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Full and Fair Full and Fair ReportingReporting

Full and Fair Full and Fair ReportingReporting

Electronic Presentation by Douglas Cloud

Pepperdine University

Electronic Presentation by Douglas Cloud

Pepperdine University

Chapter Chapter F6F6

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1. Explain the purpose of accounting regulation.

2. Describe how accounting standards are established in the United States.

3. Explain the purpose of the Financial Accounting Standards Board’s conceptual framework.

ObjectivesObjectivesObjectivesObjectives

Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:

Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:

ContinuedContinuedContinuedContinued

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4. Identify supplementary information to the financial statements in a corporate annual report.

5. Describe the purpose of internal controls and types of controls that should be evident in business organizations.

ObjectivesObjectivesObjectivesObjectives

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11ObjectiveObjectiveObjectiveObjective

Explain the purpose of accounting regulation.

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Accounting regulations protect the interests of external decision makers by ensuring that information for evaluating

the performance and financial condition of a business is available and that the

information is prepared according to specific guidelines.

Accounting regulations protect the interests of external decision makers by ensuring that information for evaluating

the performance and financial condition of a business is available and that the

information is prepared according to specific guidelines.

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What specific guidelines?

What specific guidelines?

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Specific guidelines that provide assurance that the information is reliable and comparable over time and

across companies.

Specific guidelines that provide assurance that the information is reliable and comparable over time and

across companies.

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The purchaser of a corporation’s stock needs assurance that the shares are reasonably priced and represent a

legitimate business.

The purchaser of a corporation’s stock needs assurance that the shares are reasonably priced and represent a

legitimate business.

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Accounting regulations attempt to ensure that corporations prepare accounting

information in conformity with generally accepted accounting principles (GAAP).

Accounting regulations attempt to ensure that corporations prepare accounting

information in conformity with generally accepted accounting principles (GAAP).

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The Securities Act of 1933 requires most corporations to file

registration statements before selling stock to

investors.

The Securities Act of 1933 requires most corporations to file

registration statements before selling stock to

investors.

Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations

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The Securities Exchange Act of

1934 requires corporations to provide annual

financial reports to stockholders.

The Securities Exchange Act of

1934 requires corporations to provide annual

financial reports to stockholders.

Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations

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Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations

The 1934 act also created the Securities and Exchange Commission (SEC). The

SEC is responsible for overseeing external financial reporting for publicly traded

corporations.

The 1934 act also created the Securities and Exchange Commission (SEC). The

SEC is responsible for overseeing external financial reporting for publicly traded

corporations. Securities and Securities and Exchange Exchange

CommissionCommission

Securities and Securities and Exchange Exchange

CommissionCommission

Securities and Securities and Exchange Exchange

CommissionCommission

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The failure of a corporation to report fairly their activities to stockholders is a major concern in a capitalistic economy.

The failure of a corporation to report fairly their activities to stockholders is a major concern in a capitalistic economy.

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22Describe how accounting standards are established in the United States.

ObjectiveObjectiveObjectiveObjective

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Standard Setting OrganizationsStandard Setting OrganizationsStandard Setting OrganizationsStandard Setting Organizations

The Financial Accounting

Standards Board (FASB) has been the primary organization for setting accounting

standards for businesses in the U.S.

since 1973.

The Financial Accounting

Standards Board (FASB) has been the primary organization for setting accounting

standards for businesses in the U.S.

since 1973.

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The Governmental Accounting

Standards Board (GASB) is a private

organization that sets standards for state and

local governmental units.

The Governmental Accounting

Standards Board (GASB) is a private

organization that sets standards for state and

local governmental units.

Standard Setting OrganizationsStandard Setting OrganizationsStandard Setting OrganizationsStandard Setting Organizations

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Standard Setting OrganizationsStandard Setting OrganizationsStandard Setting OrganizationsStandard Setting Organizations

The General Accounting Office is the primary federal government agency

that oversees accounting in the

federal government.

The General Accounting Office is the primary federal government agency

that oversees accounting in the

federal government.

