ACTG 3110

Chapter 1 - Financial Accounting and Accounting Standards

Overview

• What is accounting?• Financial versus Managerial accounting• Importance of financial accounting

– Who provides it– Who uses it

• Financial Statements– Balance Sheet– Income Statement– Statement of Cash Flows – Statement of Owner’s Equity

Challenges Facing Financial Accounting

• Nonfinancial Measurements

• Forward-looking Information

• Soft Assets

• Timeliness

Overview

• Economic Environment and Financial Reporting– Capital markets

– Corporate form of business

– Secondary versus primary market

– Cash versus accrual accounting

– Need for GAAP

• Generally Accepted Accounting Principles (GAAP)

Parties Involved in Standard Setting

• Securities and Exchange Commission (SEC)– 1933 and 1934 Acts

– Oversight role

– Enforcement

• American Institute of CPAs (AICPA)– Committee of Accounting Procedure (CAP)

• 1938 - 1959

• Formed by AICPA

• Issued 51 Accounting Research Bulletins

Parties Involved in Standard Setting

• AICPA– Accounting Principles Board (APB)

• 1959-1973

• Formed by AICPA

• Issued 31 APB Opinions & 4 statements

• Financial Accounting Standards Board (FASB)– 1973 – Present

– Established Due Process

Parties Involved in Standard Setting

• Accounting Standards Executive Committee (AcSEC)– Committee of the AICPA to respond to FASB

• Emerging Issues Task Force (EITF)– Set up by the FASB – Deals with immediate problems

FASB

• Supported by the Financial Accounting Foundation

• 7 voting members are full time employees

• Members must not retain investments in companies

• Includes CPAs, Business people, and Academicians

• More influential than CAP or APB

House of GAAP

• Most Authoritative– CAP’s Accounting Research Bulletins (ARBs) – APB Opinions – FASB’s Statements of Financial Accounting

Concepts (SFAC)– FASB’s Statements of Financial Accounting

Standards (SFAS)

House of GAAP

• Second most authoritative:– FASB Technical Bulletins– AICPA Statements of Positions (SOP)– AICPA Industry Audit and Accounting Guides

• Third most authoritative:– EITF Statements– AICPA AcSEC Practice Bulletins

House of GAAP

• Least authoritative– AICPA Accounting Interpretations– FASB Implementation Guides– Widely recognized and prevalent industry

practices

• HOWEVER, SEC is overall ruler on GAAP; may override private sector FASB

Enforcement of Standards

• SEC

• AICPA code of Ethics

• State Boards of Accountancy

• Courts

• Bankers

Issues in Financial Reporting

• Standard Setting in a Political Environment• Expectations Gap

– Sarbanes-Oxley Act of 2002 (SOX)

– Public Oversight Board of Accountancy (PCBOA)

• International Accounting Standards Board (IASB)• Rules-based versus Principles-based approaches to

GAAP

Ethics in Accounting

• AICPA Code of Ethics

• IMA Code of Ethics

• IIA Code of Ethics

• Company’s Codes of Ethics

• Basic morals