environment and theoretical structure of financial accounting
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Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Environment and Theoretical Structure of Financial Accounting
Chapter 1
1-2
Financial Accounting Environment
Profit-orientedcompanies
Not-for-profitentities
Households
Providers ofFinancial
InformationExternal
User GroupsInvestorsCreditorsEmployeesLabor unionsCustomersSuppliersGovernmentagenciesFinancialintermediaries
Relevant
FinancialInformation
1-3
Financial Accounting EnvironmentRelevant financial information is provided primarily through
financial statements and related disclosure notes. The following financial statements are the most frequently provided.
1. Balance Sheet2. Income Statement3. Statement of Cash Flows4. Statement of Shareholders’ EquityStarting in 2012, companies must either provide a Statement
of Other Comprehensive Income immediately following the Income Statement, or present a Combined Statement of Comprehensive Income that includes the information normally contained in both the Income Statement and the Statement of Other Comprehensive Income.
1-4
Cash versus Accrual AccountingCash Basis Accounting
Revenue is recognized when cash is received. Expenses are recognized when cash is paid.
OROROR
OR
Accrual AccountingRevenue is recognized when earned.
Expenses are recognized when incurred.
1-5The Development of Financial Accounting and Reporting Standards
Concepts, principles, and
proceduresdeveloped to meet the
needs of external users (GAAP).
1-6
Historical Perspective and Standards
1-7
Current U. S. Standard Setting
Supported by the Financial Accounting Foundation
Seven full-time, independent voting members
Members not required to be CPAs
Financial Accounting Standards Board
1-8
International Standard Setting
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 to help participants in the world’s capital
markets and other users make economic decisions.
1-9Efforts to Converge U.S. and International 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 enforcement
Progress: September 2002: FASB and IASB sign Norwalk
Agreement. November 2008: SEC issues a Roadmap with
milestones. May 2011: SEC issues discussion paper describing a
“condorsement” approach. November 2011: SEC issues two studies comparing
U.S. GAAP to IFRS and analyzing how IFRS are applied globally.
December 2011: SEC postpones final determination until 2012.
1-10A Move Away from
Rules-Based Standards?Rules-based accounting standards
vs. Objectives-oriented approach
Objectives-oriented (principles-based) approach stresses
professional judgment
1-11
The Conceptual FrameworkThe Conceptual Framework has been described as
an “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 by SFAC 8)Qualitative Characteristics (SFAC 2, replaced by SFAC 8)Elements of Financial Statements (SFAC 3, replaced by SFAC 6)Recognition and Measurement (SFAC 5 and SFAC 7)
1-12
ObjectiveTo provide financial information that is useful to capital providers.
ElementsRecognition and
MeasurementConcepts
ConstraintsFinancial
Statements
The Conceptual Framework
Qualitative Characteristics
1-13
NeutralityCompleteness Free from error
Predictivevalue Materiality
Relevance Faithful representation
Qualitative Characteristics ofAccounting Information
Comparability(Consistency) UnderstandabilityVerifiability Timeliness
Decision usefulness
Confirmatory value
1-14
Elements of Financial Statements
1-15
Elements of Financial Statements
1-16Recognition, Measurement and
Disclosure ConceptsRecognition
Process of admitting information into the basic
financial statements
Criteria:1. Definition2. Measurability3. Relevance4. Reliability
Measurement Process of associating
numerical amounts with the elements.
Measurement Attributes:
1. Historical cost2. Net realizable
value3. Current cost4. Present value of
future cash flows5. Fair valueDisclosure
Process of including additional supplemental
information.
Examples:1. Parenthetical
amounts2. Notes to FS3. Supplemental FS
1-17
Revenue Recognition: Realization
Two Criteria:1.Earnings process is complete or virtually complete.2.Reasonable certainty as to the collectability of the asset to be received (usually cash).
1-18
Expense Recognition: MatchingThe matching principle requires that all
expenses incurred in generating revenue for a period also be recognized in the same period.
Four Approaches1.Based on exact cause-and-effect relationships.2.By associating an expense with the revenues recognized in a specific time period.3.By a systematic and rational allocation to specific time periods.4.In the period incurred, without regard to related revenues.
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End of Chapter 1
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