1 an electronic presentation by douglas cloud pepperdine university

1

An electronic presentation by Douglas Cloud

Pepperdine University

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Task Force Clip Art included in this electronic presentation is used with

the permission of New Vision Technology of

Nepean Ontario, Canada.

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The Environment of Financial Reporting

The Environment of Financial Reporting

Chapter1

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Understand capital markets and decision making.

Know what is included in financial reporting. Explain generally accepted accounting

principles (GAAP) and the sources of GAAP. Identify the types of pronouncements issued

by the FASB. and Exchange Commission (SEC) and the FASB.

ObjectivesObjectives

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Understand how the Financial Accounting Standards Board (FASB) operates.

Describe the relationship between the Securities and Exchange Commission (SEC) and the FASB.

Use ethical models for decision making about ethical dilemmas.

Understand creative thinking.

ObjectivesObjectives

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Companies need large amounts of capital for operations.

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Companies may obtain capital by

issuing capital stock...

Stock Exchange

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... or by borrowing from lenders.

Bank

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Capital MarketsCapital Markets

Corporations

Financial InstitutionsInvestors

Borrow money

Sell stocks and bonds

Primary Market (e.g., individuals,

banks)

Secondary Market (e.g., New York Stock Exchange)

Buy and sell stocks and

bonds


bonds

Investors Investors


bonds

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Accounting Information Economic Activities and Decision Making

Accounting Information Economic Activities and Decision Making

External Decisio

n Making

Internal Decisio

n Making

Accumu-late

AccountingInformation

Commu-nicate

Impact

Impact

Company’s Economic Activities

External User

Internal User

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Comparison of Financial and Managerial Accounting


Sources of AuthoritySources of Authority

Financial Accounting Managerial Accounting

GAAP Internal needs

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Time Frame of Reported InformationTime Frame of Reported Information


Primarily historical Present and future



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ScopeScope


Mainly total company Individual departments, divisions, and total company



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Type of InformationType of Information


Primarily quantitative

Sales$275,240

Cost180,120

Gross95,120

Expenses 80,120

Net inc. $15,000



Qualitative as well as quantitative

Materials usage is

unfavorable

by $8,400.

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Statement FormatStatement Format


Determined by company; focused upon specific decisions being made

format

Prescribed by GAAP; oriented toward investment

and credit decisions



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Decision FocusDecision Focus


External Internal



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Financial ReportingFinancial Reporting

Financial reporting is the process of communicating

financial accounting information about a

company to external users.

Financial reporting is the process of communicating

financial accounting information about a

company to external users.

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Balance sheet (or statement of financial position) which summarizes a company’s financial position at a given date.

Income statement which summarizes the results of a company’s income producing activities for a period of time.

Statement of cash flows which summarizes a company’s cash inflows and outflows for a period of time.

Companies present at least three major financial statements:


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A statement of changes in stockholders’ equity

also is included by many companies.

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.

This statement summarizes the

changes in each item of stockholders’

equity for a period.


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Generally Accepted AccountingPrinciples (GAAP)

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.

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Hierarchy of Sources of GAAPHierarchy 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.

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D Widely accepted practices and pronouncements representing prevalent practice in a particular industry or applications to specific circumstances.

F Other accounting literature.

Hierarchy of Sources of GAAPHierarchy of Sources of GAAP

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History of GAAP in the Private Sector

History of GAAP in the Private Sector

1938

CAP formed

CAP issued 51

ARBs

APB issued 31 Opinions

1959

APB formed

1973

FASB formed

Present

FASB issued 135

Statements of Standards as

of 4/99

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Reasons for Forming APBReasons for Forming APB

To alleviate criticism about the process of formulating accounting principles, which included wider representation.

To create a policy-making body whose rules would be binding on companies rather than optional.

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Criticisms of the APBCriticisms of the APB

Independence. The members of the APB were part-time volunteers whose major responsibilities were to their employers.

Representation. The public accounting firms and the AICPA were too closely associated with the development of accounting standards.

