Intermediate Accounting Part I Chapt 1

Objective (or purpose) of financial reporting

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

4 Different Types of Financial Statments

1. Balance Sheet 2. Income Statement 3. Statement of Cash Flows 4. Statement of Owners'/ Stockholders' Equity Note disclosures are also an integral part of each financial statement

What are the sources of pressure that change and influence the development of GAAP?

1. Business Entities 2. CPA's & Accounting Firms 3. AICPA (AcSEC) 4. Academicians 5. Investing Public 6. Financial Community (analysts, bankers, etc) 7. Preparers (Financial Executives Institute) 8. Government (SEC, IRL, other agencies) 9. Industry Associations

GAAP is comprised of: a. FASB standards, interpretations, and concepts statements. b. FASB financial standards. d. any accounting guidance included in the FASB Codification.

d. any accounting guidance included in the FASB Codification

Statements of financial accounting concepts

do not establish generally accepted accounting principles. Rather, these statements set forth fundamental objectives and concepts that the FASB intends to use as a basis for developing future standards. These statements serve as guidelines in solving existing and emerging accounting problems in a consistent, sound manner.

Wheat Committee

in 1971 accounting profession's leaders, anxious to avoid governmental rule-making, appointed a Study Group on Establishment of Accounting Principles

decision-usefulness approach

investors are interested in assessing 1. the company's ability to generate net cash inflows and 2. management's ability to protect and enhance the capital providers' investments

proprietary perspective

is a perspective that financial reporting should be focused only on the needs of share holders is considered not appropriate

accrual-basis accounting

it ensures that a company records events that change its financial statements in the periods in which the events occur, rather than only in periods in which is receives or pays cash

Generally Accepted Accounting Principles (GAAP)

means either that an authoritative accounting rule-making body has established a principle of reporting in a given area or that over time a given practice has been accepted as appropriate because of its universal application

Interpretations (of the Financial Accounting Standards Board)

modify or extend existing standards represent extensions or modifications of existing standards

Opinions

official pronouncements of the APB

American Institute of Certified Public Accountants (AICPA)

prepares questions for CPA exam

What is Rule 203 of the Code of Professional Conduct?

prohibits a member of the AICPA from expressing an opinion that financial statements conform with GAAP if those statements contain a material departure from an accounting principle promulgated by the FASB, or its predecessors, the APB and the CAP, unless the member can demonstrate that because of unusual circumstances the financial statements would otherwise have been misleading. Failure to follow this rule can lead to a loss of a CPA's license to practice. This rule is extremely important because it requires auditors to follow FASB standards.

An effective process of capital allocation is critical to a healthy economy, which

promotes productivity, encourages innovation, provides an efficient and liquid market for buying and selling securities

staff positions

provides additional guidance on implementing or applying FASB Standards or Interpretations

Financial Statements

the principal means through which a company communicates its financial information to those outside it. These statements provide a company's history quantified in money terms.

Financial Accounting

the process that culminates in the preparation of financial reports ion the enterprise for use by both internal and external parties. User of these financial reports include investors, creditors, managers, unions, and government agencies.

What dangers exist if politics play too much of a role in the development of GAAP?

the rules will be subject to manipulation for the purpose of furthering whatever policy prevails at the moment. No matter how well intentioned the rule maker may be, if information is designed to indicate that investing in a particular enterprise involves less risk than it actually does, or is designed to encourage investment in a particular segment of the economy, financial reporting will suffer an irreplaceable loss of credibility.

What is the purpose of information presented in notes to the financial statements?

to provide disclosure required by generally accepted accounting principles

If you were given complete authority in the matter, how would you propose that GAAP should be developed and enforced?

(1) The method must be efficient, responsive, and expeditious. (2) The method must be free of bias and be above or insulated from pressure groups. (3) The method must command widespread support if it does not have legislative authority. (4) The method must produce sound yet practical accounting principles or standards.

