Intermediate Accounting I

Intermediate Accounting I • You are to occupy available seats from the front of the classroom first.

Intermediate Accounting IGreg Sommers, PhD CPA gsommers@smu.edu http://gsommers.cox.smu.edu/acct3311/ https://www.facebook.com/groups/483384275096780/

Syllabus • It is our contract to protect you, me and your fellow students. • Read it, know it.

My thoughts about cheating…

What I need Full name (last, first) What name I should call you by Major Favorite restaurant in SMU/Park Cities area (non-bar and you are paying) What was a highlight from your last year? If applicable, school activity or sport that may cause you to miss class Example Smith, Elizabeth Beth Marketing Fred’s Taco & Egg Roll Palace Getting sunburned (in Hawaii!!) SMU synchronized shotput team Who are you?

My Goal for You Whatever be the detail with which you cram your students, the chance of their meeting in after-life exactly that detail is infinitesimal; and if they do meet it, they will probably have forgotten what you taught them about it. The really useful training yields a comprehension of a few general principles with a thorough grounding in the way they apply to a variety of concrete details. In subsequent practice the students will have forgotten your particular details; but they will remember by an unconscious common sense how to apply principles to immediate circumstances. Alfred North Whitehead The Aims of Education and Other Essays

Expectations – Content • Accounting is different than 8th grade social science where you learned it and then after the test could forget it. The content you learn in each accounting course is the basis for the next course and must be retained. • You are expected to know and be ready to use what you learned in Introductory Financial Accounting. • Solid Footing • Chapter 3 is essentially a review of Introductory Financial Accounting. Chapter 6 is Time Value of Money which most have learned in prior classes.

Expectations – Behavior • Be ready to begin the discussion promptly and attend the section for which you registered. • Your superiors, peers, and client personnel will have the same expectations in your firm and client assignments. • You are to occupy available seats from the front of the classroom first. • Your superiors and clients would not expect you to sit a significant distance away during meetings/interactions. • The use of laptop and other hand-held devices and/or audio/video recording devices during the class period is restricted without prior written consent. • These devices are distracting and their use has the ability to cause others to be skeptical of your intentions and commitment.

Be on time

Chapter 1FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDSSommers – Intermediate I

Discussion Question Q1-1 Differentiate broadly between financial accounting and managerial accounting. Financial accounting measures, classifies, and summarizes in report form those activities and that information which relate to the enterprise as a whole for use by parties both internal and external to a business enterprise. Managerial accounting also measures, classifies, and summarizes in report form enterprise activities, but the communication is for the use of internal, managerial parties, and relates more to subsystems of the entity. Managerial accounting is management decision oriented and directed more toward product line, division, and profit center reporting.

Discussion Question Q1-4 What is the objective of financial reporting? The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity through equity investments and loans or other forms of credit. Information that is decision-useful to capital providers (investors) may also be useful to other users of financial reporting who are not investors.

Objective of Accounting • What is the primary objective of financial accounting? • The primary objective of financial accounting is to provide financial 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.

What is Information? Imagine you are locked up in a cell, incommunicado, for the next 24 hours. I offer to tell you the winning number of the lottery that will be picked this very evening. The will-be-winning ticket, worth $100,000,000, is still available. How much should you pay for the information? Nothing. This information is worthless to you because you cannot act on it. Information is valuable insofar as it may allow you to produce better results that you would have gotten without it. Unless the information may lead you to act differently than you would have acted had you not known it, its value is zero. Since you can neither buy, nor ask someone else to buy the lottery ticket, the winning number is worthless to you. Fred Kofman – http://www.linkedin.com/today/post/article/20130819190438-36052017-cut-your-meeting-time-by-90

Discussion Question Q1-7 What is the likely limitation of “general-purpose financial statements”? General-purpose financial statements are not likely to satisfy the specific needs of all interested parties. Since the needs of interested parties such as creditors, managers, owners, governmental agencies, and financial analysts vary considerably, it is unlikely that one set of financial statements is equally appropriate for these varied uses.

Objective of Financial Accounting General-Purpose Financial Statements • Provide financial reporting information to a wide variety of users. • Provide the most useful information possible at the least cost. Equity Investors and Creditors Investors are the primary user group.

