Financial

Financial Accounting
Accounting and
and
Accounting
Accounting Standards
Standards

Chapter

1
Intermediate Accounting,
12th Edition
Kieso, Weygandt, and Warfield

Chapter
1-1

Prepared by Coby Harmon, University of California, Santa Barbara

Chapter
Chapter 11 Learning
Learning Objectives
Objectives
1.

Identify the major financial statements and other means of

financial reporting.

2.

Explain how accounting assists in the efficient use of scarce

resources.

3.

Describe some of the challenges facing accounting.

4.

List the objectives of financial reporting.

5.

Explain the need for accounting standards.

6.

Identify the major policy-setting bodies and their role in the

standard-setting process.

7.

Explain the meaning of generally accepted accounting principles.

8.

Describe the impact of user groups on the standard-setting

process.

9.

Understand issues related to ethics and financial accounting.

Chapter
1-2

Financial
Financial Accounting
Accounting and
and Accounting
Accounting Standards
Standards
Financial
Financial Statements
Statements
and
and Financial
Financial
Reporting
Reporting
Accounting and
Capital Allocation
Challenges
Objectives
The Need to
Develop Standards

Chapter
1-3

Parties
Parties Involved
Involved in
in
Standard
Standard Setting
Setting
Securities and
Exchange
Commission (SEC)
American Institute of
Certified Public
Accountants (AICPA)
Financial Accounting
Standards Board
(FASB)
Governmental
Accounting
Standards Board
(GASB)
Changing Role of the
AICPA

Generally
Generally Accepted
Accepted
Accounting
Accounting
Principles
Principles

Issues
Issues in
in Financial
Financial
Reporting
Reporting
Political Environment
The Expectations
Gap
International
Accounting
Standards
Ethics

Characteristics
Characteristics of
of Accounting
Accounting
Essential characteristics of accounting are:
(1) the identification, measurement, and
communication of financial information about
(2) economic entities to
(3) interested parties.
parties

Chapter
1-4

LO 1 Identify the major financial statements and other means of financial reporting ..

Characteristics
Characteristics of
of Accounting
Accounting
Economic Entity

Financial Statements

Additional Information

Financial
Information

Balance Sheet

Presidents letter

Income Statement

Prospectuses,

Statement of Cash
Flows

SEC Reporting

Accounting?
Identifies
and
Measures
and
Communicates

Statement of
Owners or
Stockholders Equity
Note Disclosures

GAAP
Chapter
1-5

News releases
Forecasts
Environmental
Reports
Etc.

Not GAAP

LO 1 Identify the major financial statements and other means of financial reporting ..

Characteristics
Characteristics of
of Accounting
Accounting
Review

What is the purpose of information presented in

notes to the financial statements?
a. To provide disclosure required by generally
accepted accounting principles.
b. To correct improper presentation in the financial
statements.
c. To provide recognition of amounts not included in
the totals of the financial statements.
d. To present managements responses to auditor
comments.
Chapter
1-6

LO 1 Identify the major financial statements and other means of financial reporting ..

Accounting
Accounting and
and Capital
Capital Allocation
Allocation
Resources are limited. Efficient use of resources often
determines whether a business thrives.

Illustration 1-1 Capital

Allocation Process

Financial
Financial
Reporting
Reporting
Information to help
users with capital
allocation decisions.

Chapter
1-7

Users
Users

Capital
Capital Allocation
Allocation

Investors, creditors,
and other users

The process of
determining how and
at what cost money
is allocated among
competing interests.

LO 2 Explain how accounting assists in the efficient use of scare resources.

Accounting
Accounting and
and Capital
Capital Allocation
Allocation
Review

An effective process of capital allocation is critical to a

healthy economy, which
a. promotes productivity.
b. encourages innovation.
c. provides an efficient and liquid market for buying
and selling securities.
d. All of the above.

Chapter
1-8

LO 2 Explain how accounting assists in the efficient use of scare resources.

Challenges
Challenges Facing
Facing Financial
Financial Accounting
Accounting
Non-financial Measurements
Forward-looking Information
Soft Assets
Timeliness

Chapter
1-9

LO 3 Describe some of the challenges facing accounting.