Statements of financial Accounting Concepts

-the series sets forth fundamental objective and concepts that the Board uses in developing future standards of financial accounting and reporting -primary document of the FASB that establishes GAPP

What is the value of a common set of standards in financial accounting and reporting?

A common set of standards applied by all businesses and entities provides financial statements which are reasonably comparable. Without a common set of standards, each enterprise could, and would, develop its own theory structure and set of practices, resulting in non-comparability among enterprises.

What is the benefit of a single set of high-quality accounting standards

A single set of high quality accounting standards ensures adequate comparability. Investors are able to make better investment decisions if they receive financial information from a U.S. company that is comparable to an international competitor.

What was the Committee on Accounting Procedure, and what were its accomplishments and failings?

A special committee of the American Institute of CPAs that, between the years of 1939 and 1959, issued 51 Accounting Research Bulletins dealing with a wide variety of timely accounting problems. These bulletins provided solutions to immediate problems and narrowed the range of alternative practices. But, the Committee's problem-by-problem approach failed to provide a well-defined and well-structured body of accounting theory that was so badly needed. The Committee was replaced in 1959 by the Accounting Principles Board.

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 ABP issued 31 Opinions

APB Opinions

Opinions of the Accounting Principles Board

APB Opinions were issued by the Accounting Principles Board during the years 1959 through 1973 and, unless superseded by FASB Statements, are recognized as accepted practice and constitute the requirements to be followed by all business enterprises.

How are financial accountants challenged in their work to make ethical decisions? Is technical mastery of GAAP not sufficient to the practice of financial accounting?

Accountants must perceive the moral dimensions of some situations because GAAP does not define or cover all specific features that are to be reported in financial statements. In these instances accountants must choose among alternatives. These accounting choices influence whether particular stakeholders may be harmed or benefited. Moral decision-making involves awareness of potential harm or benefit and taking responsibility for the choices.

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 accounting principles.

Accounting Research Bulletin

Accounting Research Bulletins

Accounting Research Bulletins were pronouncements on accounting practice issued by the Committee on Accounting Procedure between 1939 and 1959; since 1964 they have been recognized as accepted accounting practice unless superseded in part or in whole by an opinion of the APB or an FASB standard.

The products of standard-setting (e.g., FASB standards and EITF consensuses) included FASB Codification. The Updates included the background and basis for conclusions for the new pronouncement in the common format, regardless of the form in which such guidance may have been issued. Updates are also issued for amendments to the SEC content in the Codification

Accounting Standards Updates

Which of the following generally provides a better indication of an enterprise's present and continuing ability to generate favorable cash flows? A. Cash basis accounting. B. Accrual basis accounting. C. Managerial basis accounting. D. Financial basis accounting.

Accrual basis accounting: Accrual basis accounting better indicates present and continuing favorable cash flows for a company.

An effective capital allocation process -promotes productivity -encourages innovation -provides an efficient market for buying and selling securities -All of these choices are correct

All the above An effective capital allocation process does all of these items. It promotes productivity, encourages innovation and provides an efficient market for buying and selling securities.`

How does accounting help the capital allocation process?

An effective process of capital allocation is critical to a healthy economy which - promotes productivity - encourages innovation - provides an efficient & liquid mark for buying & Selling securities

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

Auditing Standards Boards

One writer recently noted that 99.4 % of all companies prepare statements that are in accordance with GAAP. Why then is there such a concern about fraudulent financial reporting?

Concern exists about fraudulent financial reporting because it can undermine the entire financial reporting process. Failure to provide information to users that is accurate can lead to inappropriate allocations of resources in our economy. In addition, failure to detect massive fraud can lead to additional governmental oversight of the accounting profession.

Some individuals have indicated that the FASB must be cognizant of the economic consequences of its pronouncements. What is meant by "economic consequences"?

Economic consequences means the impact of accounting reports on the wealth positions of issuers and users of financial information and the decision-making behavior resulting from that impact. In other words, accounting information impacts various users in many different ways which leads to wealth transfers among these various groups.

