An electronic presentation by Douglas Cloud Pepperdine University

1. An electronic presentation by Douglas Cloud Pepperdine University

2. C 1 hapter The Environment of Financial Reporting

3. Objectives 1.Understand capital markets and decision making. 2.Know what is included in financial reporting. 3.Explain generally accepted accounting principles (GAAP) and the sources of GAAP. 4.Identify the types of pronouncements issued by the FASB. Continued

4. Objectives 5.Understand how the Financial Accounting Standards Board (FASB) operates. 6.Describe the relationship between the Securities and Exchange Commission (SEC) and the FASB. 7.Use ethical models for decision making about ethical dilemmas. 8.Understand creative and critical thinking.

5. Companies need large amounts of capital for operations.

6. Companies may obtain capital by issuing capital stock... Stock Exchange

7. ... or by borrowing from lenders. Bank

8. Corporations Sell stocks and bonds Borrow money Investors Financial Institutions Buy and sell stocks and bonds Buy and sell stocks and bonds Buy and sell stocks and bonds Investors Investors Capital Markets Primary Market (e.g., individuals, banks) Secondary Market (e.g., New York Stock Exchange)

9. 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

10. External and Internal Users 1. Buy.A potential investor decides to purchase a particular security on the basis of communicated accounting information. 2.Hold. An actual investor decides to retain a particular security on the basis of communicated accounting information. 3. Sell.An actual investor decides to dispose of a particular security on the basis of communicated accounting information.

11. Financial Accounting Managerial Accounting Internal needs GAAP Comparison of Financial and Managerial Accounting Sources of Authority

12. Financial Accounting Managerial Accounting Primarily historical Present and future Comparison of Financial and Managerial Accounting Time Frame of Reported Information

13. Financial Accounting Managerial Accounting Individual departments, divisions, and total company Mainly total company Comparison of Financial and Managerial Accounting Scope

14. Financial Accounting Managerial Accounting Sales $275,240 Cost 180,120 Gross mar. 95,120 Expenses 80,120 Net inc. $15,000 Materials usage is unfavorable by $8,400. Primarily quantitative Qualitative as well as quantitative Comparison of Financial and Managerial Accounting Type of Information

15. Financial Accounting Managerial Accounting Prescribed by GAAP; oriented toward investment and credit decisions Determined by company; focused upon specific decisions being made Comparison of Financial and Managerial Accounting Statement Format

16. Financial Accounting Managerial Accounting External Internal Comparison of Financial and Managerial Accounting Decision Focus

17. The company’s accountants prepare both the financial and the managerial accounting reports… …and the information comes from the same information system.

18. Financial Reporting Financial reporting is the process of communicating financial accounting information about a company to external users.

19. Financial Reporting Companies present at least three major financial statements: • Thebalance sheet (or statement of financial position) which summarizes a company’s financial position at a given date. • The income statement which summarizes the results of a company’s income producing activities for a period of time. • The statement of cash flows which summarizes a company’s cash inflows and outflows for a period of time.

20. Financial Reporting This statement summarizes the changes in each item of stockholders’ equity for a period. A statement of changes in stockholders’ equity also is included by many companies.

21. 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. They are like laws and are the rules that must be followed in financial reporting.

22. Hierarchy of Sources of GAAP A.Pronouncements of authoritative bodies (FASB, APB, CAP, SEC). B.Pronouncements of bodies of expert accountants that have been exposed for public comment. C. Pronouncements of bodies of expert accountants that have not been exposed for public comment. Continued

23. Hierarchy of Sources of GAAP D.Widely accepted practices and pronouncements representing prevalent practice in a particular industry or applications to specific circumstances. E.Other accounting literature.

24. 1959 APB formed 1973 FASB formed Present 1938 CAP formed History of GAAP in the Private Sector FASB issued 145 Statements of Standards as of 5/02 APB issued 31 Opinions CAP issued 51 ARBs

25. Reasons for Forming APB 1.To alleviate criticism about the process of formulating accounting principles, which included wider representation. 2. To create a policy-making body whose rules would be binding on companies rather than optional. The APB was comprised 17 to 21 members, selected primarily from the accounting profession.

26. Criticisms of the APB 1. Independence.The members of the APB were part-time volunteers whose major responsibilities were to the business, governmental, or academic organization employing them. 2.Representation.The public accounting firms and the AICPA were too closely associated with the development of accounting standards. 3.Response time. Emerging problems were not solved quickly enough by the part-time members of the APB.

27. 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

28. 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

29. Types of Pronouncements Issued by the FASB • Statements of Financial Accounting Standards • Interpretations • Technical Bulletins • Statements of Financial Accounting Concepts • Other Pronouncements

30. 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

31. Issue Exposure Draft Modify Exposure Drafts Vote (super-majority) Issue Statement FASB Operating Procedures From previous page Hold Public Hearings

32. Other Organizations Impacting GAAP • 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

33. Other Organizations Impacting GAAP • International Accounting Standards Committee (IASC) • Governmental Accounting Standards Board (GASB) • Financial Executives International (FEI) • Institution of Management Accountants (IMA) • Association for Investment Management and Research (AIMR)

34. EITF FEI CASB GASB IMA G4+1 AIMR AAA IASC IRS Participants in the Development of GAAP FASB SEC AICPA

35. 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.

36. 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.

37. 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.

38. 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.

39. 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.

40. 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.

41. An Ethicist’s Basic Approaches to Moral Reasoning (1) The utilitarianmodel, which evaluations actions based on the greatest good for the greatest number. (2) Therightsmodel, which embraces actions that protect individual moral rights. (3) Thejusticemodel, which emphasizes a fair distribution of benefits and burdens.

42. Creative Thinking Recognize Problem Identify Alternatives Evaluate Alternatives Select Solution Implement Solution Critical Thinking Creative and Critical Thinking Impact on Problem Solving

43. C 1 hapter The End