Objectives
Objectives of
of Financial
Financial Accounting
Accounting
Financial
Financialreporting
reportingshould
shouldprovide
provideinformation:
information:
(a)
(a) that
thatisisuseful
usefulto
topresent
presentand
andpotential
potentialinvestors
investorsand
and
creditors
creditorsand
andother
otherusers
usersin
inmaking
makingrational
rationalinvestment,
investment,
credit,
credit,and
andsimilar
similardecisions.
decisions.
(b)
(b) to
tohelp
helppresent
presentand
and potential
potentialinvestors
investorsand
andcreditors
creditorsand
and
other
otherusers
usersin
inassessing
assessingthe
theamounts,
amounts,timing,
timing,and
and
uncertainty
uncertaintyof
ofprospective
prospectivecash
cashreceipts.
receipts.
(c)
(c) about
aboutthe
theeconomic
economicresources
resourcesof
ofan
anenterprise,
enterprise,the
theclaims
claims
to
tothose
thoseresources,
resources,and
andthe
theeffects
effectsof
oftransactions,
transactions,
events,
events,and
andcircumstances
circumstancesthat
thatchange
changeits
itsresources
resourcesand
and
claims
claimsto
tothose
thoseresources.
resources.
Chapter
1-10

LO 4 List the objectives of financial reporting.

Objectives
Objectives of
of Financial
Financial Accounting
Accounting
Review

All of the following are objectives of financial

reporting except to provide information
a. About enterprise resources, claims to those
resources, and changes in them.
b. That is useful in investment and credit decisions.
c. About the management and major shareholders of
an enterprise.
d. That is useful in assessing cash flow prospects.
Chapter
1-11

LO 4 List the objectives of financial reporting.

Need
Need to
to Develop
Develop Standards
Standards
Various users
need financial
information

The accounting profession

has attempted to develop a
set of standards that are
generally accepted and
universally practiced.

Chapter
1-12

Financial Statements

Balance Sheet
Income Statement
Statement of Stockholders Equity
Statement of Cash Flows
Note Disclosure

Generally
Generally Accepted
Accepted
Accounting Principles
Principles
(GAAP)

LO 5 Explain the need for accounting standards.

Parties
Parties Involved
Involved in
in Standard
Standard Setting
Setting
Four organizations:

Securities and Exchange Commission (SEC)

American Institute of Certified Public
Accountants (AICPA)

Financial Accounting Standards Board (FASB)

Government Accounting Standards Board (GASB)

Chapter
1-13

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Securities
Securities and
and Exchange
Exchange Commission
Commission
Established by federal government
Accounting and reporting for public companies

Securities
Securities
Act
Act of
of 1933
1933

Securities
Securities
Act
Act of
of 1934
1934

Encouraged private standard-setting body

SEC requires public companies to adhere to GAAP
SEC Oversight
Enforcement Authority
Chapter
1-14

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

American
American Institute
Institute of
of CPAs
CPAs
National professional organization
Established the following:
Committee
Committee on
on
Accounting
Accounting
Procedures
Procedures

Chapter
1-15

Accounting
Accounting
Principles
Principles Board
Board

1939 to 1959

1959 to 1973

Issued 51 Accounting
Research Bulletins
(ARBs)

Issued 31 Accounting
Principle Board
Opinions (APBOs)

Problem-by-problem
approach failed

Wheat Committee
recommendations
adopted in 1973

http://www.aicpa.org/

LO 6

Financial
Financial Accounting
Accounting Standards
Standards Board
Board
Wheat Committees recommendations resulted in the creation of a
the Financial Accounting Standards Board in 1973.
Financial
Financial
Accounting
Accounting
Foundation
Foundation
Financial
Financial
Accounting
Accounting
Standards
Standards Board
Board
Financial
Financial Accounting
Accounting
Standards
Standards Advisory
Advisory
Council
Council
Chapter
1-16

Selects members of the FASB

Funds their activities
Exercises general oversight.

Mission to establish and improve

standards of financial accounting
and reporting.

Consult on major policy issues.

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Financial
Financial Accounting
Accounting Standards
Standards Board
Board
Missions is to establish and improve standards of
financial accounting and reporting. Differences
between FASB and APB include:
Smaller Membership
Full-time, Remunerated Membership
Greater Autonomy
Increased Independence
Broader Representation
http://www.fasb.org/

Chapter
1-17

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Financial
Financial Accounting
Accounting Standards
Standards Board
Board
Review

The first step taken in the establishment of a typical

FASB statement is
a. The board conducts research and analysis and a
discussion memorandum is issued.
b. A public hearing on the proposed standard is held.
c. The board evaluates the research and public
response and issues an exposure draft.
d. Topics are identified and placed on the boards
agenda.
Chapter
1-18

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Due
Due Process
Process
FASB relies on two basic premises:
Responsive to entire economic community
(2) Operate in full view of the public
(1)

Step 1 = Topic placed on agenda

Step 2 = Research conducted and Discussion Memorandum
issued.
Step 3 = Public hearing
Step 4 = Board evaluates research, public response and
issues Exposure Draft
Step 5 = Board evaluates responses and issues final
Statement of Financial Accounting Standard
Chapter
1-19

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Types
Types of
of Pronouncements
Pronouncements
Issued by the FASB:
Standards, Interpretations, and Staff Positions.
Financial Accounting Concepts
Emerging Issues Task Force Statements

Chapter
1-20

LO 6 Identify the major policy-setting bodies and

their role in the standard-setting process.