The view that companies are distinct and separate from their owners (present shareholders).

Entity Perspective

The difference between what the public thinks accountants should do and what accountants think they can do

Expectations Gap

General-purpose financial statements are prepared primarily for:

External Users

Issued by the FASB, these provide interpretive guidance and also minor amendments to standards and interpretations

FASB Staff Positions

Rank from the most authoritative to the least authoritative, the following three items: FASB Technical Bulletins, AICPA Practice Bulletins, and FASB Standards.

FASB Standards, FASB Technical Bulletins, AICPA Practice Bulletins.

Statements of the Financial Accounting Standards Board

FASB Statements are pronouncements of the Financial Accounting Standards Board and currently represent the accounting profession's authoritative pronouncements on financial accounting and reporting practices.

The accounting process that culminates in the preparation of financial reports for use by both internal and external parties

Financial Accounting

Reporting of financial information other than in formal financial statements.

Financial Reporting

The principal means through which a company communicates its financial information. These statements reflect the collection, tabulation, and final data. The statements most frequently provided are 1. balance sheet. 2. Income Statement. 3. Statement of Cash Flows. 4. Statement of Owners' or Stockholder's Equity. Note disclosures are an integral part of a company's financial statements

Financial Statements

Differentiate broadly between financial accounting and managerial accounting.

Financial accounting measures, classifies, and summarizes in report form those activities and that information which relate to the enterprise as a whole for use by parties both internal and external to a business enterprise. Managerial accounting also measures, classifies, and summarizes in report form enterprise activities, but the communication is for the use of internal, managerial parties, and relates more to subsystems of the entity. Managerial accounting is management decision oriented and directed more toward product line, division, and profit center reporting.

Differentiate between "financial statements" and "financial reporting."

Financial statements generally refer to the four basic financial statements: balance sheet, income statement, statement of cash flows, and statement of changes in owners' or stockholders' equity. Financial reporting is a broader concept; it includes the basic financial statements and any other means of communicating financial and economic data to interested external parties. Examples of financial reporting other than financial statements are annual reports, prospectuses, reports filed with the government, news releases, management forecasts or plans, and descriptions of an enterprise's social or environmental impact.

What is the likely limitation of "general-purpose financial statements"?

General-purpose financial statements are not likely to satisfy the specific needs of all interested parties. Since the needs of interested parties such as creditors, managers, owners, governmental agencies, and financial analysts vary considerably, it is unlikely that one set of financial statements is equally appropriate for these varied uses.

GAAP stands for

Generall

What are the primary advantages of having a Codification of generally accepted accounting principles?

Hopefully, the codification will help users to better understand what GAAP is. If this occurs, companies will be more likely to comply with GAAP and the time to research accounting issues will be substantially reduced. In addition, through the electronic web-based format, GAAP can be easily updated which will help users stay current.

The major key players on the international side are the:

IASB & IOSCO

In what ways was it felt that the pronouncements issued by the Financial Accounting Standards Board would carry greater weight than the opinions issued by the Accounting Principles Board?

It was believed that FASB Statements would carry greater weight than APB Opinions because of significant differences between the FASB and the APB, namely: (1) The FASB has a smaller membership, (2) full-time compensated members; (3) the FASB has greater autonomy, (4) increased independence; (5) the FASB has broader representation than the APB.

What organizations are the two key international plays int he development of international accounting standards? Explain their role.

International Organization of Securities Commissions (IOSCO) and International Accounting Standards Board (IASB). -IOSCO does not set accounting standards, but ensures that the global markets can operate in an efficient and effective manner -IASB's mission is to develop a single set of high quality, understandable and international financial reporting standards (IFRSs) for general purpose financial statements.

IFRS is comprises of

International financial reporting standards International Accounting Standards International Accounting Interpretations

Statements issued by the FASB that modify or extend existing standards

Interpretations

Meaning of decision-usefulness in the context of financial reporting.

