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Environment and Theoretical Structure of Financial Accounting

Environment and Theoretical Structure of Financial Accounting. Chapter 1. Relevant. Financial Information. Financial Accounting Environment. Providers of Financial Information. External User Groups. Profit-oriented companies Not-for-profit entities Households. Investors Creditors

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Environment and Theoretical Structure of Financial Accounting

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  1. Environment and Theoretical Structure of Financial Accounting Chapter 1

  2. 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

  3. Relevant financial information is provided primarily through financial statements and related disclosure notes. The following financial statements are the most frequently provided. Balance Sheet Income Statement Statement of Cash Flows Statement of Shareholders’ Equity Starting 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. Financial Accounting Environment

  4. Cash versus Accrual Accounting Cash Basis AccountingRevenue is recognized when cash is received. Expenses are recognized when cash is paid. OROROR OR Accrual Accounting Revenue is recognized when earned.Expenses are recognized whenincurred.

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

  6. Historical Perspective and Standards

  7. Supported by the Financial Accounting Foundation Seven full-time, independent voting members Members not required to be CPAs Current U. S. Standard Setting Financial Accounting Standards Board

  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.

  9. Efforts 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.

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

  11. The Conceptual Framework The 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)

  12. The Conceptual Framework Objective To provide financial information that is useful to capital providers. Qualitative Characteristics Recognition andMeasurementConcepts Elements FinancialStatements Constraints

  13. Qualitative Characteristics ofAccounting Information Decision usefulness Relevance Faithful representation Confirmatory value Predictivevalue Materiality Completeness Neutrality Free from error Comparability (Consistency) Verifiability Timeliness Understandability

  14. Elements of Financial Statements

  15. Elements of Financial Statements

  16. Recognition, Measurement and Disclosure Concepts Criteria: Definition Measurability Relevance Reliability Recognition Process of admitting information into the basic financial statements Measurement Attributes: Historical cost Net realizable value Current cost Present value of future cash flows Fair value Measurement Process of associating numerical amounts with the elements. Examples: Parenthetical amounts Notes to FS Supplemental FS Disclosure Process of including additional supplemental information.

  17. Revenue Recognition: Realization Two Criteria: Earnings process is complete or virtually complete. Reasonable certainty as to the collectability of the asset to be received (usually cash).

  18. Expense Recognition: Matching The matching principle requires that all expenses incurred in generating revenue for a period also be recognized in the same period. Four Approaches Based on exact cause-and-effect relationships. By associating an expense with the revenues recognized in a specific time period. By a systematic and rational allocation to specific time periods. In the period incurred, without regard to related revenues.

  19. End of Chapter 1

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