Scribd Logo
Upload

Welcome to Scribd!

  • 460 views

    Intermediate+Financial+Accounting+I+-+Chapter+1+ S

    Uploaded by

    Neil Stechschulte
    The document provides an overview of key concepts in financial accounting including the environment, users, relevant financial statements, cash versus accrual accounting, the development of accounting standards, the conceptual framework, recognition and measurement concepts, and revenue and expense recognition principles. It discusses the roles of standard setting bodies like the FASB and IASB in developing Generally Accepted Accounting Principles.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    Intermediate+Financial+Accounting+I+-+Chapter+1+ S

    Uploaded by

    Neil Stechschulte
    460 views38 pages
    The document provides an overview of key concepts in financial accounting including the environment, users, relevant financial statements, cash versus accrual accounting, the development of accounting standards, the conceptual framework, recognition and measurement concepts, and revenue and expense recognition principles. It discusses the roles of standard setting bodies like the FASB and IASB in developing Generally Accepted Accounting Principles.

    Original Description:

    Intermediate Accounting Chapter 1

    Original Title

    Intermediate+Financial+Accounting+I+-+Chapter+1+_s_

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document provides an overview of key concepts in financial accounting including the environment, users, relevant financial statements, cash versus accrual accounting, the development of accounting standards, the conceptual framework, recognition and measurement concepts, and revenue and expense recognition principles. It discusses the roles of standard setting bodies like the FASB and IASB in developing Generally Accepted Accounting Principles.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    460 views38 pages

    Intermediate+Financial+Accounting+I+-+Chapter+1+ S

    Uploaded by

    Neil Stechschulte
    The document provides an overview of key concepts in financial accounting including the environment, users, relevant financial statements, cash versus accrual accounting, the development of accounting standards, the conceptual framework, recognition and measurement concepts, and revenue and expense recognition principles. It discusses the roles of standard setting bodies like the FASB and IASB in developing Generally Accepted Accounting Principles.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 38

    Environment and Theoretical

    Structure of Financial Accounting


    Chapter 1

    Intermediate Financial Accounting

    Financial Accounting
    Environment
    Providers of
    External
    User Groups

    Financial
    Information

    Profit-oriented
    companies
    Not-for-profit
    entities
    Households

    Investors
    Creditors
    Relevant
    Employees
    Labor unions
    Customers
    Financial Suppliers
    Information Government
    agencies
    Financial
    intermediaries

    Intermediate Financial Accounting

    Financial Accounting
    Environment
    Relevant financial information is provided primarily through
    financial statements and related disclosure notes. The following
    financial statements are the most frequently provided.
    1. Balance Sheet
    2. Income Statement
    3. Statement of Cash Flows
    4. Statement of Shareholders Equity
    Starting in 2012, companies must either provide a Statement of
    Other Comprehensive Income immediately following the Income
    Statement, or present a Combined Statement of Comprehensive
    Income that includes the information normally contained in both
    the Income Statement and the Statement of Other
    Comprehensive Income.
    Intermediate Financial Accounting

    The Economic Environment


    and Financial Reporting
    A sole proprietorship
    is owned by a
    single individual.
    A partnership is
    owned by two or
    more individuals.

    A corporation is owned
    by shareholders.
    Intermediate Financial Accounting

    A highly-developed
    system
    communicates
    financial information
    from a corporation to
    its many
    shareholders.

    Investment-Credit Decisions A
    Cash Flow Perspective
    Shareholders
    Receive
    Cash

    1.
    2.

    Dividends
    Sale of Stock

    Creditors
    Receive
    Cash
    1.
    2.

    Interest
    Repayment of
    Principle

    Accounting information should help


    investors and creditors evaluate the
    amount, timing, and uncertainty of
    the enterprises future cash flows.

    Intermediate Financial Accounting

    Cash versus Accrual Accounting


    Cash Basis Accounting

    Revenue is recognized when cash is


    received.
    O
    Expenses are recognized
    when
    cash
    is
    R
    paid.
    O
    OR
    R
    O
    R

    Accrual Accounting
    Revenue is recognized when earned.
    Expenses are recognized when incurred.
    Intermediate Financial Accounting

    Cash versus Accrual Accounting


    Cash Basis Accounting
    Carter Company has sales on account totaling
    $100,000 per year for three years. Carter
    collected $50,000 in the first year and $125,000 in
    the second and third years. The company prepaid
    $60,000 for three years rent in the first year.
    Utilities are $10,000 per year, but in the first year
    only $5,000 was paid. Payments to employees
    are $50,000 per year.

    Lets look at the cash flows.