Investors are interested in assessing the company's 1. Ability to generate net cash inflows and 2. Management's ability to protect & enhance the capital provider's investments.

Authoritative status of The Conceptual Framework for Financial Reporting

It is used when there is no standard or interpretation related to the reporting issues under consideration

The objective of financial reporting places most emphasis on:

Reporting to capital providers

What are some of the major challenges facing the accounting profession?

Nonfinancial measurement—how to report significant key performance measurements such as customer satisfaction indexes, backlog information and reject rates on goods purchased. Forward-looking information—how to report more future oriented information. Soft assets—how to report on intangible assets, such as market know-how, market dominance, and well-trained employees. Timeliness—how to report more real-time information.

Accounting standard-setters use the following process in establishing accounting standards:

Research, discussion paper, exposure draft, standard

explain or define "generally accepted accounting principles or standards," what essential characteristics would you include in your explanation?

Principles that have substantial authoritative support Major sources of GAAP - FASB Standards, Interpretation & Staff Positions - APB Opinions - AICPA Accounting Research Bulletins

What is the objective of financial reporting?

Provide financial information about he reporting entity that is useful to - present & potential equity investors - lenders - other creditors in making decisions in their capacity as capital providers.

IASB Structure

Quite similar to the FASB's, except the IASB has a larger number of board members.

From the four statements that follow, which are true? 1. Technical competence is not enough when encountering ethical decisions. 2. The pressures "to bend the rules," "to play the game," "to just ignore it" can be considerable. 3. Time, job, client, personal, and peer pressures do not complicate the process of ethical sensitivity and selection among alternatives. 4. The decision may be easier because there is no comprehensive ethical system to provide guidelines.

Statements 1 and 2 are true; Statements 3 and 4 are false because pressures do complicate ethics and the decision is more difficult because there is no comprehensive ethical system to provide guidelines.

Which of the following publications is not considered a GAAP document? Statement of Financial Accounting Concepts FASB Standards AICPA Research Bulletins APB Opinions

Statements of Financial Accounting Concepts

Explain the role of the Emerging Issues Task Force in establishing generally accepted accounting principles.

The Emerging Issues Task Force often arrives at consensus conclusions on certain financial report ing issues. These consensus conclusions are then looked upon as GAAP by practitioners because the SEC has indicated that it will view consensus solutions as preferred accounting and will require persuasive justification for departing from them. Thus, at least for public companies which are subject to SEC oversight, consensus solutions developed by the Emerging Issues Task Force are followed unless subsequently overturned by the FASB. It should be noted that the FASB took greater direct ownership of GAAP established by the EITF by requiring that consensus positions be ratified by the FASB.

In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards?

The SEC has the power to prescribe, in whatever detail it desires, the accounting practices and principles to be employed by the companies that fall within its jurisdiction. Because the SEC receives audited financial statements from nearly all companies that issue securities to the public or are listed on the stock exchanges, it is greatly interested in the content, accuracy, and credibility of the statements. For many years the SEC relied on the AICPA to regulate the profession and develop and enforce accounting principles. Lately, the SEC has assumed a more active role in the development of accounting standards, especially in the area of disclosure requirements. In December 1973, in ASR No. 150, the SEC said the FASB's statements would be presumed to carry substantial authoritative support and anything contrary to them to lack such support. It thereby supports the development of accounting principles in the private sector.

What is the profession doing to try to close the "expectations gap"?

The accounting profession recognizes it must play an important role in narrowing this gap. To meet the needs of society, the profession is continuing its efforts in developing accounting standards, such as numerous pronouncements issued by the FASB, to serve as guidelines for recording and processing business transactions in the changing economic environment.

What purposes did the AICPA create the Accounting Principles Board?

The creation of the Accounting Principles Board was intended to advance the written expression of accounting principles, to determine appropriate practices, and to narrow the differences and inconsistencies in practice. To achieve its basic objectives, its mission was to develop an overall conceptual framework to assist in the resolution of problems as they became evident and to do substantive research on individual issues before pronouncements were issued.

