What is Financial Accounting?

Language of Business:
(1) the identification, measurement, and communication of financial information about
(2) economic entities to (3) interested parties.

Chapter 1-1

Accounting and Capital Allocation

Resources are limited. Efficient use of resources often determines whether a business thrives.

Financial Reporting
Information to help users with capital allocation decisions.

Users
Primarily Investors & creditors (present and potential)

Capital Allocation
The process of determining how and at what cost money is allocated among competing interests.

Chapter 1-2

Overall Objective
Provide decision useful information

1. ability to generate net cash inflows

a) Assess -Solvency, Liquidity, Profitability, & Risk

2. managements ability to protect and

enhance the capital providers investments
a) Assess the stewardship of Managers - ROA b) Control of Management-Determination of compensation awards

Chapter 1-3

GAAP information limits

Economic Entity Financial Information Financial Statements
Balance Sheet Income Statement Statement of Cash Flows Statement of Owners or Stockholders Equity Note Disclosures

Additional Information
Presidents letter Prospectuses, SEC Reporting News releases Forecasts Environmental Reports Etc.

Accounting?
Identifies and

Measures
and Communicates

GAAP
Chapter 1-4

Not GAAP

Parties Involved in Standard Setting

Three organizations:

Securities and Exchange Commission (SEC) American Institute of Certified Public Accountants (AICPA) Financial Accounting Standards Board (FASB)

Chapter 1-5

1. Securities and Exchange Commission

Established by federal government

Accounting and reporting for public companies

Securities Act of 1933

Securities Act of 1934

Encouraged private standard-setting body SEC requires public companies to adhere to GAAP SEC Oversight Enforcement Authority
Chapter 1-6

2. American Institute of CPAs

National professional organization Established the following:
Committee on Accounting Procedures

Accounting Principles Board

1939 to 1959 Issued 51 Accounting Research Bulletins (ARBs) Problem-by-problem approach failed

1959 to 1973 Issued 31 Accounting Principle Board Opinions (APBOs)

Chapter 1-7

http://www.aicpa.org/

2. American Institute of CPAs

AICPA and Accounting Standards Executive Committee AcSEC (established by AICPA) no longer issues authoritative accounting and audit guidance for public companies. Government oversight preferred following Sarbanes Oxley Act PCAOB oversees the development of auditing standards. AICPA continues to develop and grade the CPA examination and issue industry guides.

Chapter 1-8

3. Financial Accounting Standards Board

Wheat Committees recommendations resulted in the creation of the Financial Accounting Standards Board in 1973. Financial Accounting Foundation Financial Accounting Standards Board
Financial Accounting Standards Advisory Council
Chapter 1-9

Selects members of the FASB Funds their activities Exercises general oversight. Mission to establish and improve standards of financial accounting and reporting.

Consult on major policy issues.

3. Financial Accounting Standards Board

Missions is to establish and improve standards of financial accounting and reporting. Differences between FASB and APB include:
Smaller Membership Full-time, Remunerated Membership Greater Autonomy Increased Independence Broader Representation
http://www.fasb.org/

Chapter 1-10

Old House of GAAP

AICPA Accounting Interpretations FASB Implementation Guides Category D (Least Authoritative) FASB Emerging Issues Task Force AICPA AcSEC Practice Bulletins Recognized Industry Practices

Category C FASB Technical Bulletins AICPA Industry Audit and Accounting Guides Category B FASB Statements, Interpretations, and Staff Positions
Chapter 1-11

AICPA Statements of Position

APB Opinions

CAP Accounting Research Bulletins

LO 7

Category A (Most Authoritative)

New Codification for GAAP

Codification provides, in one place, all authoritative literature by topic

Chapter 1-12

Generally Accepted Accounting Principles

FASB Codification

Goal in developing the Codification is to provide in one place all the authoritative literature related to a particular topic.

Creates one level of GAAP, which is considered authoritative.

All other accounting literature is considered nonauthoritative. FASB has developed the Financial Accounting Standards Board Codification Research System (CRS). CRS is an online real-time database that provides easy access to the Codification.

Chapter 1-13

Generally Accepted Accounting Principles

Illustration 1-5 FASB Codification Framework

Chapter 1-14

Diversity in Practice
iGAAP includes the standards, referred to as International Financial Reporting Standards (IFRS), developed by the IASB. Differences between U.S. GAAP and iGAAP exist because of different: user needs, political pressures, and perhaps time Norwalk Agreement convergence of standards iGAAP tends to be simpler and less stringent than U.S. GAAP.

SEC recently eliminated the need for foreign companies that trade shares in U.S. markets to reconcile IFRS accounting with U.S. GAAP.

Chapter 1-15