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Identifying the major Financial statements and other means of fnancial reporting. Explaining how accounting assists in the efcient use of scarce resources. Identifying the need for accounting standards.
Identifying the major Financial statements and other means of fnancial reporting. Explaining how accounting assists in the efcient use of scarce resources. Identifying the need for accounting standards.
Identifying the major Financial statements and other means of fnancial reporting. Explaining how accounting assists in the efcient use of scarce resources. Identifying the need for accounting standards.
LEARNING OBJECTIVES 1.Identify the major fnancial statements and other means of fnancial reporting. 2.Explain how accounting assists in the efcient use of scarce resources. 3.Identify the objective of fnancial reporting. 4.Explain the need for accounting standards. 5.Identify the major policy-setting bodies and their role in the standard-setting process. 6.Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codifcation for GAAP. 7.Describe the impact of user groups on the rule-making process. 8.Describe some of the challenges facing fnancial reporting. 9.Understand issues related to ethics and fnancial accounting.
Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e 1-1 Partial Outline Chapter 1 A.(L.O. 1)Major fnancial statements and fnancial reporting. 1. Identifcation, measurement, and communication of fnancial information (discuss diference between fnancial statements and fnancial reporting). a. Financial statements: (1)Income statement. (2)Balance sheet. (3)Statement of cash fows. (4)Statement of owners or stockholders equity. b. Financial reporting: (1)Presidents letter or supplementary schedules in the annual report. (2)Prospectuses. (3)Reports fled with the SEC and other government agencies. (4)News releases and management forecasts. (5)Social or environmental impact statements. 2. To interested parties (discuss stockholders, creditors, government agencies, management, employees, consumers, labor unions, etc.). B.(L.O. 2)How accounting assists in the use of scare resources. 1. A world of scarce resources. Accounting helps to identify efcient and inefcient users of resources. 2. Capital allocation. Accounting assists in the efective capital allocation process by providing fnancial reports to interested users. 3. Changing user needs. Accounting will continue to be faced with challenges to providing information needed for an efcient capital allocation process. C.(L.O. 3)Objective of fnancial reporting. 1. To provide fnancial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers. D.(L.O. 4)Need for accounting standards.
1-2 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e 1. To meet the various needs of users, companies prepare a single set of general- purpose fnancial statements. 2. Users expect fnancial statements to present fairly, clearly, and completely the companys fnancial operations. 3. The accounting profession has developed a set of standards and procedures called generally accepted accounting principles (GAAP). E.(L.O. 5)Parties involved in standard-setting. 1. Standard setting in the public sector: a. Discuss the role of the SEC, reasons for its establishment, SEC jurisdiction. b. Delegation of SECs authority to the private sector (AICPA and FASB). 2. Standard setting in the private sector. a. History of private-sector standard setting from the CAP to the APB to the FASB. b. Reasons for establishment of the FASB. c. Composition, membership, and voting rules of the FASB. d. Organization and funding of the FASB. e. Description of the FASBs due process system in setting standards. f. Emerging Issues Task ForceCreated by FASB for the purpose of reaching a consensus on how to account for new and unusual fnancial transactions that have a potential for creating difering fnancial reporting practices. 3. The SEC continues to play an active role in infuencing standards, e.g., accounting for business combinations and intangible assets; and concerns about the accounting for of-balance sheet items raised by the failure of Enron. F.(L.O. 6)Meaning of GAAP. 1. Generally accepted accounting principles (GAAP) have substantive authoritative support. 2. The AICPAs Code of Professional Conduct requires that members prepare fnancial statements in accordance with GAAP. 3. GAAP includes: a. FASB Standards and Interpretations, APB Opinions, AICPA Accounting Research Bulletins. (Most authoritative.)
Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e 1-3 b. AICPA Industry Audit and Accounting Guides, AICPA Statements of Position, FASB Technical Bulletins. c. FASB Emerging Issues Task Force, AICPA AcSEC Practice Bulletins, widely recognized/prevalent industry practices. (1)Mention that the AICPA will no longer issue authoritative accounting guidance for public companies. d. AICPA Accounting Interpretations, FASB Implementation Guides (Q and A) 4. The FASB developed the Financial Accounting Standards Board Accounting Standards Codifcation (the Codifcation). a. The Codifcation changes the way GAAP is documented, presented and updated. b. Explains what GAAP is and eliminates nonessential information. G.(L.O. 7)Impact of user groups. 1. Describe user (pressure) groups, their composition and their interests. 2. Discuss impact of accounting on the interests of each group. 3. Discuss impact of economic consequences. Although accounting standards should be based on sound concepts, the FASB must be attentive to the economic consequences of its pronouncements. H.The expectations gap. 1. What people think accountants should do vs. what accountants think they can do. 2. Discuss the Sarbanes-Oxley Act and the Public Company Accounting Oversight Board. I.(L.O. 8)Challenges facing fnancial reporting. 1. Nonfnancial measurements. 2. Forward-looking information. 3. Soft assets. 4. Timeliness. J.(L.O. 9)Ethics and fnancial accounting. 1.In accounting, companies frequently encounter ethical dilemmas. Some of these dilemmas are easy to resolve but many are not, requiring difcult choices among allowable alternatives.
