1 The Environment of Financial Reporting

1. 1 The Environment of Financial Reporting ntermediate Accounting I 中级会计学 Accounting School ·Zhongnan University of Economics & Law

2. Intermediate Accounting 1 The Environment of Financial Reporting Forewords • Course nature and objective • Teaching methods • Test requirements and form • Scoring system • Brief contents

3. Intermediate Accounting 1 The Environment of Financial Reporting I. Accounting information: users, uses, and GAAP in U.S.A. Companies may obtain capital by issuing capital stock or by borrowing from lenders Bank Stock Exchange

4. Intermediate Accounting 1 The Environment of Financial Reporting “Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions--in making reasoned choices among alternative courses of action.”(Statement of the Accounting Principles Board No. 4, p. 40)

5. Intermediate Accounting 1 The Environment of Financial Reporting Intermediate Accounting 1 The Environment of Financial Reporting Impact External User External Decision Making Accounting Information Accumu- late Communi- cate Internal Decision Making Internal User Impact Accounting Information Economic Activities and Decision Making Company’s Economic Activities

6. Intermediate Accounting 1 The Environment of Financial Reporting Major Internal and External Stakeholder Groups Investors Government Community Board of Directors Management Employees Analysts Suppliers Employees Customers Creditors

7. Intermediate Accounting 1 The Environment of Financial Reporting Comparison of Financial and Managerial Accounting Sources of Authority; Statement Format; Decision Focus… Could you illustrate differences between financial and managerial accounting?

8. Intermediate Accounting 1 The Environment of Financial Reporting Financial Reporting Financial reporting is the process of communicating financial accounting information about a company to external users. The balance sheet reports, as of a certain point in time, the resources of a company (the assets), the company’s obligations (the liabilities), and the equity of the owners.

9. Intermediate Accounting 1 The Environment of Financial Reporting Financial Reporting Financial reporting is the process of communicating financial accounting information about a company to external users. The income statement reports, for a certain interval, the net assets generated through business operations (revenues), the net assets consumed (the expenses), and the net income.

10. Intermediate Accounting 1 The Environment of Financial Reporting Financial Reporting Financial reporting is the process of communicating financial accounting information about a company to external users. The statement of cash flows reports, for a certain interval, the amount of cash generated and consumed by a company through operating, financing, and investing activities.

11. Intermediate Accounting 1 The Environment of Financial Reporting Financial Reporting • A statement of changes in stockholders’ equity also is included by many companies. This statement summarizes the changes in each item of stockholders’ equity for a period. • Accounting estimates and judgments are outlined in the notes to financial statements.

12. Intermediate Accounting 1 The Environment of Financial Reporting Generally Accepted AccountingPrinciples (GAAP) GAAP are the guidelines, procedures, and practices that a company is required to use in recording and reporting the accounting information in its audited financial statements.

13. Intermediate Accounting 1 The Environment of Financial Reporting Hierarchy of Sources of GAAP • Level A • FASB Statements and Interpretations • APB Opinions • CAP Accounting Research Bulletins • SEC Regulation S-X and Financial Reporting Releases • Level B • FASB Technical Bulletins • AICPA Industry Audit and Accounting Guides • AICPA Statementsof Position • Level C • Consensus Positions of EITF • AICPA Practice Bulletins • Level D • AICPA Accounting Interpretations • FASB “Question and Answer” guides • AICPA Accounting Trends and Techniques • Level E • Other accounting literature A B C D E Higher Authority Lower Authority

14. Intermediate Accounting 1 The Environment of Financial Reporting 2. The development of accounting standards in U.S.-CAP Committee on Accounting Procedures (CAP) Born: 1939 Died: 1959 Pronouncements: Accounting Research Bulletins

15. Intermediate Accounting 1 The Environment of Financial Reporting 2. The development of accounting standards in U.S.-APB Accounting Principles Board (APB) Born: 1959 Died: 1973 Pronouncements: APB Opinions

16. Intermediate Accounting 1 The Environment of Financial Reporting 2. The development of accounting standards in U.S.-FASB Financial Accounting Standards Board (FASB) Born: 1973 Died: Pronouncements: Statements of Financial Accounting Standards

17. Intermediate Accounting 1 The Environment of Financial Reporting Appoint, fund, and oversee Financial Accounting Standards Advisory Council (approximately 30 members) Financial Accounting Standards Board (7 members) Advise Structure of the FASB Financial Accounting Foundation (16-member board of trustees) Continued