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Standard Setting OrganizationsStandard Setting OrganizationsStandard Setting OrganizationsStandard Setting Organizations

The International Accounting Standards

Board (IASB) recommends accounting standards that it believes are appropriate for

a broad range of global activities involving

companies in many nations.

The International Accounting Standards

Board (IASB) recommends accounting standards that it believes are appropriate for

a broad range of global activities involving

companies in many nations.

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The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process

1. Accounting issues are identified and evaluated for consideration.

2. A discussion memorandum is issued and responses are solicited.

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The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process

1. Accounting issues are identified and evaluated for consideration.

2. A discussion memorandum is issued and responses are solicited.

A A discussion memorandumdiscussion memorandum is a is a document that identifies document that identifies

accounting issues and alternative accounting issues and alternative approaches to resolving the issue.approaches to resolving the issue.

A A discussion memorandumdiscussion memorandum is a is a document that identifies document that identifies

accounting issues and alternative accounting issues and alternative approaches to resolving the issue.approaches to resolving the issue.

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The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process

3. Public hearings are held.

1. Accounting issues are identified and evaluated for consideration.

2. A discussion memorandum is issued and responses are solicited.

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The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process

3. Public hearings are held.4. An exposure draft is issued and responses are

solicited.

1. Accounting issues are identified and evaluated for consideration.

2. A discussion memorandum is issued and responses are solicited.

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The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process

3. Public hearings are held.4. An exposure draft is issued and responses are

solicited.

1. Accounting issues are identified and evaluated for consideration.

2. A discussion memorandum is issued and responses are solicited.

An An exposure draftexposure draft is a document that is a document that describes a proposed accounting standard.describes a proposed accounting standard.

An An exposure draftexposure draft is a document that is a document that describes a proposed accounting standard.describes a proposed accounting standard.

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The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process

3. Public hearings are held.4. An exposure draft is issued and responses are

solicited.

1. Accounting issues are identified and evaluated for consideration.

2. A discussion memorandum is issued and responses are solicited.

5. Additional public hearings are held as needed.

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An accounting standard is an official An accounting standard is an official pronouncement establishing acceptable accounting pronouncement establishing acceptable accounting

procedures or financial report content.procedures or financial report content.

An accounting standard is an official An accounting standard is an official pronouncement establishing acceptable accounting pronouncement establishing acceptable accounting

procedures or financial report content.procedures or financial report content.

6. A standard is issued.

The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process

3. Public hearings are held.4. An exposure draft is issued and responses are

solicited.

1. Accounting issues are identified and evaluated for consideration.

2. A discussion memorandum is issued and responses are solicited.

5. Additional public hearings are held as needed.

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7. Existing standards are reviewed and modified as needed.

6. A standard is issued.

The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process

3. Public hearings are held.4. An exposure draft is issued and responses are

solicited.

1. Accounting issues are identified and evaluated for consideration.

2. A discussion memorandum is issued and responses are solicited.

5. Additional public hearings are held as needed.

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33Explain the purpose of the Financial Accounting Standards Board’s conceptual framework.

ObjectiveObjectiveObjectiveObjective

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The FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual Framework

The FASB conceptual framework is a set of objectives, principles, and

definitions to guide the development of new accounting standards.

The FASB conceptual framework is a set of objectives, principles, and

definitions to guide the development of new accounting standards.

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The FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual Framework

The FASB conceptual framework includes The FASB conceptual framework includes four major components:four major components:

1. Objectives of financial reporting2. Qualitative characteristics of accounting

information3. Elements of financial statements4. Recognition and measurement in

financial statements

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The FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual Framework

To be relevant, information

should be timely and have

predictive or feedback value.

To be relevant, information

should be timely and have

predictive or feedback value.

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The FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual Framework

To be reliable, information should faithfully represent

economic events and should be verifiable

and neutral.

To be reliable, information should faithfully represent

economic events and should be verifiable

and neutral.

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44Identify supplementary information to the financial statements in a corporate annual report.

