
28
AICPA
Provides authority to the FASB
through its Code of Professional
Conduct Rule 203.
AICPA members must show that client
financial statements comply with
FASB pronouncements (GAAP).
AICPA grants continuing membership
to its members who comply with Rule
203.
29. 29
FASB “Due Process”
1) Topic or project added to agenda.
2) Task force assembled to study topic.
3) Research and analysis performed by
FASB technical staff.
4) Discussion Memorandum (DM) drafted
and released.
5) Public hearing, usually 60 days later, is
held.
Continued
Continued
30. 30
FASB “Due Process”
6) Board analyzes and evaluates public
response.
7) Exposure Draft (ED) prepared and released.
8) Sixty-day exposure period allows for public
comment.
9) Committee studies public response to
exposure draft and prepares final draft.
Continued
Continued
31. 31
FASB “Due Process”
10) 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.
32. 32
Emerging Issue Task Force
In an effort to overcome the slow process of
In an effort to overcome the slow process of
standard setting, in 1984 the FASB established
standard setting, in 1984 the FASB established
the Emerging Issues Task Force (EITF) to
the Emerging Issues Task Force (EITF) to
assist the FASB in identifying the emerging
assist the FASB in identifying the emerging
issues that affect financial reporting.
issues that affect financial reporting.
33. Accounting Standard–Setting
33
Organizations
FAF SEC AICPA Other
GASAC GASB FASAC FASB AcSEC U.S. Gov't IAPC
EITF IASC
34. Securities Exchange Commission 34
(1933-present)
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 dictate GAAP.
Has tended to defer setting GAAP to the
accounting profession.
35. Securities and Exchange
35
Commission
SEC official statements are referred to
SEC official statements are referred to
as Financial Reporting Releases
as Financial Reporting Releases
which are accounting interpretations
which are accounting interpretations
and policies the SEC uses in
and policies the SEC uses in
evaluating firms’ disclosure policies.
evaluating firms’ disclosure policies.
36. Securities and Exchange
36
Commission
Other Authoritative Literature
Other Authoritative Literature
Staff Accounting Bulletins
Accounting and Auditing
Enforcement Releases
Accounting Series Releases
37. American Institute of Certified
37
Public Accountants
The American
Institute of Certified
Public Accountants
(AICPA) is the
professional
organization of
practicing CPAs in the
United States.
38. American Accounting 38
Association
The American
Accounting
Association (AAA)
is primarily an
organization for
accounting
professors.
39. 39
Internal Revenue Service
The Internal Revenue
Service (IRS) has the
primary goal of
equitable collecting
revenue.
41. 41
What is GAAP?
– FASB Statements
A
and Interpretations
– APB Opinions
– CAP Accounting
Research Bulletins
Highest Authority
Highest Authority
42. 42
What is GAAP?
– FASB Technical
B
Bulletins
– AICPA Industry
Audit and
Accounting Guides
– AICPA Statements
of Position
43. 43
What is GAAP?
– Consensus
C
Positions of EITF
– AICPA Practice
Bulletins
44. 44
What is GAAP?
– AICPA Accounting
D
Interpretations
– FASB “Question and
Answer” guides
– Other widely recognized
industry practices
Lowest Authority
Lowest Authority
45. International Accounting
45
Standards Committee
The accounting standards
The accounting standards
The International Accounting
The International Accounting
produced by the International
produced by the International
Standards Committee (ISAC)
Standards Committee (ISAC)
Accounting Standards Committee
Accounting Standards Committee
are referred toin 1973 to develop
was formed in 1973 to develop
was formed as International
are referred to as International
Accountingaccounting standards.
worldwide accounting standards.
worldwide Standards or IAS.
Accounting Standards or IAS.
46. Conceptual Framework of
46
Accounting
Objectives
of Financial
Reporting
Qualitative Elements
Characteristics of Financial
of Information Statements
Accounting
Recognition and Measurement Concepts
Assumptions Principles Constraints
47. Objectives of Financial47
Reporting
The overall objective of
The overall objective of
financial reporting is to
financial reporting is to
provide information useful
provide information useful
for decision making.
for decision making.
48. Objectives of Financial48
Reporting
Usefulness.
Understandability.
Target audience: investors and creditors.
Assessing future cash flows.
Evaluating economic resources.
Primary focus on earnings.
49. Objectives of Financial49
Reporting
Usefulness
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.
50. Objectives of Financial50
Reporting
Understandability
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.
51. Objectives of Financial51
Reporting
Target Audience
Target Audience
While there are many potential users of
financial reports, the objectives are directed
primarily toward investors and creditors.
52. Objectives of Financial52
Reporting
Assessing Future Cash Flows
Assessing Future Cash Flows
Financial reporting should provide
information that is useful in assessing
amounts, timing, and uncertainty (risk) of
prospective cash flows.
53. Objectives of Financial53
Reporting
Evaluating Economic Resources
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.
54. Objectives of Financial54
Reporting
Primary Focus on Earnings
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.
55. Qualitative Characteristics of
55
Accounting Information
Decision
Makers
Benefits > Cost
Understandability
Decision
Usefulness
Relevance Reliability
Predictive Feedback Timeliness Verifiability Representational
Value Value Faithfulness
Neutrality
Comparability
(including
Consistency)
Materiality
56. 56
What About Conservatism?
The concept of conservatism can
The concept of conservatism can
be summarized as follows: When
be summarized as follows: When
in doubt, recognize all losses but
in doubt, recognize all losses but
don’t recognize any gains.
don’t recognize any gains.
57. 57
Elements of Financial Statements
• Assets
• Liabilities
• Equity, or Net Assets
• Investments by Owners
• Distributions to Owners
• Comprehensive Income
• Revenues
• Expenses
• Gains
• Losses
58. Recognition, Measurement,
58
and Reporting
Boiling down all the estimates and
judgments into one
number and then using
that one number to make a
journal entry is called
recognition.
59. Recognition, Measurement,
59
and Reporting
Skipping the journal entry and
Skipping the journal entry and
just relying on the note to
just relying on the note to
convey the information to users
convey the information to users
is called disclosure.
is called disclosure.
60. Recognition, Measurement,
60
and Reporting
Assumptions Constraints
• Cost-Benefit
• Economic Entity
• Materiality
• Going Concern
• Industry Practice
• Arm’s-Length
• Conservatism
Transactions Principles
• Monetary Unit • Historical Cost
• Periodicity • Revenue
Recognition
• Matching
• Full Disclosure
Recognition and Measurement Concepts
61. Recognition, Measurement,
61
and Reporting
Measurement
Measurement
1. Historical cost
2. Current replacement cost
3. Current market value
4. Net realizable value
5. Present (or discounted) value
62. Recognition, Measurement,
62
and Reporting
Reporting
Reporting
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
63. Traditional Assumptions of the
63
Accounting Model
• Economic entity.
• Going concern.
• Arm’s-length transactions.
• Stable monetary unit.
• Accounting period.
