1. Summary of Learning Objectives
Identify the major financial statements and other means of financial reporting
Companies most frequently provide (l) the balance sheet, (2) the income statement, (3) the statement of cash flows, and (4) the statement of owners' or stockholders' equity.
financial accounting
The accounting process that culminates in the preparation of financial reports for use by both internal and external parties. (p. 4).
financial statements
The principal means through which a company communicates its financial information. These statements reflect the collection, tabulation, and final summarization of the accounting data. The statements most frequently provided are (1) the balance sheet, (2)
financial reporting
Reporting of financial information other than in formal financial statements. Examples include the president's letter or supplementary schedules in the corporate annual report, prospectuses, reports filed with government agencies, news releases, managemen
2. Summary of Learning Objectives
Explain how accounting assists in the efficient use of scarce resources.
Accounting provides reliable, relevant, and timely information to managers, investors, and creditors to allow resource allocation to the most efficient enterprises. Accounting also provides measurements of efficiency (profitability) and financial soundnes
3. Summary of Learning Objectives
Identify the objective of financial reporting.
he objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity
objective of financial reporting
Goal for financial accounting and reporting, established by the accounting profession, which is to provide information about the reporting entity that is useful to present and potential to equity investors, lenders, and other creditors in decisions about
general-purpose financial statements
Provide financial reporting information to a wide variety of users at the least cost. (p. 5).
entity perspective
The view that companies are distinct and separate from their owners (present shareholders). (p. 6).
decision-usefulness
Approach that requires that financial reporting be useful to investors by helping them assess (1) the company's ability to generate net cash inflows and (2) management's ability to protect and enhance the capital providers' investments. (p. 6).
accrual-basis accounting
Accounting approach, in which a company records events that change its financial statements in the periods in which the events occur, rather than only in the periods in which it receives or pays cash. Thus, a company recognizes revenues when it earns them
4. Summary of Learning Objectives
Explain the need for accounting standards.
The accounting profession has atmpted to develop a set of standards that is generally accepted and universally practiced. Readers of financial statements would have to familiarize themselves with every company's peculiar accounting and reporting practices
generally accepted accounting principles (GAAP)
The common set of accounting standards and procedures, for which either an authoritative accounting rule-making body has established a principle of reporting in a given area, or over time, a given practice has been accepted as appropriate because of its u
5. Summary of Learning Objectives
Identify the major policy-setting bodies and their role in the standard-setting process.
The Securities and Exchange Commission (SEC) is a federal agency that has the broad powers to prescribe, in whatever detail it desires, the accounting standards to be employed by companles that fall within its jurisdiction. The American Institute of Certi
Securities and Exchange Commission (SEC)
Federal agency established to help develop and standardize financial information presented to stockholders. It administers the Securities Exchange Act of 1934 and several other acts. Most companies that issue securities to the public are required to file
American Institute of Certified Public Accountants (AICPA)
The national professional organization of practicing Certified Public Accountants (CPAs), whose various committees and boards have been an important contributor to the development of GAAP. (p. 9).
Committee on Accounting Procedure (CAP)
Committee established by the AICPA in 1939 at the urging of the SEC to deal with accounting problems. The CAP issued 51 Accounting Research Bulletins and was replaced by the Accounting Principles Board in 1959. (p. 9).
Accounting Research Bulletins
Fifty-one bulletins from the Committee on Accounting Procedure (CAP) during the years 1939 to 1959, issued to deal with accounting problems as they arose. Subsequently, the AICPA created the Accounting Principles Board to provide a structured body of acco
Accounting Principles Board (APB)
Private standard-setting organization from 1959 to 1973, whose mission was to develop an overall conceptual framework. Its official pronouncements, called APB Opinions, were to be based mainly on research studies and be supported by reasons and analysis.
APB Opinions
The official pronouncements of the Accounting Principles Board, intended to be based mainly on research studies and be supported by reasons and analysis. Between its inception in 1959 and its dissolution in 1973, the APB issued 31 opinions. (p. 9).
