Environment and Theoretical

Structure of Financial Accounting

Chapter 1

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

Copyright2013byTheMcGrawHillCompanies,Inc.Allrightsreserved.

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Financial Accounting Environment

Providers of
Financial
Information

Profit-oriented
companies
Not-for-profit
entities
Households

External
User Groups

Relevant

Financial
Information

Investors
Creditors
Employees
Labor unions
Customers
Suppliers
Government
agencies
Financial
intermediaries

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Financial Accounting Environment

Relevant financial information is provided primarily through
financial statements and related disclosure notes. The
following financial statements are the most frequently
provided.
1. Balance Sheet
2. Income Statement
3. Statement of Cash Flows
4. 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.

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Cash versus Accrual Accounting

Cash Basis Accounting
Revenue is recognized when cash is received.
Expenses are recognized when cash is paid.
O
R
O
OR
R
O
R

Accrual Accounting
Revenue is recognized when earned.
Expenses are recognized when incurred.

The Development of Financial

Accounting and Reporting Standards

Concepts,
principles, and
procedures
developed to meet the
needs of external
users (GAAP).

1-5

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Historical Perspective and Standards

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Current U. S. Standard Setting

Financial
Accounting
Standards Board
Supported by the Financial Accounting

Foundation
Seven full-time, independent voting
members
Members not required to be CPAs

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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 worlds capital
markets and other users make
economic decisions.

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

1-9

A Move Away from

Rules-Based Standards?
Rules-based accounting standards
vs.
Objectives-oriented approach
Objectives-oriented
(principles-based)
approach stresses
professional judgment

110

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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)

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The Conceptual Framework

Objective
To provide financial information
that is useful to capital providers.

Qualitative
Characteristics

Elements

Constraints

Financial
Statements

Recognition and
Measurement
Concepts

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Qualitative Characteristics of
Accounting Information
Decision usefulness

Relevance

Faithful representation

Predictive Confirmatory
Materiality
value
value

Comparability
(Consistency)

Verifiability

Completeness Neutrality

Timeliness

Free from
error

Understandability

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Elements of Financial Statements

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Elements of Financial Statements

Recognition, Measurement and

Disclosure Concepts
Recognition
Process of admitting
information into the basic
financial statements

Measurement
Process of associating
numerical amounts with the
elements.

Disclosure
Process of including
additional supplemental
information.

Criteria:
1. Definition
2. Measurability
3. Relevance
4. Reliability
Measurement
Attributes:
1. Historical cost
2. Net realizable
value
3. Current cost
4. Present value of
future cash flows
Examples:
5.
value
1. Fair
Parenthetical
amounts
2. Notes to FS
3. Supplemental FS

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Revenue Recognition: Realization

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

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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
1.Based on exact cause-and-effect
relationships.
2.By associating an expense with the revenues
recognized in a specific time period.
3.By a systematic and rational allocation to
specific time periods.
4.In the period incurred, without regard to
related revenues.

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End of Chapter 1