Governmental
Governmental Accounting
Accounting Standards
Standards Board
Board
Created in 1984 to address state and local governmental reporting
issues.
Financial
Financial
Accounting
Accounting
Foundation
Foundation

Chapter
1-21

Financial
Financial
Accounting
Accounting
Standards
Standards Board
Board

Governmental
Governmental
Accounting
Accounting
Standards
Standards Board
Board

Financial
Financial Accounting
Accounting
Standards
Standards Advisory
Advisory
Council
Council

Governmental
Governmental
Accounting
Accounting Standards
Standards
Advisory
Advisory Council
Council

http://www.gasb.org/

LO 6

Generally
Generally Accepted
Accepted Accounting
Accounting Principles
Principles
Those principles that have substantial authoritative
support.
Major sources of GAAP are:
FASB Standards, Interpretations, and Staff Positions
APB Opinions
AICPA Accounting Research Bulletins

Chapter
1-22

LO 7 Explain the meaning of generally accepted accounting principles.

House
House of
of GAAP
GAAP
AICPA Accounting
Interpretations

FASB Implementation
Guides

Recognized Industry
Practices

Category D (Least Authoritative)

FASB Emerging Issues Task Force

AICPA AcSEC Practice Bulletins

Category C
FASB Technical
Bulletins

AICPA Industry Audit

and Accounting Guides

AICPA Statements of
Position

Category B
FASB
FASB Statements,
Statements,
Interpretations,
Interpretations, and
and
Staff
Staff Positions
Positions
Chapter
1-23

APB
APB Opinions
Opinions

CAP
CAP Accounting
Accounting
Research
Research Bulletins
Bulletins

Category A (Most Authoritative)

LO 7

Generally
Generally Accepted
Accepted Accounting
Accounting Principles
Principles
Review

Which of the following accounting pronouncements is the

most authoritative?
a. FASB Statement of Financial Accounting Concepts.
b. FASB Technical Bulletins.
c. AICPA Accounting Principles Board Opinion.
d. AICPA Statement of Position.

Chapter
1-24

LO 7 Explain the meaning of generally accepted accounting principles.

Issues
Issues in
in Financial
Financial Reporting
Reporting
Standard Setting in a Political Environment
Accounting standards are as much a product of
political action as they are of careful logic or
empirical findings.

Chapter
1-25

LO 8 Describe the impact of user groups on the standard-setting process.

Standard Setting

Business
BusinessEntities
Entities

CPAs
CPAsand
and
Accounting
AccountingFirms
Firms
AICPA
AICPA(AcSEC)
(AcSEC)

Financial
Financial
Community
Community

FASB
FASB

Preparers
Preparers

(e.g.,
(e.g.,FEI)
FEI)

Government
Government

Academicians
Academicians

(SEC,
(SEC,IRS,
IRS,other
other
agencies)
agencies)

Investing
InvestingPublic
Public

Accounting standards,
interpretations, and bulletins
Chapter
1-26

Illustration 1-5 User

Groups that Influence
Accounting Standards

Industry
Industry
Associations
Associations

LO 8 Describe the impact of user groups on the standard-setting process.

Issues
Issues in
in Financial
Financial Reporting
Reporting
Review:
All those who serve on the FASB must be
Certified Public Accountants.

False

Chapter
1-27

LO 8 Describe the impact of user groups on the standard-setting process.

Issues
Issues in
in Financial
Financial Reporting
Reporting
Expectation Gap
What the public thinks accountants should do vs.
what accountants think they can do.
Difficult to close
Sarbanes-Oxley Act (2002)
Public Company Accounting Oversight Board
(PCAOB)

Chapter
1-28

LO 8 Describe the impact of user groups on the standard-setting process.

Issues
Issues in
in Financial
Financial Reporting
Reporting
International Accounting Standards
Two sets of standards accepted for international use:
U.S. GAAP, issued by the FASB
International Financial Reporting Standards
(IFRS), issued by the IASB
FASB and IASB recognize that global markets will best be
served if only one set of GAAP is used.

Chapter
1-29

LO 8 Describe the impact of user groups on the standard-setting process.

Issues
Issues in
in Financial
Financial Reporting
Reporting
Ethics in the Environment of Financial Accounting
In accounting, we frequently encounter ethical
dilemmas.
GAAP does not always provide an answer
Doing the right thing is not always easy or obvious

Chapter
1-30

LO 9 Understand issues related to ethics and financial accounting.

Copyright
Copyright
Copyright 2006 John Wiley & Sons, Inc. All rights reserved.
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information contained herein.

Chapter
1-31