ObjectiveObjectiveObjectiveObjective

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Corporate annual reports Corporate annual reports usually include:usually include:

Corporate annual reports Corporate annual reports usually include:usually include:

A letter from the president or chief executive officer of the company

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Corporate annual reports Corporate annual reports usually include:usually include:

Corporate annual reports Corporate annual reports usually include:usually include:

A description of the company’s products and business activities

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Corporate annual reports Corporate annual reports usually include:usually include:

Corporate annual reports Corporate annual reports usually include:usually include:

A summary of selected business data

Financial data, such as financial statements for a number of years

Financial data, such as financial statements for a number of years

An example of such data is shown in the next slide.

An example of such data is shown in the next slide.

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Exhibit 1Exhibit 1

Summary Business

Data from a Corporate

Report

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Corporate annual reports Corporate annual reports usually include:usually include:

Corporate annual reports Corporate annual reports usually include:usually include:

A discussion by management of the company’s performance (MD&A)

This section explains important events and

changes in performance during the years presented in the financial statements.

This section explains important events and

changes in performance during the years presented in the financial statements.

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Corporate annual reports Corporate annual reports usually include:usually include:

Corporate annual reports Corporate annual reports usually include:usually include:

Notes to the financial statements

Notes to financial statements describe how some of the

numbers were computed and provide additional

information about items reported on the statements.

Notes to financial statements describe how some of the

numbers were computed and provide additional

information about items reported on the statements.

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Corporate annual reports Corporate annual reports usually include:usually include:

Corporate annual reports Corporate annual reports usually include:usually include:

A statement of management responsibilities for the financial statements

Management is responsible for preparing statements

and related information that fairly reports the business activities of a corporation.

Management is responsible for preparing statements

and related information that fairly reports the business activities of a corporation.

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Corporate annual reports Corporate annual reports usually include:usually include:

Corporate annual reports Corporate annual reports usually include:usually include:

An audit report

An audit involves a detailed, systematic investigation of a

company’s accounting records and procedures for the purpose of determining the reliability of

financial reports.

An audit involves a detailed, systematic investigation of a

company’s accounting records and procedures for the purpose of determining the reliability of

financial reports.

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Corporate annual reports Corporate annual reports usually include:usually include:

Corporate annual reports Corporate annual reports usually include:usually include:

An audit report

An unqualified opinion states that the auditor believes that the financial statements fairly present the company’s actual economic events for the period covered by the

audited statements.

An unqualified opinion states that the auditor believes that the financial statements fairly present the company’s actual economic events for the period covered by the

audited statements.

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55Describe the purpose of internal controls that should be evident in business organizations.

ObjectiveObjectiveObjectiveObjective

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Management PhilosophyManagement PhilosophyManagement PhilosophyManagement Philosophy

Top management should develop

and enforce policies to ensure

an effective system of internal

controls.

Top management should develop

and enforce policies to ensure

an effective system of internal

controls.

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CCoonndduuc c tt

CCooddee

Business EthicsBusiness EthicsBusiness EthicsBusiness Ethics

Management should create a code of ethics and other documents

that establish company policy and inform

employees of acceptable and expected behavior.

Management should create a code of ethics and other documents

that establish company policy and inform

employees of acceptable and expected behavior.

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Computer System ControlsComputer System ControlsComputer System ControlsComputer System Controls

Internal controls should be built into computer information systems to protect a company’s

information resources from unauthorized access, improper use, and destruction.

Internal controls should be built into computer information systems to protect a company’s

information resources from unauthorized access, improper use, and destruction.

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Human Resources ControlsHuman Resources ControlsHuman Resources ControlsHuman Resources Controls Hiring qualified employees who have the

appropriate skills for a particular job.

Conducting background checks to identify employees who have a history of improper behavior.

Maintaining a good training program to ensure employee development and maintenance of skills.

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Physical ControlsPhysical ControlsPhysical ControlsPhysical Controls Merchandise and materials can be secured

in warehouses or display cases. Merchandise can be tagged electronically

to make shoplifting or theft difficult. Surveillance equipment can monitor

important resources. Cash registers, vaults, and safety deposit

boxes can be used to secure financial resources

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THE ENDTHE END

CCHAPTERHAPTER F6 F6

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