Wheat Committee
The Study Group on Establishment of Accounting Principles, chaired by Francis Wheat, that examined the organization and operation of the Accounting Principles Board and determined the changes needed to attain better productivity and more timely correction
Financial Accounting Standards Board (FASB)
The major organization of the standard-setting structure for financial accounting. Its mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public. The FASB consists of five members, app
Standards Statement
Statements issued by the FASB that are considered GAAP and thereby binding in accounting practice. These statements go through a rigorous due process system (discussion memo, public hearing, exposure draft). The passage of a new Standards Statement requir
interpretations
Statements issued by the FASB that modify or extend existing standards. Interpretations have the same authority as standards for purposes of determining GAAP. (p. 12).
staff positions
Issued by the FASB, these provide interpretive guidance and also minor amendments to standards and interpretations. (p. 12).
Statement of Financial Accounting Concepts
A series of statements by the FASB that set forth fundamental objectives and concepts that the Board uses in developing future standards of financial accounting and reporting. Unlike a Standards Statement, these statements of concepts do not establish GAA
Emerging Issues Task Force (EITF)
Group created in 1984 by the FASB to reach a consensus on how to account for new and unusual financial transactions that might create differing financial reporting practices. The FASB reviews and approves all EITF consensuses, and the SEC views consensus
Auditing Standards Board
The arm of the AICPA that had been responsible for developing auditing standards. The Public Company Accounting Oversight Board, established by the Sarbanes-Oxley Act, now oversees the development of auditing standards. (p. 13).
6. Summary of Learning Objectives
Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP.
Generally accepted accounting principles GAAP) are those principles that have substantial authoritative support, such as FASB Sandards, interpretations, and staff positions, APB Opinions and interpretations, AICPA Accounting Research Bulletins, and other
Financial Accounting Standards Board Codification (Codification)
Developed by the FASB, it provides in one place all the authoritative literature related to a particular topic. (p. 14).
Accounting Standards Update
The process by which a new FASB standard, staff position, etc., is included in the FASB Codification. The update includes the background and basis for conclusions for the new pronouncement in a common format, regardless of the form in which such guidance
Financial Accounting Standards Board Codification Research System (CRS)
An online, real-time database that provides easy access to the Codification, through a topically organized structure, subdivided into topics, subtopics, sections, and paragraphs, using a numerical index system. (p. 14).
7. Summary of Learning Objectives
lescribe the impact of user groups on the rule-making process.
er groups lay want particular economic events accounted for or reported in a particular way, and ley fight hard to get what they want. They especially target the FASB to influence changes n existing GAAP and in the development of new rules. Because of the
expectations gap
The difference between what the public thinks accountants should do and what accountants think they can do. (p. 19).
Sarbanes-Oxley Act of 2002
Legislation, enacted by the U.S. Congress, intended to combat accounting fraud, curb poor reporting practices, and make sweeping changes to the institutional structure of the accounting profession. (p. 18).
Public Company Accounting Oversight Board (PCAOB)
Organization established by the Sarbanes-Oxley Act of 2002 that has oversight and enforcement authority for accounting practices and that establishes auditing, quality control, and independence standards and rules. (p. 18).
8. Summary of Learning Objectives
Describe some of the challenges facing financial reporting.
Financial reports sec fail to provide (l) some key performance measures widely used by management, (2) forward-looking information needed by investors and creditors, (3) sufficient information on a company's soft assets (intangibles), and (4) real-time fi
International Financial Reporting Standards (IFRS)
All the accounting rules accepted for international use, issued by the International Accounting Standards Board (p. 20).
International Accounting Standards Board (IASB)
The organization, based in London, that sets accounting standards accepted for international use. Although many of these international standards are similar to U.S. GAAP, the FASB and the IASB are currently working on a convergence project to result in on
9. Summary of Learning Objectives
Understand issues related to ethics and financial accounting.
Financial accountants are called on for moral discernment and ethical decision-making. Decisions ;ometimes are difficult because a public consensus has not emerged to formulate a compehensive ethical system that provides guidelines in making ethical judgm