ac303-ch1slides
TRANSCRIPT
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Environment and TheoreticalStructure of Financial Accounting
Chapter 1
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Financial Accounting Environment
Profit-orientedcompanies
Not-for-profit
entities
Providers of
Financial
InformationExternal
User Groups
Investors
CreditorsEmployees
Labor unions
Customers
SuppliersGovernmentagencies
Financialintermediaries
Relevant
FinancialInformation
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The Economic Environmentand Financial Reporting
A sole proprietorshipis owned by a
single individual.
A partnership isowned by two ormore individuals.
A corporation is ownedby shareholders.
A highly-developedsystem communicatesfinancial information
from a corporation to its
many shareholders.
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Financial Accounting Environment
Relevant financial information is providedprimarily through financial statements andrelated disclosure notes.
Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Shareholders Equity
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Cash versus Accrual Accounting
Cash Basis AccountingRevenue is recognized when cash is received.Expenses are recognized when cash is paid.
OROROR
OR
Accrual Accounting
Revenue is recognized when earned.
Expenses are recognized whenincurred.
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Cash versus Accrual Accounting
Cash Basis Accounting
Carter Company has sales on account totaling$100,000 per year for three years. Carter collected
$50,000 in the first year and $125,000 in the secondand third years. The company prepaid $60,000 for
three years rent in the first year. Utilities are $10,000per year, but in the first year only $5,000 was paid.
Payments to employees are $50,000 per year.
Lets look at the cash flows.
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Cash versus Accrual Accounting
Cash Basis Accounting
Year 1 Year 2 Year 3 Total
Sales (on credit) 100,000$ 100,000$ 100,000$ 300,000$
Cash receipts from
customers 50,000$ 125,000$ 125,000$ 300,000$
Payment of 3
years' rent (60,000) - - (60,000)
Salaries toemployees (50,000) (50,000) (50,000) (150,000)
Payments for
utilities (5,000) (15,000) (10,000) (30,000)
Net cash flow (65,000)$ 60,000$ 65,000$ 60,000$
Summary of Cash Flows
Cash flows in any one year may not
be a predictor of future cash flows.
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Cash versus Accrual Accounting
Accrual Basis Accounting
Year 1 Year 2 Year 3 Total
Revenue 100,000$ 100,000$ 100,000$ 300,000$
Rent Expense (20,000) (20,000) (20,000) (60,000)
Salaries Expense (50,000) (50,000) (50,000) (150,000)
Utilities Expense (10,000) (10,000) (10,000) (30,000)
Net Income 20,000$ 20,000$ 20,000$ 60,000$
Summary of Operations
Net Income is considered a better indicatorof future cash flows.
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The Development of FinancialAccounting and Reporting Standards
Concepts,principles, and
procedures were
developed to meet the
needs of external
users (GAAP).
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Current Standard Setting
Supported by the Financial Accounting Foundation
Seven full-time, independent voting members
Members not required to be CPAs
Financial Accounting
Standards Board
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Accounting Standard-Setting
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FASB Accounting StandardsCodification
The objective of the codification project was to integrate and
organize by topics all relevant accounting pronouncements
into a searchable, online database.
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FASBs Standard-Setting Process1. Board receives recommendations for projects.
2. Board votes to add the project to its agenda .
3. Board deliberates the issues at a series of public
meetings.
4. Board issues an Exposure Draft (ED).
5. Board holds a public roundtable meeting on the ED.
6. Staff analyzes feedback and the Board re-deliberates
the proposed revisions at public meetings .
7. Board issues a Standards Update describing
amendments to the Codification.
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Global Accounting Standards
The main objective of the International
Accounting Standards Board (IASB) is to
develop a single set of high quality,
understandable and enforceable global
accounting standards.
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Efforts to Converge U.S. andInternational Standards
Issues and Concerns: Desire for a single set of global standards Need for standards that are customized to fit stringent legal
and regulatory requirements of U.S.
Possible differences in implementation and enforcementProgress: September 2002: FASB and IASB sign Norwalk Agreement. November 2008: SEC issues a Roadmapwith milestones.
Nov 2011: SEC postpones making convergence decision. July 2012: SEC issues final report on 2-yr adoption study. July 2012: Chief Acct. J. Kroeker resigns. Dec. 2012: M. Schapiro steps down as SEC Chair. CurrentlySEC seemingly backs away from convergence.
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Role of the Auditor
Auditors serve as independentintermediaries to help insure that
management has appropriately appliedGAAP in preparing the companysfinancial statements.
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The Conceptual Framework
The Conceptual Framework has been described asan Accounting Constitution. It provides the
underlying foundation for accounting standards.
FASB Conceptual Framework(Statements of Financial Accounting Concepts)
Objectives of Financial Reporting (SFAC 1, replaced bySFAC 8)Qualitative Characteristics (SFAC 2, replaced by SFAC 8)Elements of Financial Statements (SFAC 3, replaced bySFAC 6)Recognition and Measurement (SFAC 5 and SFAC 7)
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Objective
To provide financial informationthat is useful to capital providers.
Elements
Financial
StatementsConstraints
The Conceptual Framework
Recognition andMeasurement
Concepts
Fundamental andEnhancingQualitative
Characteristics
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Relevance Faithful representation
Predictive
value
Confirmatory
value
NeutralityCompletenessFree from
material error
Qualitative Characteristics ofAccounting Information
Comparability
(Consistency)UnderstandabilityVerifiability Timeliness
Decision usefulness
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Practical Boundaries (Constraints) toAchieving Desired Qualitative Characteristics
Cost
EffectivenessMateriality
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Elements of Financial Statements
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Elements of Financial Statements
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Underlying Assumptions andAccounting Principles
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Recognition, Measurement andDisclosure Concepts
RecognitionProcess of admitting information
into the basic financial statements
Criteria:
1. Definition2. Measurability
3. Relevance
4. Reliability
MeasurementProcess of associating numerical
amounts with the elements.
Measurement Attributes:
1. Historical cost
2. Net realizable value
3. Current cost
4. Present value of
future cash flows
5. Fair value
DisclosureProcess of including additional
supplemental information.
Examples:
1. Parenthetical
amounts
2. Notes to FS
3. Supplemental FS
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Fair Value Hierarchy
U.S. GAAP gives companies the optionto report some or
all of their financial assets and liabilities at fair value