Briefly describe the FASB/IASB convergence process and the principles that guide their convergence efforts.

The international standards must be of high quality and sufficiently comprehensive. To achieve this goal, the IASB and the FASB have set up an extensive work plan to achieve the objective of developing one set of world-class international standards. This work plan actually started in 2002, when an agreement was forged between the two Boards, where each acknowledged their commitment to the development of high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting (referred to as the Norwalk Agreement). At that meeting, the FASB and the IASB pledged to use their best efforts to (1) make their existing financial reporting standards fully compatible as soon as is practicable, and (2) coordinate their future work programs to ensure that once achieved, compatibility is maintained. This document was reinforced in 2006 when the parties issued a memorandum of understanding (MOU) which highlighted three principles: ● Convergence of accounting standards can best be achieved through the development of high-quality common standards over time. ● Trying to eliminate differences between two standards that are in need of significant improvement is not the best use of the FASB's and the IASB's resources—instead, a new common standard should be developed that improves the financial information reported to investors. ● Serving the needs of investors means that the Boards should seek convergence by replacing standards in need of improvement with jointly developed new standards. Subsequently, in 2009 the Boards agreed on a process to complete a number of major projects by 2011, including monthly joint meetings. As part of achieving this goal, it is critical that the process by which the standards are established be independent. And, it is necessary that the standards are maintained, and emerging accounting issues are dealt with efficiently. The SEC directed its staff to develop and execute a plan ("Work Plan") to enhance both the understanding of the SEC's purpose and public transparency in this area. The SEC Work Plan addresses such areas as independence of standard-setting, investor understanding of IFRS, and auditor readiness. Based on the staff report issued in 2012, it does not appear that the SEC is ready to adopt IFRS any time soon. However, the SEC has encouraged the FASB and IASB to continue their convergence efforts.

The first step taken in the establishment of a typical FASB statement is

Topics are identified and place on the board's agenda

Financial reporting

The method of sharing financial information other than through formal financial statements. -president's letter -supplementary schedules in the corporate annual report - prospectuses, -reports filed with government agencies, -news releases -management's forecasts -social or environmental impact statements

Managerial Accounting

The process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, control and evaluate a company's operations

What might explain the fact that different accounting standard-setters have developed accounting standards that are sometimes quite different in nature?

The standards issued by these organizations are sometimes principles-based, rules-based, tax-oriented, or business-based. In other words, they often differ in concept and objective.

How are FASB preliminary views and FASB exposure drafts related to FASB "statements"?

The technical staff of the FASB conducts research on an identified accounting topic and prepares a "preliminary views" that is released by the Board for public reaction. The Board analyzes and evaluates the public response to the preliminary views, deliberates on the issues, and issues an "exposure draft" for public comment. The preliminary views merely present all facts and alternatives related to a specific topic or problem, whereas the exposure draft is a tentative "statement." After studying the public's reaction to the exposure draft, the Board may reevaluate its position, revise the draft, and vote on the issuance of a final statement.

The role of the Securities and Exchange Commission (SEC) in the formulation of accounting standards can be best described as

Varied - the SEC relies on FASB to develop standards but gives advice and recommendations to the private sector as needed.

What is the "expectations gap"?

What is the "expectations gap"? the difference between what people think accountants should be doing and what accountants think they can do.

The Study Group on Establishment of Accounting Principles, chaired by Francis Wheat, that examined the organization and operation of the Accoutning Principles Board and determined the changes needed to attain better productivity and more timely correction of accoutning abuses. The Study Group submitted its recommendations to the AICPA Council in the spring of 1972, which adopted the recommendations in total and implemented them by early 1973

Wheat Committee

Codification

a compilation of all GAAP in one place. Its purpose is to integrate and synthesize existing GAAP and not to create new GAAP. It creates one level of GAAP which is considered authoritative.

