Chapter 1 The Conceptual Framework and Objectives of Financial Reporting.
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Transcript of Chapter 1 The Conceptual Framework and Objectives of Financial Reporting.
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Chapter 1
The Conceptual Framework and Objectives of Financial Reporting
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What is Accounting Used For?
• Decision Making– Evaluation of past performance– Expectations of future performance
• Allocation of Resources
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Free enterprise principle
Resources will flow to the segments of the economy
that will use them most efficiently in the creation of new wealth
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Role of Accounting
Accounting Information
Investors
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Chapter 1 -- Learning Objective
2. Trace the evolution of generally accepted accounting
principles
GAAP
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GAAP
A consensus
The conventions, rules, and procedures necessary to define accepted accounting
practice
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Sources of GAAP
Committee on Accounting ProceduresAccounting Principles BoardFinancial Accounting Principles Board
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Committee on Accounting Procedure
CAP1939 - 1959
First private body concerned with writing accounting rules
Issued 51 Accounting Research BulletinsMembers were practicing CPAsAn “ad hoc” approach
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Accounting Principles Board
APB1959 - 1973
Appointed by the AICPAPrimarily from public accountingIssued 31 APB OpinionsCriticized for failing to deal with
problems on a timely basis Many saw a need for independence
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Financial Accounting Foundation
FAF Established 1973
Appoints members of Financial Accounting Standards Board (FASB)
Appoints members of Financial Accounting Standards Advisory Committee (FASAC)
Provides financial support to FASBContributions from industry & CPA firms
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Financial Accounting Standards Board
FASB Established 1973
7 membersMembers are full time, well paidResponsible only to FAFPassage of standards requires 5 out of 7
votes
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Securities and Exchange Commission
• Appointed by President
• Reports to Congress
• Final authority on reporting by public companies
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International Accounting Standards
• International Accounting Standards Committee
• Standards less specific
• “Principle Based”
• Not allowed by SEC
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Accounting Standard Setting
• A political process
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Chapter 1 -- Learning Objective
3. Relate the objectives of financial reporting as stated in the
conceptual framework to the accounting process
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Conceptual Framework
Statements of Financial Accounting Concepts (SFACs)
Purpose:Establish the objectives and concepts to be used by the FASB in developing standards for financial reporting
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Conceptual Framework
SFACs
1 Objectives of Financial Reporting
2 Qualitative Characteristics
4 Objectives for Nonbusiness Organizations
5 Recognition & Measurement
6 Elements of Financial Statements
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Objectives of Financial Reporting
SFAC No. 1
To provide information:
1.Useful in investment and credit decisions
2.Useful in assessing future cash flows
3.About enterprise resources, claims and changes
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Chapter 1 -- Learning Objective
4. Interpret the meaning of the qualitative characteristics of
accounting information enumerated in the conceptual framework
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Objectives
• Useful for decision making• Information about future cash flows• Information about resources, claims to
resources, changes in resources– Liquidity– Solvency– Flexibility– Profitability
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Qualitative Characteristics
SFAC No. 2
� Primary Qualities� Understandability* Relevance* Reliability
� Secondary Qualities* Comparability* Consistency
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RelevanceThe capacity for information to make a difference
Predictive Value
Feedback Value
Timeliness
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ReliabilityUser has confidence in the information:
Verifiability
Representational Faithfulness
Neutrality
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Secondary Qualities
• Comparability—With other enterprises
• Consistency—Period to Period– Changes in accounting must be to Better
principles
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ConstraintsMeasurement and reporting practices are affected by:
Cost/benefits
Materiality
Industry practices
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Chapter 1 -- Learning Objective
5. Understand the assumptions and conventions underlying the
recognition and measurement of accounting data for financial reporting
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Recognition and Measurement
SFAC No. 5
� Recognition* Reporting an item in the financial statements
� Measurement* The amount reported for an item in financial
statements
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Recognition Criteria1 Definition
� Must meet definition of an element of financial statements found in SFAC No. 6
2 Measurability� Must be measurable with sufficient reliability
3 Relevance� Must be capable of making a difference
4 Reliability� Must be representationally faithful, verifiable & neutral
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Basic Accounting Assumptions:
Economic entity
Going concern (Continuity)
Periodicity
Monetary unit
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Basic Conventions and Practices
Cost or other measurement attributes
Revenue recognition
Matching
Conservatism
Full disclosure
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Chapter 1 -- Learning Objective
6. Distinguish among the elements of the financial statements
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Elements of Financial StatementsSFAC No. 6
Basic Building Blocks
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Elements of Financial Statements• Assets
• Liabilities
• Equity
• Investments by owners
• Distributions to owners
• Comprehensive Income
• Revenues
• Expenses
• Gains
• Losses
Balance Sheet
Income Statement
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Chapter 1 -- Learning Objective
7. Understand how accounting information is used in
investment decision models
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Investment Decision Model
Growth potential
Goal
FactorsOperating efficiency
Capital generation
Asset productivity
Financial leverage
Income Statement
Balance Sheet
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Chapter 1 -- Learning Objective
8. Develop an appreciation of ethical and moral considerations in
business
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Decision Model
1. Determine the Facts
2. Define the ethical issues
3. Identify major values
4. Specify the Alternatives
5. Compare values and alternatives
6. Assess consequences
7. Decide
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Decision Model forEthical Dilemmas
1.Determine the facts
2.Define the ethical issue
3.Identify major values
4.Specify the alternatives
5.Compare values and alternatives
6.Assess the consequences
7.Make the decision