1 An electronic An electronic presentation presentation by Douglas Cloud by Douglas Cloud Pepperdine University Pepperdine University
Jan 17, 2018
1
An electronic presentationAn electronic presentation by Douglas Cloudby Douglas Cloud
Pepperdine UniversityPepperdine University
2
The Environment The Environment of Financial of Financial ReportingReporting
Chapter1
3
1. Understand capital markets and decision making.
2. Know what is included in financial reporting.3. Explain generally accepted accounting
principles (GAAP) and the sources of GAAP.4. Identify the types of pronouncements issued
by the FASB.
Objectives
ContinuedContinued
4
5. Understand how the Financial Accounting Standards Board (FASB) operates.
6. Describe the relationship between the Securities and Exchange Commission (SEC) and the FASB.
7. Use ethical models for decision making about ethical dilemmas.
8. Understand creative and critical thinking.
Objectives
5
Companies need large amounts of capital for operations.
6
Companies may obtain capital by
issuing capital stock...
Stock Exchange
7
... or by borrowing from lenders.
Bank
8
Capital MarketsCapital Markets
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
Buy and sell stocks and
bonds
Investors InvestorsBuy and sell stocks and
bonds
9
Accounting Information Economic Accounting Information Economic Activities and Decision MakingActivities and Decision Making
Accumu-late
AccountingInformation
Communi-cate
External User
Internal User
External Decisio
n Making
Internal Decisio
n Making
Company’s Economic Activities
Impact
Impact
10
External and Internal UsersExternal and Internal Users
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.
11
Comparison of Financial and Comparison of Financial and Managerial AccountingManagerial Accounting
Sources of Authority
Internal needs
Managerial Accounting Financial Accounting
GAAP
12
Time Frame of Reported Information
Comparison of Financial and Comparison of Financial and Managerial AccountingManagerial Accounting
Present and future
Managerial Accounting
Primarily historical
Financial Accounting
13
Scope
Comparison of Financial and Comparison of Financial and Managerial AccountingManagerial Accounting
Mainly total company
Financial Accounting
Individual departments, divisions, and total company
Managerial Accounting
14
Type of Information
Comparison of Financial and Comparison of Financial and Managerial AccountingManagerial Accounting
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
15
Statement Format
Comparison of Financial and Comparison of Financial and Managerial AccountingManagerial Accounting
Prescribed by GAAP; oriented toward investment
and credit decisions
Financial Accounting
Determined by company; focused upon specific decisions being made
Managerial Accounting
16
Decision Focus
Comparison of Financial and Comparison of Financial and Managerial AccountingManagerial Accounting
External
Financial Accounting
Internal
Managerial Accounting
17
The company’s accountants prepare both the financial
and the managerial accounting reports…
…and the information comes from the same information system.
18
Financial ReportingFinancial ReportingFinancial reporting is the
process of communicating financial accounting information about a
company to external users.
19
The balance sheet (or statement of financial position) which summarizes a company’s financial position at a given date.
The income statement which summarizes the results of a company’s income producing activities for a period of time.
The statement of cash flows which summarizes a company’s cash inflows and outflows for a period of time.
Companies present at least three major financial statements:
Financial ReportingFinancial Reporting
20
A statement of changes in stockholders’ equity
also is included by many companies.
This statement summarizes the
changes in each item of stockholders’
equity for a period.
Financial ReportingFinancial Reporting
21
Generally Accepted AccountingGenerally Accepted AccountingPrinciples (GAAP)Principles (GAAP)
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.
They are like laws and are the rules that must be followed in financial reporting.
22
Hierarchy of Sources of GAAPHierarchy of Sources of GAAP
A. Pronouncements of authoritative bodies (FASB, APB, CAP, SEC).
B. Pronouncements of bodies of expert accountants that have been exposed for public comment.
C. Pronouncements of bodies of expert accountants that have not been exposed for public comment.
ContinuedContinued
23
D. Widely accepted practices and pronouncements representing prevalent practice in a particular industry or applications to specific circumstances.
