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An electronic presentation by Douglas Cloud Pepperdine University

An electronic presentation by Douglas Cloud Pepperdine University. Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada. C. 1. hapter. The Environment of Financial Reporting. Objectives.

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An electronic presentation by Douglas Cloud Pepperdine University

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  1. An electronic presentation by Douglas Cloud Pepperdine University

  2. Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

  3. C 1 hapter The Environment of Financial Reporting

  4. Objectives • Understand capital markets and decision making. • Know what is included in financial reporting. • Explain generally accepted accounting principles (GAAP) and the sources of GAAP. • Identify the types of pronouncements issued by the FASB. and Exchange Commission (SEC) and the FASB.

  5. Objectives • Understand how the Financial Accounting Standards Board (FASB) operates. • Describe the relationship between the Securities and Exchange Commission (SEC) and the FASB. • Use ethical models for decision making about ethical dilemmas. • Understand creative thinking.

  6. Companies need large amounts of capital for operations.

  7. Companies may obtain capital by issuing capital stock... Stock Exchange

  8. ... or by borrowing from lenders. Bank

  9. Corporations Sell stocks and bonds Borrow money Investors Financial Institutions Buy and sell stocks and bonds Buy and sell stocks and bonds Buy and sell stocks and bonds Investors Investors Capital Markets Primary Market (e.g., individuals, banks) Secondary Market (e.g., New York Stock Exchange)

  10. Impact External User External Decision Making Accounting Information Company’s Economic Activities Accumu- late Commu- nicate Internal Decision Making Internal User Impact Accounting Information Economic Activities and Decision Making

  11. GAAP Internal needs Comparison of Financial and Managerial Accounting Sources of Authority Financial Accounting Managerial Accounting

  12. Present and future Primarily historical Comparison of Financial and Managerial Accounting Time Frame of Reported Information Financial Accounting Managerial Accounting

  13. Individual departments, divisions, and total company Mainly total company Comparison of Financial and Managerial Accounting Scope Financial Accounting Managerial Accounting

  14. Sales $275,240 Cost 180,120 Gross 95,120 Expenses 80,120 Net inc. $15,000 Materials usage is unfavorable by $8,400. Qualitative as well as quantitative Primarily quantitative Comparison of Financial and Managerial Accounting Type of Information Financial Accounting Managerial Accounting

  15. format Prescribed by GAAP; oriented toward investment and credit decisions Determined by company; focused upon specific decisions being made Comparison of Financial and Managerial Accounting Statement Format Financial Accounting Managerial Accounting

  16. External Internal Comparison of Financial and Managerial Accounting Decision Focus Financial Accounting Managerial Accounting

  17. Financial Reporting Financial reporting is the process of communicating financial accounting information about a company to external users.

  18. Financial Reporting Companies present at least three major financial statements: • Balance sheet (or statement of financial position) which summarizes a company’s financial position at a given date. • Income statement which summarizes the results of a company’s income producing activities for a period of time. • Statement of cash flows which summarizes a company’s cash inflows and outflows for a period of time.

  19. Financial Reporting This statement summarizes the changes in each item of stockholders’ equity for a period. A statement of changes in stockholders’ equity also is included by many companies.

  20. Generally Accepted AccountingPrinciples (GAAP) GAAP are the guidelines, procedures, and practices that a company is required to use in recording and reporting the accounting information in its audited financial statements.

  21. Hierarchy of Sources of GAAP • Pronouncements of authoritative bodies (FASB, APB, CAP, SEC). • Pronouncements of bodies of expert accountants that have been exposed for public comment. • Pronouncements of bodies of expert accountants that have not been exposed for public comment.

  22. Hierarchy of Sources of GAAP • Widely accepted practices and pronouncements representing prevalent practice in a particular industry or applications to specific circumstances. • Other accounting literature.

  23. 1959 APB formed 1973 FASB formed Present 1938 CAP formed History of GAAP in the Private Sector FASB issued 135 Statements of Standards as of 4/99 APB issued 31 Opinions CAP issued 51 ARBs

  24. Reasons for Forming APB • To alleviate criticism about the process of formulating accounting principles, which included wider representation. • To create a policy-making body whose rules would be binding on companies rather than optional.

  25. Criticisms of the APB • Independence.The members of the APB were part-time volunteers whose major responsibilities were to their employers. • Representation.The public accounting firms and the AICPA were too closely associated with the development of accounting standards. • Response time. Emerging problems were not solved quickly enough.

  26. Appoint, fund, and oversee Financial Accounting Standards Advisory Council (approximately 30 members) Financial Accounting Standards Board (7 members) Advise Structure of the FASB Financial Accounting Foundation (16-member board of trustees) Continued on next slide

  27. Task Forces of the Standards Board (including Emerging Issues Task Force) Consult Support Appoint Research and Technical Staff Consult Structure of the FASB Financial Accounting Standards Board (7 members) Administrative Staff

  28. Types of Pronouncements Issued by the FASB • Statements of Financial Accounting Standards • Interpretations • Technical Bulletins • Statements of Financial Accounting Concepts • Other Pronouncements

  29. Issue Discussion Memorandum or Invitation to Comment Appoint Task Force Deliberate on Findings Conduct Research Issue Exposure Draft Hold Public Hearings FASB Operating Procedures Identify Topic Continue next slide

  30. Modify Exposure Drafts Deliberate on Findings Vote (super-majority) Hold Public Hearings Issue Exposure Draft Hold Public Hearings Issue Statement FASB Operating Procedures

  31. Other Organizations Impacting GAAP • Securities and Exchange Commission (SEC) • American Institute of Certified Public Accountants (AICPA) • FASB Emerging Issues Task Force (EITF) • Cost Accounting Standards Board (CASB) • Internal Revenue Service (IRS) • American Accounting Association (AAA)

  32. Other Organizations Impacting GAAP • International Accounting Standards Committee (IASC) • Governmental Accounting Standards Board (GASB) • Financial Executives Institution (FEI) • Institution of Management Accountants (IMA) • Association for Investment Management and Research (AIMR)

  33. EITF FEI CASB FASB GASB IMA SEC AICPA AAA AIMR IRS IASC Participants in the Development of GAAP

  34. Principles of the AICPA Code of Professional Conduct Responsibilities In carrying out their responsibilities as professionals, members should exercise sensitive professional judgment in all their activities.

  35. Principles of the AICPA Code of Professional Conduct The Public Interest Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism.

  36. Principles of the AICPA Code of Professional Conduct Integrity To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.

  37. Principles of the AICPA Code of Professional Conduct Objectivity and Independence A member should maintain objectivity and be free from conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance.

  38. Principles of the AICPA Code of Professional Conduct Due Care A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge the professional responsibility to the best of the member’s ability.

  39. Principles of the AICPA Code of Professional Conduct Scope and Nature of Service A member in public practice should observe the Principles of the CPC in determining the scope and nature of the services to be provided.

  40. An Ethicist’s Basic Approaches to Moral Reasoning • The utilitarianmodel, which evaluations actions based on the greatest good for the greatest number. • Therightsmodel, which embraces actions that protect individual moral rights. • The justicemodel, which emphasizes a fair distribution of benefits and burdens.

  41. Creative Thinking Recognize Problem Identify Alternatives Evaluate Alternatives Select Solution Implement Solution Critical Thinking Creative and Critical Thinking

  42. C 1 hapter The End

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