INTERMEDIATE ACCOUNTING14th EDITIONK. Fred SkousenEarl K. SticeJames D. Stice

This electronic presentation prepared by Douglas Cloud, Pepperdine University

Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada

FINANCIAL REPORTING

Learning ObjectivesDescribe the purpose of financial reporting and identify the primary financial statements.Explain the function of accounting standards and describe the role of the FASB in setting these standards in the United States.Recognize the importance to financial reporting of the SEC, AICPA, AAA, and IRS.

Learning ObjectivesRealize the growing importance and relevance of international accounting issues to the practice of accounting in the United States and understand the role of the IASC in international accounting standard setting.Understand the significance of the FASBs 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.

Learning ObjectivesIdentify career opportunities related to accounting and financial reporting in the fields of public accounting, corporate accounting, financial analysis, banking, and consulting.

Definition for AccountingAccounting 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. (APB 4.40).

Definition for AccountingAccounting provides a vital service in todays business environment.Accounting is concerned primarily with quantitative financial information that is used in conjunction with qualitative evaluations in making judgments.Key features of this definition:

Accounting information is used in making decisions about how to allocate scarce resources.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.Definition for AccountingKey features of this definition:

Users of Accounting InformationAll parties interested in the financial health of a company are called stakeholders.

Users of Accounting InformationInternal users, who make decisions directly affecting the internal operations of the enterprise.External users, who make decisions concerning their relationship to the enterprise.Two major classifications of stakeholders

InvestorsCommunityBoard of DirectorsManagementEmployeesSuppliersEmployeesCreditorsCustomersAnalystsGovernmentMajor Internal and External Stakeholder Groups

Financial ReportingThe balance sheet reports, as of a certain point in time, the resources of a company (the assets), the companys obligations (the liabilities), and the equity of the owners.The income statement reports, for a certain interval, the net assets generated through business operations (revenues), the net assets consumed (the expenses), and the net income.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.

Accounting estimates and judgments are outlined in the notes to financial statements.Financial Reporting

Financial Statement Relationships

Relative Frequency of Audit Opinions (1998)CompaniesUnqualified5,978Unqualified With Explanatory Language1,030Qualified6No opinion2Adverse 0 Total7,016

Accounting Standard-Setting OrganizationsFASACFASBFAFSECAcSECAICPAIASCIAPCOtherEITFGASACGASBU.S. Gov't

Securities and Exchange Commission (1934-present)1929 stock market crash blamed on nonstandard accounting.1934 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.

U.S. Accounting Standard- Setting BodiesCommittee on Accounting Procedures(CAP)Born:1939Died: 1959Pronouncements: Accounting Research Bulletins

U.S. Accounting Standard- Setting BodiesAccounting Principles Board(APB)Born: 1959Died:1973Pronouncements: APB Opinions

U.S. Accounting Standards Setting BodiesFinancial Accounting Standards Board(FASB)Born: 1973Died:Pronouncements: Statements of Financial Accounting Standards

FASACFASBFAFSECAcSECAICPAIASCIAPCOtherEITFGASACGASBU.S. Gov'tAccounting Standard-Setting Organizations

Financial AccountingStandards Board (1973-present)Seven full-time members comprise this independent body.Issues Statements of Financial Accounting Standards.Determines GAAP by due process.Works within the conceptual framework.

FASB Authority Sources-- OverviewFASB*

FASB Authority Sources--SECMaintains power to regulate registrant companies.Congress

FASB Authority Sources-- AICPAProvides 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.

AICPAFASBMembers of the AICPAEndorsement of FASB through Rule 203GAAPFASB Authority Sources -- AICPA

FASB Due ProcessTopic or project added to agenda.Task force assembled to study topic.Research and analysis performed by FASB technical staff.Discussion Memorandum drafted and released.Public hearing, usually 60 days later, is held.

FASB Due ProcessBoard analyzes and evaluates public response.Exposure Draft prepared and released.Sixty-day exposure period allows for public comment.Committee studies public response to exposure draft and prepares final draft.Board votes on final draft (5-2 margin required for passage).

SEC Authoritative LiteratureFinancial Reporting ReleasesStaff Accounting BulletinsAccounting and Auditing Enforcement ReleasesAccounting Series Releases

What is GAAP?Level AFASB Statements and InterpretationsAPB OpinionsCAP Accounting Research BulletinsLevel BFASB Technical BulletinsAICPA Industry Audit and Accounting GuidesAICPA Statements of PositionLevel CConsensus Positions of EITFAICPA Practice BulletinsLevel DAICPA Accounting InterpretationsFASB Question and Answer guidesOther widely recognized industry practices

International Accounting Standards CommitteeThe International Accounting Standards Committee (ISAC) was formed in 1973 to develop worldwide accounting standards.The accounting standards produced by the International Accounting Standards Committee are referred to as International Accounting Standards (IASs).

Conceptual Framework OverviewObjectivesof FinancialReportingQualitativeCharacteristicsof InformationAccountingElementsof FinancialStatements Recognition and Measurement ConceptsAssumptionsPrinciplesConstraints

Objectives of Financial ReportingUsefulness.Understandability.Target audience: investors and creditors.Assessing future cash flows.Evaluating economic resources.Primary focus on earnings.

Objectives of Financial ReportingUsefulnessFinancial 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.

Objectives of Financial ReportingUnderstandabilityFinancial 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.

Objectives of Financial ReportingTarget AudienceWhile there are many potential users of financial reports, the objectives are directed primarily toward investors and creditors.

Objectives of Financial ReportingAssessing Future Cash FlowsFinancial reporting should provide information that is useful in assessing amounts, timing, and uncertainty (risk) of prospective cash flows.

Objectives of Financial ReportingEvaluating Economic ResourcesFinancial reporting should also provide information about an enterprises 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.

Objectives of Financial ReportingPrimary Focus on EarningsInformation 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.

Qualitative Characteristics of Accounting InformationPrimary Qualities A. Relevance 1. Predictive Value 2. Feedback Value 3. Timeliness B. Reliability 1. Verifiability 2. Representational Faithfulness 3. Neutrality Secondary Qualities A. Comparability B. Consistency

Qualitative Characteristics of Accounting InformationComparabilityConsistencyPredictiveValueFeedbackValueTimelinessRelevanceVerifiabilityNeutralityRepresentationalFaithfulnessReliabilityDecisionUsefulnessUnderstandabilityDecision MakersBenefits > CostMateriality

What About Conservatism?The concept of conservatism can be summarized as follows: When in doubt, recognize all losses but dont recognize any gains.

Elements of Financial Statements Assets Liabilities Equity Investment Distribution Comprehensive Income Revenues Expenses Gains Losses

Recognition andMeasurement ConceptsAssumptionsPrinciplesConstraintsEconomic EntityGoing ConcernArms-Length TransactionsMonetary UnitPeriodicityHistorical CostRevenue RecognitionMatchingFull DisclosureCost-BenefitMaterialityIndustry PracticeConservatism

Financial Statements v.Financial ReportingA full set of financial statements is necessary to meet the objectives of financial reporting. Included in the recommended set of general-purpose financial statements are reports that show: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.

Traditional Assumptions of the Accounting ModelEconomic entity.Going concern.Arms-length transactions.Stable monetary unit.Accounting period.

Careers in Financial AccountingPublic accounting.Company accounting.User (analyst, banker, consultant).

The End

12345678910Adapted from Kieso, Donald E. and Jerry J. Weygandt. Intermediate Accounting 7th ed. (John Wiley & Sons, Inc. 1992) p. 10 1112181920212223