Intermediate accounting chapter 1 1 Financial accounting environment i Financial accounting chiefly concerned with providing financial information to carious external users ii Primary focus of financial accounting is on the information needs of investors and creditors iii Convey financial information through financial statements and related disclosure notes iv Financial reporting the process of providing information to external users b The economic environment and financial reporting 1 Majority of the productive resources are privately owned rather than government owned 2 Capital markets provide a mechanism to help our economy allocate resources efficiently a Composite of all investors and creditors 3 Corporations acquire capital from investors in exchange for ownership interest and from creditors by borrowing 4 Initial market transactions involve issuance of stocks and bonds by the corporation 5 Secondary market transactions involve the transfer of stocks and bonds between individuals and institutions a Corporations receive no new cash from these b Help establish market prices for additional shares and for bonds that corporations may wish to issue in the future to acquire additional capital ii The investment credit decisions a cash flow perspective 1 Investors and creditors are interested in earning a fair return on the resources they provide 2 Consider uncertainty or risk of expected return 3 The expected rate of return is key in investment decision 4 Company can only provide a return if they make profit 5 The objective of financial accounting is to provide investors and creditors with useful information for decision making iii Cash versus accrual accounting 1 Cash basis accounting a Produces a new operating cashflow the difference between cash receipts and cash payments from transactions related to providing goods and services to customers during a reporting period b Net operating cash flow is not always a good predictor of long run cash generating ability because a company can receive cash a for a previous period s sales 2 Accrual accounting a Reflects resources other than cash flows provided and consumed by operations during a period b Uses revenues expenses and net income c Net income is a better indicator of future operating cash flows than is current net operating cash flow d Accrual is used my most c The development of financial accounting and reporting standards 1 Generally accepted accounting principles GAAP A dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes ii Historical perspective and standards a Pressure on accountants after market crash of 1929 b Acts created to restore investor s confidence i 1933 securities act 1 sets forth accounting and disclosure requirements for initial offerings of securities ii 1934 securities exchange act 1 applies to secondary market transactions and mandates reporting requirements for companies hose securities are publicly traded on either organized stock exchanges or in over the counter markets 2 created the securities and exchange commission sec a has the authority to set accounting and reporting standards for companies whose securities are publicly traded b has delegated the task of setting accounting standards to the private sector c power lies with the SEC 2 Early US standard setting a Committee on Accounting Procedure CAP i The first private sector body to assume the task of setting accounting standards ii Was a committee of the American Institute of Accountants AIA 1 Was renamed the American institute of Certified Public Accountants AICPA iii From 1938 to 1959 the CAP issued 51 accounting research bulletins ARBs which dealt with specific accounting reporting problems b In 1959 the Accounting Principles Board APB replaced the CAP c APB operated from 1959 through 1973 and issued 31 Accounting Principles Board Opinions APBOs various Interpretations and four Statements d APB was never able to establish a conceptual framework for financial accounting and reporting that as broadly accepted 3 The FASB a Criticism of the APB led to the creation in 1973 of the Financial Accounting Standards Board FASB b 7 full time members c Supported by its parent organization the Financial Accounting Foundation FAF which is responsible for selecting the members of the FASB and its Financial Accounting Standards Advisory Council FASAC ensuring adequate funding of FASB activities and exercising general oversight of the GASB s activities d In 1984 the FASB s Emerging Issues Task Force EITF was formed to improve financial reporting by resolving narrowly defined financial accounting issues within the framework of existing GAAP e EITF addresses implementation issues which speeds up standard setting process and allows FASB to focus on pervasive long term problems f EITF rulings are ratified by the FASB and are part of GAAP 4 Codification a FASB developed a conceptual framework that isn t authoritative GAAP but provides an underlying structure for the development of accounting standards b To simplify the task of researching an accounting topic in 2009 FASB implemented FASB Accounting Standards Codification c Codification integrates and topically organizes all relevant accounting pronouncements compromising GAAP in a searchable online database d Represents the single source of authoritative nongovernmental US GAAP and includes portions of SEC accounting guidance that are relevant to financial reports filed with the SEC 5 International standard setting a Differences in international accounting standards make it difficult for multinational corporations and investors b The international accounting standards committee IASC formed in 1973 to develop global accounting standards c Reorganized and then called the International Accounting Stards Board IASB i Dedicated to developing a single set of global accounting standards 6 Efforts to converge US and international standards a Should the US adopt IFRS iii The standard setting process 1 Due Process a Use many steps to help the FASB acquire information to determine the preferred method of accounting b Exposes FASB to political pressure for the accounting method that better suits them 2 Politics in Standard Setting a Intense pressure over controversial accounting standards and FASB has changed standards in response b Ex 1990s with respect to accounting for employee stock options c Ex accounting for