Chapter 1 Notes Financial Statements and Financial Reporting essential characteristics of accounting o the identification measurement and communication of financial information about economic entities to interested parties financial accounting the process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties o users include investors creditors managers unions gov t agencies managerial accounting the process of identifying measuring analyzing and communicating financial information needed by management to plan control and evaluate a company s operations financial statements the principle means through which a company communicates its financial information to those outside it o provide a company s history quantified in money terms o 4 most common financial statements balance sheet income statement statement of cash flows statement of owners or stockholders equity o note disclosures are also provide with each statement Objective of Financial Reporting objective 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 i e capital to the entity General Purpose Financial Statements general purpose financial statements provide financial reporting information to a wide variety of users o provide at the least cost the most useful information possible Equity Investors and Creditors objective of financial reporting identifies investors and creditors as the primary users for general purpose financial statements o provides an important focus of general purpose financial reporting Entity Perspective entity perspective companies are viewed as separate and distinct from their owners o consistent with the present business environment where most companies engaged in financial reporting have substance distinct from their investors o a proprietary perspective is not appropriate perspective that financial reporting should be focused only on the needs of shareholders Decision Usefulness decision usefulness approach says that investors are interested in financial reporting because it provides information that is useful in decision making investors are interested in 2 things o the company s ability to generate net cash flows o management s ability to protect and enhance the capital providers investments accrual basis accounting o ensures that a company records events that change its financial statements in the periods in which the events occur not in the periods in which it receives or pays cash o in the long run trends in revenues and expenses are more meaningful than trends in cash receipts and disbursements The Need to Develop Standards generally accepted accounting principles GAAP a set of standards that are generally accepted and universally practiced in the United States Parties Involved in Standard Setting 3 organizations partake in the development of GAAP o Securities and Exchange Commission SEC o American Institute of Certified Public Accountants AICPA o Financial Accounting Standards Board FASB Securities and Exchange Commission SEC SEC helps develop and standardize financial information presented to stockholders o federal agency o can prescribe accounting practices and standards to be employed by companies that fall within its jurisdiction Public Private Partnership SEC encouraged creation of a private standard setting body because it believed that private companies had the resources to do so o these standards have developed through either the AICPA or the FASB SEC requires that all registrants adhere to GAAP SEC Oversight generally the SEC relies on the FASB to develop accounting standards Enforcement companies listed on a stock exchange must submit financial statements to the SEC in the case of an irregularity the SEC sends the company a deficiency letter o usually taken care of quickly o if not the SEC can issue a stop order which prevents the company from issuing trading securities American Institute of Certified Public Accountants AICPA AICPA o important contributor to the development of GAAP Committee on Accounting Procedure Committee on Accounting Procedure CAP o composed of practicing CPAs o issued 51 Accounting Research Bulletins between 1939 and 1959 dealt with various accounting problems problem by problem approach failed to provide structure to accounting principles in 1951 the Accounting Principles Board was created Accounting Principles Board Accounting Principles Board APB o created in 1959 ended in 1973 o major purposes advance the written expression of accounting principles determine appropriate practices narrow the areas of inconsistency in practice o twofold mission to achieve these objectives develop an overall framework to assist in the resolution of problems as they arise research issues before the AICPA issues pronouncements APB Opinions the APB s official pronouncements replaced by FASB in 1973 due to the research and suggestions for ways to attain better results provided by the Wheat Committee Changing the Role of the AICPA AICPA established the Accounting Standards Executive Committee AcSEC o created when the FASB replaced the APB o authorized to speak for the AICPA in the area of financial accounting and reporting done through various written communications Audit and Accounting Guides o summarize the accounting practices of specific industries o provide specific guidance on matters not addressed by the FASB o i e accounting for casinos colleges banks Statements of Position SOPs o provide guidance on financial reporting topics until the FASB sets standards on the issues at question Practice Bulletins o provide the AcSEC s views on financial reporting issues not considered by the FASB Financial Accounting Standards Board FASB FASB o mission to establish and improve standards of financial accounting and reporting for the guidance and education of the public success of the FASB relied on several differences between itself and the APB o smaller membership FASB 7 members APB 18 members o full time remunerated membership FASB employees well paid full time members appointed to renewable 5 year terms APB members volunteers part time o greater autonomy FASB appointed by the Financial Accounting Foundation not a part of any single professional organization APB senior committee of the AICPA o increased independence FASB members must sever all ties with their firms