Which of the following would result if there was not set of generally accepted and universally practiced accounting standards? a. It would be almost impossible to prepare statements that could be compared. b. Each company would have to develop its own standards. c. Readers of financial statements would have to familiarize themselves with every company's peculiar accounting and reporting practices. d. All of these answer choices are correct.

d. All of these

Which of the following is not a significant difference between the FASB (Financial Accounting Standards Board) and its predecessor, the APB? a. Increased independence. b. Broader representation. c. Greater autonomy. d. Larger membership.

d. Larger Membership Board membership decreased from 18 to 7 members

Economic consequences of accounting standard-setting means:

accounting standards can have detrimental impacts on the wealth levels of the providers of financial information.

Codification Research System

an-on-line real time data base which provides easy access to the Codification. The Codification and the related CRS provide a topically organized structure which is subdivided into topic, subtopics, sections, and paragraphs.

All of the following are true regarding the FASB Codification except: a. the goal of the Codification was to provide one place where all authoritative literature about a particular topic could be found. b. the purpose of the Codification is to create new GAAP. c. the Codification was created to simplify user access. d. the Codification changes the way GAAP is documented, presented, and updated.

b. the purpose of the Codification is to create new GAAP

The mission of the International Accounting Standards Board (IASB) is to a. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations. b. develop a uniform currency in which the financial transactions of companies throughout the world would be measured. c. develop a single set of high-quality and understandable IFRS for general-purpose financial statements. d. arbitrate accounting disputes between auditors and international companies.

c. Develop a single set of high-quality and understandable IFRS for general-purpose financial statements

entity perspective

companies are viewed as separate and distinct from their owners (present shareholders) using this perspective

Emerging Issues Task Force (EITF)

comprised of representatives from CPA firms and financial statement preparers provides guidance on how to account for new and unusual financial transactions that have the potential for creating diversity in financial reporting practices

Statements of financial accounting standards

constitute generally accepted accounting principles and dictate acceptable financial accounting and reporting practices as promulgated by the FASB. The first statement was issued by the FASB in 1973.

The chairman of the FASB at one time noted that "the flow of standards can only be slowed if 1) producers focus less on quarterly earnings per share and tax benefits and more on quality products, and 2) accountants and lawyers rely less on rules and law and more on professional judgment and conduct." Explain his comment.

too much attention is put on the bottom line and not enough on the development of quality products. Managers should be less concerned with short-term results and be more concerned with the long-term results. In addition, short-term tax benefits often lead to long-term problems. Accountants are overly concerned with following a set of rules, so that if litigation ensues, they will be able to argue that they followed the rules exactly. The problem with this approach is that accountants want more and more rules with less reliance on professional judgment. Less professional judgment leads to inappropriate use of accounting procedures in difficult situations. In the accountants' defense, recent legal decisions have imposed vast new liability on accountants. The concept of accountant's liability that has emerged in these cases is broad and expansive; the number of classes of people to whom the accountant is held responsible are almost limitless.

What is the purpose of FASB staff positions?

used to provide interpretive guidance and to make minor amendments to existing standards. The due process used to issue a FSP is the same used to issue a new standard.

The Sarbanes-Oxley Act was enacted to combat fraud and curb poor reporting practices. What are some of the key provisions of this legislation?

● Establishes an oversight board for accounting practices. The Public Company Accounting Over-sight Board (PCAOB) has oversight and enforcement authority and establishes auditing, quality control, and independence standards and rules. ● Implements stronger independence rules for auditors. Audit partners, for example, are required to rotate every five years and auditors are prohibited from offering certain types of consulting services to corporate clients. ● Requires CEOs and CFOs to personally certify that financial statements and disclosures are accurate and complete and requires CEOs and CFOs to forfeit bonuses and profits when there is an accounting restatement. ● Requires audit committees to be comprised of independent members and members with financial expertise. ● Requires codes of ethics for senior financial officers. ● Section 404 of the Sarbanes-Oxley Act requires public companies to attest to the effectiveness of their internal controls over financial reporting.