    Intermediate Financial Accounting

    Cash versus Accrual Accounting


    Cash Basis Accounting

    Intermediate Financial Accounting

    Cash versus Accrual Accounting


    Cash Basis Accounting

    Cash flows in any one year may not


    be a predictor of future cash flows.

    Intermediate Financial Accounting

    Cash versus Accrual Accounting


    Accrual Basis Accounting

    Intermediate Financial Accounting

    Cash versus Accrual Accounting


    Accrual Basis Accounting

    Net Income is considered a better indicator


    of future cash flows.

    Intermediate Financial Accounting

    The Development of Financial


    Accounting and Reporting Standards

    Concepts,
    principles, and
    procedures
    developed to meet the
    needs of external
    users (GAAP).

    Intermediate Financial Accounting

    Historical Perspective and Standards

    Intermediate Financial Accounting

    Current U. S. Standard Setting


    Financial Accounting
    Standards Board
    Supported by the Financial Accounting

    Foundation
    Seven full-time, independent voting
    members
    Members not required to be CPAs
    Intermediate Financial Accounting

    FASB Accounting Standards Codification


    The codification project integrates and organizes all
    relevant accounting pronouncements into a searchable,
    online database.

    Intermediate Financial Accounting

    International Standard

    Setting

    The main objective of the International


    Accounting Standards Board (IASB) is to
    develop a single set of high quality,
    understandable, and enforceable global
    accounting standards to help participants in
    the worlds capital markets and other users
    make economic decisions.
    Intermediate Financial Accounting

    Comparison of Organizations of
    U.S. and International StandardSetters
    U.S. GAAP
    IFRS
    International
    Organization of
    Securities Commissions
    (IOSCO)
    International Accounting
    Standards Committee
    Foundation (IASCF): 22
    trustees
    International Accounting
    Standards Board (IASB):
    14 members (12 fulltime; 2 part-time)

    Regulatory oversight
    provided by:

    Securities Exchange
    Commission (SEC)

    Foundation providing
    oversight, appointing
    members, raising
    funds:

    Financial Accounting
    Foundation (FAF): 20
    trustees

    Standard-setting
    board:

    Financial Accounting
    Standards Board (FASB):
    7 full-time members

    Advisory council
    providing input on
    agenda and projects:

    Financial Accounting
    Standards Advisory
    Council (FASAC): 30-40
    members

    Standards Advisory
    Council (SAC): 30-40
    members

    Group to deal with


    emerging issues:

    Emerging Issues Task


    Force (EITF): 15
    members

    International Financial
    Reporting Interpretations
    Committee (IFRIC): 14
    members

    Intermediate Financial Accounting

    Efforts to Converge U.S. and


    International Standards
    Issues and Concerns:

    Desire for a single set of global standards


    Need for standards that are customized to fit
    stringent legal and regulatory requirements of U.S.
    Possible differences in implementation and
    enforcement

    Progress:

    September 2002: FASB and IASB sign Norwalk


    Agreement.
    November 2008: SEC issues a Roadmap with
    milestones.
    May 2011: SEC issues discussion paper describing a
    condorsement approach.
    November
    Intermediate
    Financial
    Accounting
    2011:
    SEC issues two studies comparing
    U.S. GAAP to IFRS and analyzing how IFRS are

    FASBs Standard-Setting
    Process

    Board receives recommendations for projects.


    FASB Chairman decides whether to add a project to
    its agenda.
    Board deliberates the issues at a series of public
    meetings.
    Board issues an Exposure Draft (ED).
    Board holds a public roundtable meeting on the ED.
    Staff analyzes feedback and the Board re-deliberates
    the proposed revisions at public meetings .
    Board issues a Standards Update describing
    amendments to the Codification.
    Intermediate Financial Accounting

    Role of the Auditor


    Auditors serve as independent
    intermediaries to help ensure that
    management has appropriately
    applied U.S. GAAP in preparing the
    companys financial statements.

    Intermediate Financial Accounting

    Financial Reporting Reform


    As a result of numerous financial
    scandals, Congress passed the Public
    Company Accounting Reform and
    Investor Protection Act of 2002,
    (Sarbanes-Oxley Act). The goal was to
    restore credibility and investor
    confidence in the financial reporting
    process.
    Intermediate Financial Accounting

    A Move Away from


    Rules-Based Standards?
    Rules-based accounting standards
    vs.
    Objectives-oriented approach
    Objectives-oriented
    (principles-based)
    approach stresses
    professional judgment
    Intermediate Financial Accounting

    Ethics in Accounting
    Code of Ethics:
    Provides guidance and rules to help
    accounting professionals perform
    their professional responsibilities in
    an ethical manner.

