ACCT 3723 Exam 1 Chapters 1 3 Chapter 1 Financial Accounting and Accounting Standards Identify the Major Financial Statements and Other Means of Financial Reporting o Characteristics of accounting are the identification measurement and communication of financial information about economic entities to interested parties EX of interest parties Management investors creditors labor unions and employees o Companies most frequently provide The Balance Sheet The Income Statement The Statement of Cash Flows The Statement of Equity o Financial reporting other than financial statements may take various forms GAAP Balance sheet income statement statement of cash flows statement of equity and note disclosures Not GAAP President s letter prospectuses SEC reporting news releases forecasts and environmental reports Explain How Accounting Assists in the Efficient Use of Scarce Resources o Resources are limited Capital Allocation the process of determining how and at what cost money is allocated among competing interests An effective process of capital allocation is critical to a healthy economy which promotes productivity encourages innovation provides and efficient and liquid market for buying and selling securities o Accounting provides reliable relevant and timely info to users to allow resource allocation to the most efficient enterprises Accounting also provides measurements of efficiency and financial soundness Describe some of the challenges facing accounting o Financial reports fail to provide Some key information Forward looking information for investors and creditors Sufficient information for soft assets Real time financial information Easy to understand information List the Objectives of Financial Reporting o Financial reporting should provide information that is USEFUL to present and potential equity investors lenders and other creditors in making decisions in their capacity as capital providers o General Purpose Financial Statements provide financial reporting information to a wide variety of users Investors are the primary user group They are interested in assessing the company s ability to generate net cash inflow and management s ability to protect and enhance the capital providers investments o Entity Perspective companies viewed as separate and distinct from their owners Explain the Need for Accounting Standards o The accounting profession has tried to create a universal set of accounting standards so that businesses won t have to create their own GAAP Identify the Major Policy Setting Bodies and Their Role in the Standard Setting Process o Three organizations that are involved in standard setting Securities and Exchange Commission SEC National professional organization that established o Committee on Accounting Procedures CAP Issued Accounting Research Bulletins o Accounting Principles Board APB Issued Accounting Principle Board Opinions APBOs All members are CPAs American Institute of Certified Public Accountants AICPA Established the Accounting Standards Executive Committee AcSEC o AICPA and AcSEC no longer issues authoritative accounting guidance for public companies Continues to develop and grade the CPA exam Public Certified Accounting Oversight Board PCAOB oversees the development of auditing standards Financial Accounting Standards Board FASB Created as a result of the Wheat Committee s recommendations Financial Accounting Foundation selects members of the FASB and exercises general oversight FASB s mission is to establish and improve standards of financial accounting and reporting Financial Accounting Standards Advisory Committee consult on major policy issues FASB relies on two basic premises Responsive to entire economic community Operate in full view of the public Employs a Due Process system which enables interested parties to express their views on issues under consideration Types of Pronouncements Accounting Standards Updates Financial Accounting Concepts Explain the Meaning of Generally Accepted Accounting Principles o GAAP those principles that have substantial authoritative support o House of GAAP Category A Most Authoritative FASB Standards Interpretations and Staff Positions APB Opinions AICPA Accounting Research Bulletins Category D Least Authoritative AICPA Accounting Interpretations FASB Implementation Guides Recognized Industry Practices o FASB Codification Goal in developing the codification is to provide in one place all the authoritative literature related to a particular topic Creates one level of GAAP which is considered authoritative All other accounting literature is considered non authoritative Describe the Impact of User Groups on the Standard Setting Process o GAAP is as much a product of political action as they are of careful logic or empirical findings o User groups may want certain events accounted for in certain ways They target the FASB to influence changes in existing GAAP and in the development of new rules o Expectation Gap what the public thinks accountants should do vs what accountants think they can do Understand Issues Related to Ethics and Financial Accounting o In accounting we frequently encounter ethical dilemmas GAAP does not always provide and answer Doing the right thing is not always easy or obvious Chapter 2 Conceptual Framework of Underlying Financial Accounting Describe the Usefulness of Conceptual Framework o Conceptual Framework Builds on and relates to an established body of concepts and objectives Provides a framework for solving new and emerging practical problems Increases financial statements users understanding of and confidence in financial reporting Enhances comparability among companies financial statements Describe the FASB s Efforts to Construct A Conceptual Framework o The FASB has issued seven Statements of Financial Accounting Concepts SFAC No 1 Objectives of Financial Reporting No 2 Qualitative Characteristics of Accounting Info No 3 Elements of Financial Statements No 5 Recognition and Measurement in Financial Statements No 6 Elements of Financial Information and Present Value in Accounting No 7 Using Cash Flow Info and Present Value in Accounting No 8 Replaces 1 and 2 Understand the Objectives of Financial Reporting o Basic objective is to provide financial information about the reporting entity that is useful to present and potential equity investors lenders and other creditors in making decisions about providing resources to the entity Identify the Qualitative Characteristics of Accounting