18. Intermediate Accounting 1 The Environment of Financial Reporting Task Forces of the Standards Board (including Emerging Issues Task Force) Consult Support Appoint Research and Technical Staff Consult Structure of the FASB Financial Accounting Standards Board (7 members) Administrative Staff

19. Intermediate Accounting 1 The Environment of Financial Reporting Types of Pronouncements Issued by the FASB • Statements of Financial Accounting Standards • Interpretations • Technical Bulletins • Statements of Financial Accounting Concepts • Other Pronouncements

20. Intermediate Accounting 1 The Environment of Financial Reporting Issue Discussion Memorandum or Invitation to Comment Appoint Task Force Deliberate on Findings Conduct Research Issue Exposure Draft Hold Public Hearings FASB Operating Procedures Identify Topic Continued

21. Intermediate Accounting 1 The Environment of Financial Reporting Issue Exposure Draft Modify Exposure Drafts Vote (super-majority) Issue Statement FASB Operating Procedures From previous page Hold Public Hearings

22. Intermediate Accounting 1 The Environment of Financial Reporting Gov’t Regulators Instructors • SEC • American Acct. • State Boards Association of Public Acct. Statement Preparers Auditors • Financial Executives • AICPA • State societies of Institute CPAs • IMA • Major audit firms • Individual Corps FASB Authority Sources-- Overview FASB

23. Intermediate Accounting 1 The Environment of Financial Reporting 3. Other organizations currently influencing GAAP in U.S. • Securities and Exchange Commission (SEC) • American Institute of Certified Public Accountants (AICPA) • FASB Emerging Issues Task Force (EITF) • Cost Accounting Standards Board (CASB) • Internal Revenue Service (IRS) • American Accounting Association (AAA) Continued

24. Intermediate Accounting 1 The Environment of Financial Reporting • International Accounting Standards Committee (IASC)/International Accounting Standards Board (IASB) • Governmental Accounting Standards Board (GASB) • Financial Executives International (FEI) • Institution of Management Accountants (IMA) • Association for Investment Management and Research (AIMR)/ Chartered Financial Analyst Institute (CFAI)

25. Intermediate Accounting 1 The Environment of Financial Reporting Securities Exchange Commission (1933-present) • 1929 stock market crash blamed on nonstandard accounting. • 1933 Securities Act established SEC to standardize accounting. • Created to protect the interests of investors by ensuring full and fair disclosure. • Granted legal authority to dictate GAAP. • Has tended to defer setting GAAP to the accounting profession.

26. Intermediate Accounting 1 The Environment of Financial Reporting American Institute of Certified Public Accountants The American Institute of Certified Public Accountants (AICPA) is the professional organization of practicing CPAs in the United States.

27. Intermediate Accounting 1 The Environment of Financial Reporting American Accounting Association The American Accounting Association (AAA) is primarily an organization for accounting professors.

28. Intermediate Accounting 1 The Environment of Financial Reporting Internal Revenue Service The Internal Revenue Service (IRS) has the primary goal of equitable collecting revenue.

29. Intermediate Accounting 1 The Environment of Financial Reporting 4. Ethics in the accounting environment Accountants are often faced with ethical dilemmas (ethical conflicts) in their professional roles.

30. Intermediate Accounting 1 The Environment of Financial Reporting Principles of the AICPA Code of Professional Conduct Responsibilities In carrying out their responsibilities as professionals, members should exercise sensitive professional judgment in all their activities. Continued

31. Intermediate Accounting 1 The Environment of Financial Reporting Principles of the AICPA Code of Professional Conduct The Public Interest Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism. Continued

32. Intermediate Accounting 1 The Environment of Financial Reporting Principles of the AICPA Code of Professional Conduct Integrity To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity. Continued

33. Intermediate Accounting 1 The Environment of Financial Reporting Principles of the AICPA Code of Professional Conduct Objectivity and Independence A member should maintain objectivity and be free from conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance. Continued

34. Intermediate Accounting 1 The Environment of Financial Reporting Principles of the AICPA Code of Professional Conduct Due Care A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge the professional responsibility to the best of the member’s ability. Continued

35. Intermediate Accounting 1 The Environment of Financial Reporting Principles of the AICPA Code of Professional Conduct Scope and Nature of Service A member in public practice should observe the Principles of the CPC in determining the scope and nature of services to be provided.

36. Intermediate Accounting 1 The Environment of Financial Reporting 5. Comparison of the development of accounting standards in China and in U.S. Could you compare the development of accounting standards in China and in U.S.?

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