    Intermediate Financial Accounting

    Analytical Model for Ethical Decisions


    Determine the facts of the situation.
    Identify the ethical issue and the stakeholders.
    Identify the values related to the situation.
    Specify the alternative courses of action.
    Evaluate the courses of action.
    Identify the consequences of each course of
    action.
    Make your decision and take any indicated action.

    Intermediate Financial Accounting

    The Conceptual Framework


    The Conceptual Framework has been described as
    an Accounting Constitution. It provides the
    underlying foundation for accounting standards.

    FASB Conceptual Framework


    (Statements of Financial Accounting Concepts)
    Objectives of Financial Reporting (SFAC 1, replaced
    by SFAC 8)
    Qualitative Characteristics (SFAC 2, replaced by
    SFAC 8)
    Elements
    of Financial
    Intermediate
    Financial
    AccountingStatements (SFAC 3, replaced
    by SFAC 6)

    The Conceptual Framework


    Objective
    To provide financial information
    that is useful to capital providers.

    Qualitative
    Characteristics

    Elements

    Constraints

    Financial
    Statements

    Intermediate Financial Accounting

    Recognition and
    Measurement
    Concepts

    Qualitative Characteristics of
    Accounting Information
    Decision usefulness

    Relevance

    Predictive Confirmatory
    value
    value

    Faithful representation

    Materiality

    Comparability
    Verifiability
    (Consistency)
    Intermediate Financial Accounting

    Completeness Neutrality

    Timeliness

    Free from
    error

    Understandability

    Key Constraint
    Cost
    Effectiveness

    Benefits
    Costs

    Intermediate Financial Accounting

    Elements of Financial
    Statements

    Intermediate Financial Accounting

    Elements of Financial
    Statements

    Intermediate Financial Accounting

    Underlying Assumptions

    Intermediate Financial Accounting

    Recognition, Measurement and


    Disclosure Concepts
    Recognition

    Process of admitting information


    into the basic financial statements

    Measurement

    Process of associating
    numerical amounts with the
    elements.

    Disclosure

    Process of including
    additional
    supplemental
    Intermediate
    Financial
    Accounting
    information.

    Criteria:
    1. Definition
    2. Measurability
    3. Relevance
    4. Reliability
    Measurement
    Attributes:
    1. Historical cost
    2. Net realizable
    value
    3. Current cost
    4. Present value of
    future cash flows
    5.
    Fair value
    Examples:
    1. Parenthetical
    amounts
    2. Notes to FS
    3. Supplemental FS

    Revenue Recognition:
    Realization
    Two Criteria:
    1. Earnings process is complete or virtually
    complete.
    2. Reasonable certainty as to the
    collectability of the asset to be received
    (usually cash).

    Intermediate Financial Accounting

    Expense Recognition:
    Matching

    The matching principle requires that all


    expenses incurred in generating revenue for a
    period also be recognized in the same period.

    Four Approaches
    1. Based on exact cause-and-effect
    relationships.
    2. By associating an expense with the revenues
    recognized in a specific time period.
    3. By a systematic and rational allocation to
    specific time periods.
    4. In the
    period
    incurred, without regard to
    Intermediate
    Financial
    Accounting
    related revenues.

    Fair Value Hierarchy

    U.S. GAAP gives companies the option to report


    some or
    all of Accounting
    their financial assets and liabilities at
    Intermediate
    Financial
    fair value.

    Evolving U.S. GAAP


    U.S. GAAP has been evolving from an emphasis
    on revenues and expenses to an emphasis on
    assets and liabilities.
    Revenue/Expense Approach: Emphasize
    principles for recognizing revenues and expenses,
    with some assets and liabilities recognized as
    necessary to make the balance sheet reconcile with
    the income statement.
    Asset/Liability Approach: Emphasize principles
    for recognizing assets and liabilities first, and then
    recognize and measure the revenues, expenses,
    gains, and losses needed to account
    for the changes in assets and
    liabilities from the previous measurement date.

    Intermediate Financial Accounting

    Where Were Headed:


    The Conceptual Framework
    FASB and IASB Joint Conceptual Framework Project
    Eight Phases:
    A. Objective and Qualitative Characteristics (Completed)
    B. Elements and Recognition (In progress)
    C. Measurement (In progress)
    D. Reporting Entity (In progress)
    E. Presentation and Disclosure
    F. Framework for a GAAP Hierarchy
    G. Applicability to the Not-For-Profit Sector
    H. Remaining Issues

    Intermediate Financial Accounting

    End of Chapter 1

    Intermediate Financial Accounting

    You might also like