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Introduction

Introduction. Icebreaker Me You Syllabus Class Procedure Class Expectations. Insert Book Cover Picture. Environmental and Theoretical Structure of Financial Accounting. 1. Relevant. Financial Information. Financial Accounting Environment. Providers of Financial Information.

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Introduction

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  1. Introduction • Icebreaker • Me • You • Syllabus • Class Procedure • Class Expectations

  2. Insert Book Cover Picture Environmental and Theoretical Structure of Financial Accounting 1

  3. Relevant Financial Information Financial Accounting Environment Providers of Financial Information External User Groups Profit-oriented companies Not-for-profit entities Households Investors Creditors Employees Labor unions Customers Suppliers Governmentagencies Financialintermediaries

  4. 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

  5. Investment-Credit DecisionsA Cash Flow Perspective Corporate shareholders receive cash from their investments through . . . • Periodic dividend distributions from the corporation. • The ultimate sale of the ownership shares of stock.

  6. Cash Versus Accrual Accounting Cash Basis Accounting Revenue is recognized when cash is received. Expenses are recognized when cash is paid.

  7. 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 second and third years. The company prepaid $60,000 for three years’ rent in the first year. Utilities are $10,000 per year, but in the first year only $5,000 was paid. Payments to employees are $50,000 per year.Let’s look at the cash flows.

  8. Cash Versus Accrual Accounting Cash Basis Accounting

  9. Cash Versus Accrual Accounting Cash Basis Accounting Cash flows in any one year may not be a predictor of future cash flows.

  10. Cash Versus Accrual Accounting Accrual Accounting Revenue is recognized when earned. Expenses are recognized when incurred. Let’s reconsider the CarterCompany information.

  11. Cash Versus Accrual Accounting Accrual Accounting Revenue is recognized when earned. Expenses are recognized when incurred. Let’s reconsider the CarterCompany information.

  12. The Development of Financial Accounting and Reporting Standards Concepts, principles, and procedures were developed to meet the needs of external users (GAAP).

  13. Historical Perspective and Standards Securities and Exchange Commission • 1934 – present Evolution of Standard-Setting Process • 1938 – 1959: Committee on Accounting Procedures (CAP) • 1959 – 1973: Accounting Principles Board (APB)

  14. Current Standard Setting - FASBwww.fasb.org • Supported by the Financial Accounting Foundation. • Seven full-time, independent voting members serving for 10 years. • Answerable only to the Financial Accounting Foundation. • Members not required to be CPAs.

  15. Establishment of Accounting StandardsA Political Process Internal Revenue Servicewww.irs.gov Financial Executives Internationalwww.fei.org GAAP Governmental Accounting Standards Boardwww.gasb.org American Institute of CPAswww.aicpa.org Securities and Exchange Commissionwww.sec.gov American Accounting Associationwww.aaa-edu.org

  16. FASB’s Standard-Setting Process • Identification of problem. • The task force. • Research and analysis. • Discussion memorandum. • Public response. • Exposure draft. • Public response. • Statement issued.

  17. International Accounting StandardsBoard (IASB) • Established in 1973 to narrow the range of differences in accounting standards. • Increase in international trade has motivated the IASB to attempt to eliminate alternative accounting treatments.

  18. Role of the Auditor Independent intermediary to help insure that management has in fact appropriately applied GAAP.

  19. Financial Reporting Reform As a result of numerous financial scandals, Congress passed the Public Company Accounting Reform and Investor Protection Act of 2002, commonly referred to as the Sarbanes-Oxley Act for the two congressmen who sponsored the bill.

  20. The Conceptual Framework • Maintain consistency among standards. • Resolve new accounting problems. • Provide user benefits.

  21. The Conceptual Framework Objectives of Financial Reporting (SFAC No. 1) Qualitative Characteristics of Accounting Information (SFAC No. 2) Elements of Financial Statements (SFAC No. 6) Recognition and Measurement Criteria (SFAC No. 5) Environment Implementation Implementation assumptions principles constraints

  22. Conceptual Framework • Objectives • To provide information: • Useful for investor and creditor decisions. • That helps predict cash flows. • About economic resources, claims to resources, and changes in resources and claims. Recognition andMeasurementConcepts Elements QualitativeCharacteristics FinancialStatements Constraints Continued

  23. Objectives Recognition andMeasurementConcepts AssumptionsEconomic entity Going concern Periodicity Monetary unit Principles Historical cost Realization Matching Full Disclosure Elements Assets Liabilities Equity Investments by Owners Distributions to owners Revenues Expenses Gains Losses Comprehensive Income QualitativeCharacteristics Understandability Primary Relevance Reliability Secondary Comparability Consistency Financial Statements Balance sheet Income statement Statement of cash flows Statement of shareholders’ equity Related disclosures Constraints Cost effectiveness Materiality Conservatism

  24. Relevance Reliability PredictiveValue Feedback Value Timeliness Verifiability Neutrality RepresentationalFaithfulness Comparability Consistency Qualitative Characteristics ofAccounting Information Decision Usefulness

  25. Practical Constraints to Achieving Desired Qualitative Characteristics Conservatism CostEffectiveness Materiality

  26. Recognition and Measurement Concepts

  27. Question The function of financial accounting is to identify, measure and communicate financial information about economic entities to interested parties. a. True b. False

  28. Question The function of financial accounting is to identify, measure and communicate financial information about economic entities to interested parties. a. True b. False

  29. Question Accrual accounting provides a better indication of ability to generate cash flows than does information limited to the financial effects of cash receipts and cash payments. a. True b. False

  30. Question Accrual accounting provides a better indication of ability to generate cash flows than does information limited to the financial effects of cash receipts and cash payments. a. True b. False

  31. Question The primary objective of accrual basis accounting is the measurement of income. a. True b. False

  32. Question The primary objective of accrual basis accounting is the measurement of income. a. True b. False

  33. Question Generally accepted accounting principles include both standards set by various rule making bodies and certain accounting practices that have evolved over time. a. True b. False

  34. Question Generally accepted accounting principles include both standards set by various rule making bodies and certain accounting practices that have evolved over time. a. True b. False

  35. Question The major financial accounting standard setting body is the a. Accounting Principles Board b. Securities and Exchange Commission c. Financial Accounting Standards Board d. American Institute of CPAs

  36. Question The major financial accounting standard setting body is the a. Accounting Principles Board b. Securities and Exchange Commission c. Financial Accounting Standards Board d. American Institute of CPAs

  37. Question The FASB issues which of the following types of pronouncements? a. Standards b. Interpretations c. Financial Accounting Concepts d. Technical Bulletins e. All of the above

  38. Question The FASB issues which of the following types of pronouncements? a. Standards b. Interpretations c. Financial Accounting Concepts d. Technical Bulletins e. All of the above

  39. Question The Financial Accounting Standards Board develops accounting and reporting standards independent of public, business and political pressures. a. True b. False

  40. Question The Financial Accounting Standards Board develops accounting and reporting standards independent of public, business and political pressures. a. True b. False

  41. Ethics in Accounting • To be useful, accounting information must be objective and reliable. • Management may be under pressure to report desired results and ignore or bend existing rules.

  42. Model for Ethical Decisions • Determine the facts of the situation. • Identify the ethical issue and the stakeholders. • Identify the values related to the situation. • Specify the alternative courses of action. • Evaluate the courses of action. • Identify the consequences of each course of action. • Make your decision and take any indicated action.

  43. Homework • Read Chapter 1 • Briefly go through Steps 1-7 for the Ethical Dilemma in your handout to discuss next class. • Chapter 1 Exercises 1,5,6,7,10,12,13,14 • Read through Chapter 2

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