Response time. Emerging problems were not solved quickly enough.

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Structure of the FASBStructure of the FASB

Financial Accounting Standards Advisory Council

(approximately 30 members)

Financial Accounting Standards Board

(7 members)

Appoint, fund, and oversee

Advise

Financial Accounting Foundation (16-member board of trustees)

Continued on next slideContinued on next slide

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Structure of the FASBStructure of the FASB

Financial Accounting Standards Board

(7 members)

Task Forces of the Standards Board

(including Emerging Issues Task Force)

Appoint

Consult

Support

Administrative Administrative StaffStaff

Research and Research and Technical StaffTechnical Staff Consult

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Types of Pronouncements Issued by the FASB

Types of Pronouncements Issued by the FASB

• Statements of Financial Accounting Standards

• Interpretations

• Technical Bulletins

• Statements of Financial Accounting Concepts

• Other Pronouncements

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FASB Operating ProceduresFASB Operating Procedures

Identify Topic

Appoint Task Force

Conduct Research

Issue Discussion

Memorandum or Invitation to

Comment

Deliberate on Findings

Issue Exposure

Draft

Continue next slideContinue next slide

Hold Public Hearings

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FASB Operating ProceduresFASB Operating Procedures

Modify Exposure

Drafts

Vote (super-

majority)

Issue Statement

Deliberate on Findings

Issue Exposure

Draft



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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)

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)

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International Accounting Standards Committee (IASC)

Governmental Accounting Standards Board (GASB)

Financial Executives Institution (FEI)Institution of Management Accountants (IMA)Association for Investment Management and

Research (AIMR)

International Accounting Standards Committee (IASC)

Governmental Accounting Standards Board (GASB)

Financial Executives Institution (FEI)Institution of Management Accountants (IMA)Association for Investment Management and

Research (AIMR)

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Participants in the Development of GAAPParticipants in the Development of GAAP

FASB

SEC AICPA

EITF

CASB

GASBIMA

IRSIASC

AAA

AIMR

FEI

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Principles of the AICPA Code of Professional Conduct


ResponsibilitiesResponsibilitiesResponsibilitiesResponsibilities

In carrying out their responsibilities as

professionals, members should exercise sensitive

professional judgment in all their activities.

In carrying out their responsibilities as

professionals, members should exercise sensitive

professional judgment in all their activities.

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The Public InterestThe Public InterestThe Public InterestThe 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.

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.

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IntegrityIntegrityIntegrityIntegrity

To maintain and broaden public confidence,

members should perform all professional

responsibilities with the highest sense of integrity.

To maintain and broaden public confidence,

members should perform all professional

responsibilities with the highest sense of integrity.

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Objectivity and IndependenceObjectivity and IndependenceObjectivity and IndependenceObjectivity 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.

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.

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Due CareDue CareDue CareDue 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.

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.

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Scope and Nature of ServiceScope and Nature of ServiceScope and Nature of ServiceScope and Nature of Service

A member in public practice should observe the Principles of

the CPC in determining the scope and nature of the services

to be provided.

A member in public practice should observe the Principles of

the CPC in determining the scope and nature of the services

to be provided.

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An Ethicist’s Basic Approaches to Moral Reasoning

An Ethicist’s Basic Approaches to Moral Reasoning

The utilitarian model, which evaluations actions based on the greatest good for the greatest number.

The rights model, which embraces actions that protect individual moral rights.

The justice model, which emphasizes a fair distribution of benefits and burdens.

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Creative and Critical ThinkingCreative and Critical Thinking

Recognize Problem

Identify Alternatives

Evaluate Alternatives

Select Solution

Implement Solution

Creative Thinking

Critical Thinking

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Chapter1

1 an electronic presentation by douglas cloud pepperdine university

Documents

financial reportinggenerally

companys financial position

audited financial statements

major financial statements

managerial accountingdecision

accounting literature

capital stock

pronouncements of bodies