1-4 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e 2.Time, job, client, personal, and peer pressures can complicate the process of ethical sensitivity and selection among alternatives. 3.Decisions are sometimes difcult because a public consensus has not emerged to formulate a comprehensive ethical system that provides guidelines in making ethical judgments. K.International accounting standards. 1. Companies outside the U.S. often prepare fnancial statements using standards diferent from GAAP. 2. There is a growing demand for one set of high-quality international standards. 3. There are two sets of acceptable rules for international useGAAP and International Financial Reporting Standards issued by the International Accounting Standards Board (IASB). 4. The FASB and the IASB have agreed to use their best eforts to: a. Make their existing fnancial reporting standards fully compatible as soon as practicable, and b. Coordinate their future work programs to ensure that once achieved, compatibility is maintained.
Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e 1-5 *IFRS Insights Most agree that there is a need for one set of international accounting standards. Here is why: Multinational corporations. Todays companies view the entire world as their market. For example, Coca-Cola, Intel, and McDonalds generate more than 50 percent of their sales outside the United States, and many foreign companies, such as Toyota, Nestl, and Sony, fnd their largest market to be the United States. Mergers and acquisitions. The mergers between Fiat/Chrysler and Vodafone/Mannesmann suggest that we will see even more such business combinations in the future. Information technology. As communication barriers continue to topple through advances in technology, companies and individuals in diferent countries and markets are becoming more comfortable buying and selling goods and services from one another. Financial markets. Financial markets are of international signifcance today. Whether it is currency, equity securities (stocks), bonds, or derivatives, there are active markets throughout the world trading these types of instruments. RELEVANT FACTS International standards are referred to as International Financial Reporting Standards (IFRS), developed by the International Accounting Standards Board (IASB). Recent events in the global capital markets have underscored the importance of fnancial disclosure and transparency not only in the United States but in markets around the world. As a result, many are examining which accounting and fnancial disclosure rules should be followed. U.S. standards, referred to as generally accepted accounting principles (GAAP), are developed by the Financial Accounting Standards Board (FASB). The fact that there are diferences between what is in this textbook (which is based on U.S. standards) and IFRS should not be surprising because the FASB and IASB have responded to diferent user needs. In some countries, the primary users of fnancial statements are private investors; in others, the primary users are tax authorities or central government planners. It appears that the United States and the international standard-setting environment are primarily driven by meeting the needs of investors and creditors. The internal control standards applicable to Sarbanes-Oxley (SOX) apply only to large public companies listed on U.S. exchanges. There is a continuing debate as to whether non-U.S. companies should have to comply with this extra layer of regulation. Debate about international companies (non-U.S.) adopting SOX-type standards centers on whether the benefts exceed the costs. The concern is that the higher costs of SOX compliance are making the U.S. securities markets less competitive. IFRS tends to be simpler in its accounting and disclosure requirements; some people say more principles-based. GAAP is more detailed; some people say more rules-based. This diference in approach has resulted in a debate about the merits of principles-based versus rules-based standards.
1-6 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e ILLUSTRATION 1-1 THE ESSENTIAL CHARACTERISTICS OF ACCOUNTING AND FINANCIAL REPORTING
Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e 1-7 ILLUSTRATION 1-2 ORGANIZATIONAL STRUCTURE FOR SETTING ACCOUNTING STANDARDS
1-8 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e
Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e 1-9 ILLUSTRATION 1-3 STEPS TAKEN IN THE EVOLUTION OF A FASB STATEMENT OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
1-10 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e ILLUSTRATION 1-4 GAAP DOCUMENTS
Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e 1-11 ILLUSTRATION 1-5 USER GROUPS THAT INFLUENCE THE FORMULATION OF ACCOUNTING STANDARDS
1-12 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e ILLUSTRATION 1-6 KEY PROVISIONS OF THE SARBANES-OXLEY ACT
Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e 1-13 ILLUSTRATION 1-7 THE CHALLENGES FACING FINANCIAL REPORTING
1-14 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e