E. Other accounting literature.
Hierarchy of Sources of GAAPHierarchy of Sources of GAAP
24
History of GAAP in History of GAAP in the Private Sectorthe Private Sector
1938
CAP formed
CAP issued 51
ARBs
APB issued 31 Opinions
1959
APB formed
1973
FASB formed
Present
FASB issued 145
Statements of Standards as
of 5/02
25
Reasons for Forming APBReasons for Forming APB
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 from members, selected primarily from
the accounting profession.the accounting profession.
26
Criticisms of the APBCriticisms of the APB1. Independence. The members of the APB were part-
time volunteers whose major responsibilities were to the business, governmental, or academic organization employing them.
2. Representation. The public accounting firms and the AICPA were too closely associated with the development of accounting standards.
3. Response time. Emerging problems were not solved quickly enough by the part-time members of the APB.
27
Structure of the FASBStructure of the FASB
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)
ContinuedContinued
28
Financial Accounting Standards Board
(7 members)
Task Forces of the Standards Board
(including Emerging Issues Task Force)
Appoint
Consult
Support
Administrative Administrative StaffStaff
Research and Research and Technical StaffTechnical Staff Consult
Structure of the FASBStructure of the FASB
29
Types of Pronouncements Types of Pronouncements Issued by the FASBIssued by the FASB
• Statements of Financial Accounting Standards
• Interpretations• Technical Bulletins• Statements of Financial Accounting
Concepts• Other Pronouncements
30
FASB Operating ProceduresFASB Operating Procedures
Identify Topic
Appoint Task Force
Conduct Research
Issue Discussion
Memorandum or Invitation to
Comment
Issue Exposure
Draft
ContinuedContinued
Deliberate on Findings
Hold Public Hearings
31
Modify Exposure
Drafts
Vote (super-
majority)
Issue Exposure
Draft
Hold Public Hearings
FASB Operating ProceduresFASB Operating Procedures
From previous
page
Issue Statement
32
Securities and Exchange Commission (SEC) American Institute of Certified Public
Accountants (AICPA) FASB Emerging Issues Task Force (EITF) Cost Accounting Standards Board (CASB) Internal Revenue Service (IRS) American Accounting Association (AAA)
Other Organizations Other Organizations Impacting GAAPImpacting GAAP
ContinuedContinued
33
International Accounting Standards Committee (IASC)
Governmental Accounting Standards Board (GASB)
Financial Executives International (FEI) Institution of Management Accountants (IMA) Association for Investment Management and
Research (AIMR)
Other Organizations Other Organizations Impacting GAAPImpacting GAAP
34
Participants in the Participants in the Development of GAAPDevelopment of GAAP
EITF
CASB
GASB
IMA
IRSIASC
AAAAIMR
FEI
G4+1
FASBFASB
SECSEC AICPAAICPA
35
Principles of the AICPA Code Principles of the AICPA Code of Professional Conductof Professional Conduct
Responsibilities
In carrying out their responsibilities as
professionals, members should exercise sensitive
professional judgment in all their activities.
36
The 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.
Principles of the AICPA Code Principles of the AICPA Code of Professional Conductof Professional Conduct
37
Integrity
To maintain and broaden public confidence,
members should perform all professional
responsibilities with the highest sense of integrity.
Principles of the AICPA Code Principles of the AICPA Code of Professional Conductof Professional Conduct
38
Objectivity 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.
Principles of the AICPA Code Principles of the AICPA Code of Professional Conductof Professional Conduct
39
Due 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.
Principles of the AICPA Code Principles of the AICPA Code of Professional Conductof Professional Conduct
40
Scope 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.
Principles of the AICPA Code Principles of the AICPA Code of Professional Conductof Professional Conduct
41
An Ethicist’s Basic Approaches An Ethicist’s Basic Approaches to Moral Reasoningto Moral Reasoning
(1) The utilitarian model, which evaluations actions based on the greatest good for the greatest number.
(2) The rights model, which embraces actions that protect individual moral rights.
(3) The justice model, which emphasizes a fair distribution of benefits and burdens.
42
Creative and Critical Thinking Creative and Critical Thinking Impact on Problem SolvingImpact on Problem Solving
Recognize Problem
Identify Alternatives
Evaluate Alternatives
Select Solution
Implement Solution
Creative Thinking
Critical Thinking
43
Chapter1
The EndThe End
44