Objective of Financial Accounting Entity Perspective Companies viewed as separate and distinct from their owners. Decision-Usefulness Investors are interested in assessing the company’s • ability to generate net cash inflows and • management’s ability to protect and enhance the capital providers’ investments.

Investment-Credit Decisions ─A Cash Flow Perspective Shareholders Receive Cash Creditors Receive Cash Dividends Sale of Stock Interest Loan Repayment Accounting information should help investors evaluate the amount, timing, and uncertaintyof the enterprise’s future cash flows.

What do the numbers mean? (p. 5) “It’s the accounting.” That’s what many investors seem to be saying these days. Even the slightest hint of any accounting irregularity at a company leads to a subsequent pounding of the company’s stock price. For example, the Wall Street Journal has run the following headlines related to accounting and its effects on the economy. • Stocks take a beating as accounting woes spread beyond Enron. • Quarterly reports from IBM and Goldman Sachs sent stocks tumbling. • VeriFone finds accounting issues; stock price cut in half. • Bank of America admits hiding debt. • Facebook, Zynga, Groupon: IPO drops due to accounting, not valuation. It now has become clear that investors must trust the accounting numbers, or they will abandon the market and put their resources elsewhere. With investor uncertainty, the cost of capital increases for companies who need additional resources. In short, relevant and reliable financial information is necessary for markets to be efficient.

What do the numbers mean? (p. 6) In addition to providing decision-useful information about future cash flows, management also is accountable to investors for the custody and safekeeping of the company’s economic resources and for their efficient and profitable use. For example, the management of The Hershey Company has the responsibility for protecting its economic resources from unfavorable effects of economic factors, such as price changes, and technological and social changes. Because Hershey’s performance in discharging its responsibilities (referred to as its stewardship responsibilities) usually affects its ability to generate net cash inflows, financial reporting may also provide decision-useful information to assess management performance in this role.

Financial Accounting Environment • Relevant financial information is provided primarily through financial statements and related disclosure notes. • Balance Sheet • Income Statement • Statement of Cash Flows • Statement of Shareholders’ Equity

Expectation GAAP What the public thinks accountants should do vs. what accountants think they can do. • Difficult to close in light of accounting scandals. • Sarbanes-Oxley Act (2002). • Public Company Accounting Oversight Board (PCAOB).

Financial Reporting Challenges • Non-financial measurements. • Forward-looking information. • Soft assets. • Timeliness • Understandability

Generally Accepted Accounting Principles FASB Codification • Goal in developing the Codification is to provide in one place all the authoritative literature related to a particular topic. • Creates one level of GAAP, which is considered authoritative. • All other accounting literature is considered non-authoritative. FASB has developed the Financial Accounting Standards Board Codification Research System (CRS). CRS is an online real-time database that provides easy access to the Codification.

Generally Accepted Accounting Principles Illustration 1-5 FASB Codification Framework

Issues in Financial Reporting Illustration 1-6 User Groups that Influence the Formulation of Accounting Standards GAAP in a Political Environment GAAP is as much a product of political action as they are of careful logic or empirical findings.

Issues in Financial 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.

IFRS Insights – 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 financial disclosure and transparency not only in the United States but in markets around the world. • 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 differences 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 different user needs. In some countries, the primary users of financial 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.

IFRS Insights – Relevant Facts • 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 benefits exceed the costs. The concern is that the higher costs of SOX compliance are making the U.S. securities markets less competitive. • The textbook mentions a number of ethics violations, such as WorldCom, AIG, and Lehman Brothers. These problems have also occurred internationally, for example, at Satyam Computer Services (India), Parmalat (Italy), and Royal Ahold (the Netherlands).

IFRS Insights – Relevant Facts • 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 difference in approach has resulted in a debate about the merits of “principles-based” versus “rules-based” standards. • The SEC allows foreign companies that trade shares in U.S. markets to file their IFRS financial statements without reconciliation to GAAP.

A Move Away from Rules-Based Standards? • Rules based accounting standards vs. objectives-oriented approach US GAAP → IFRS • Objectives oriented (principles-based) approach stresses professional judgment

IFRS Insights ABOUT THE NUMBERS Illustration IFRS1-1 Global Companies

When Will US Move to IFRS? CFO.com Article – “SEC Stands Pat as Global Accounting Forges Ahead”

Intermediate Accounting I