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MTC ACC 201 - THE ENVIRONMENT OF FINANCIAL REPORTING

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1-1 CHAPTER 1 THE ENVIRONMENT OF FINANCIAL REPORTING CONTENT ANALYSIS OF CASES Number Content Time Range (minutes) C1-1 Pronouncements. Matching a list of descriptive statements with a list of pronouncements establishing or related to generally accepted accounting principles. 5-10 C1-2 Accounting Organizations. Matching of a list of descriptive statements with a list of abbreviations of accounting organizations. Identify complete name of each organization. 10-15 C1-3 History of Establishment of GAAP. Discuss CAP, APB, FASB, and related pronouncements. 15-30 C1-4 (AICPA adapted). Accounting Principles. Define accounting principles. Discuss sources of GAAP. 10-20 C1-5 (CMA adapted). Standard Setting. Describe why there is political action and social involvement in the standard setting process. 10-20 C1-6 Organization of the FASB. Summarize the structure of the FASB, its documents (GAAP pronouncements), and its operating procedures. 10-20 C1-7 GAAP and the AICPA. Summarize the GAAP-related documents published by the AICPA. 5-10 C1-8 Code of Professional Conduct. Identify, briefly discuss, and provide examples to illustrate the first five principles of CPC. 10-20 C1-9 GAAP Hierarchy. Define GAAP, indicate where to find GAAP, and identify which GAAP are more important (hierarchy). 10-20 C1-10 Lobbying the FASB. Discuss pros and cons of lobbying FASB by interested parties. 5-15 C1-11 Ethical Dilemma. Discuss steps to take in an ethical dilemma ("misplaced" book in library). 10-20 C1-12 Ethical Responsibilities. Discuss steps to take in an ethical dilemma (cheating by friend on exam). 10-20 C1-13 (Appendix) International Convergence. Discuss convergence of U.S. GAAP and international accounting standards. Include discussion of SEC and its role in this convergence. 15-301-2 ANSWERS TO QUESTIONS Q1-1 Primary markets are those capital markets where the exchanges of stocks and bonds are directly between a corporation and investors. Secondary markets are those where the exchanges are among the investors themselves. Q1-2 The users of financial information can be divided into two major categories: external users and internal users. These two groups do not have the same decision making information needs because of their differing relationships with the company providing economic information. External users need information for three basic decisions--whether to buy, to hold, or to sell (or in the case of creditors, whether to extend credit, maintain the credit relationship, or not extend credit). These users rely mainly on financial statements in their decision processes. Internal users (i.e., a company's management) need information to make planning and operating decisions, and may request any information they need which the accounting system is capable of providing. Q1-3 Financial accounting is the information accumulation, processing, and communication system designed to provide investment and credit decision-making information for external users of accounting information. Financial accounting information is communicated through published financial statements, and must follow the pronouncements of several policy-making groups. Managerial accounting is the information accumulation, processing, and communication system designed to provide decision-making information for internal users. Managerial accounting information is communicated via internal company reports and is not subject to the policy standards for externally communicated information. It is constrained by how useful the information is for a specific decision and by the cost of providing that information. Q1-4 Financial reporting is the process of communicating financial accounting information about a company to external users. An important way a company's financial accounting information is reported is in its annual report. Q1-5 The three major financial statements of a company and what they show are: (1) the balance sheet (or statement of financial position) which shows the company's financial position at a given date, (2) the income statement which shows the results of the company's income-producing activities for a period of time, and (3) the statement of cash flows which shows the cash inflows and cash outflows for a period of time. Many companies also present the statement of changes in stockholders' equity, which shows the changes in each item of stockholders' equity for a period of time, as a fourth major financial statement. Q1-6 Generally accepted accounting principles (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. The four accounting bodies that have established GAAP in the U.S. are the Financial Accounting Standards Board (FASB), Accounting Principles Board (APB), American Institute of Certified Public Accountants (AICPA), and the Committee on Accounting Procedure (CAP). The Securities and Exchange Commission (SEC) also establishes GAAP.1-3 Q1-7 There are four categories of GAAP in the hierarchy of sources of GAAP. The pronouncements included in Category A are FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and APB Opinions and AICPA Accounting Research Bulletins not superceded by actions of the FASB (as well as SEC Regulation S-X and Financial Reporting Releases for companies that file with the SEC). Q1-8 The CAP was the Committee on Accounting Procedure. This group issued pronouncements on accounting procedures and practice. These pronouncements were published as Accounting Research Bulletins. The CAP was replaced by the APB in 1959. The APB was the Accounting Principles Board. It was formed as an attempt to create a policy-making body whose rules would be binding rather than optional. The pronouncements of the APB were termed Opinions of the Accounting Principles Board. The APB was phased out and replaced in 1973 by the FASB. The FASB is the Financial Accounting Standards Board. This Board was formed upon the recommendations of the Wheat Committee. The FASB issues four types of documents which constitute GAAP: Statements of Financial Accounting Standards, Interpretations, Staff Positions, and Technical Bulletins. Statements of Financial Accounting Concepts constitute GAAP in some instances. Q1-9


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MTC ACC 201 - THE ENVIRONMENT OF FINANCIAL REPORTING

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