ACG3101 Financial Accounting and Reporting 1 Exam 1 Chapters 1 4 Chapter 1 Environment and Theoretical Structure of Financial Accounting 1 Financial Accounting Provides financial information to various external users o Primary Focus Financial information provided by profit oriented companies to their present and potential investors and creditors o Financial Intermediaries Includes Financial analysts stockbrokers mutual fund managers credit rating organizations Financial Statements most frequently provided 1 Balance Sheet statement of financial position 2 Income Statement statement of operations 3 Statement of Cash Flows 4 Statement of Shareholders Equity Financial Reporting Process of providing information to external users Capital Markets Provide a mechanism to help our economy allocate resources efficiently composite of all investors and creditors Primary Forms of Business Organization 1 Sole Proprietorship owned by a single individual 2 Partnership Owned by two ore more individuals Sole Proprietorships and partnerships outnumber corporations 3 Corporations Acquire capital from investors in exchange for ownership interest and form creditors by borrowing Initial Market Transactions Involve issuance of stocks and bonds by the corporation corporations receive new cash Secondary Market Transactions Subsequent transfers of stocks and bonds between investors and creditors o Help establish market prices for additional shares and for bonds that corporations may wish to issue in the future to acquire additional capital Primary objective of financial accounting is to provide investors and creditors with information that will help them make investment and credit decisions The information should help investors and creditors evaluate the amount timing and uncertainty of the enterprise s future cash receipts and disbursements CASH BASIS ACCOUNTING Net Operating Cash Flow Difference between cash receipts and cash payments from transactions related to providing goods and services to customers during a reporting period o May not be a good predictor of long run cash generating ability Revenue is recognized when cash is RECEIVED Expenses are recognized when cash is PAID ACCRUAL ACCOUNTING Provides measure of periodic performance called net income difference between revenues and expenses ACG3101 Financial Accounting and Reporting 1 Exam 1 Chapters 1 4 Chapter 1 Environment and Theoretical Structure of Financial Accounting 2 More accurate prediction of future operating cash flows and a more reasonable portrayal of the periodic operating performance of the company Net income is better indicator of future operating cash flows than current net operating cash flows Revenue is recognized when EARNED Expenses are recognized when INCURRED Generally Accepted Accounting Principals GAAP Dynamic set of broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes o Set by standard setters o Facilitate decision making by investors and creditors by helping them understand information and enhancing the comparability of that information among companies but also emerges from practice Congress SEC Securities and Exchange Commission Created from the 1934 Act Congress gave the SEC authority to set accounting and reporting standards for companies whose securities are publicly traded Delegated the task of setting accounting standards to the private sector If SEC does not agree with standard issued by private sector it can force a change in the standard Private Sector CAP Committee on Accounting Procedure 1928 1959 Committee of American Institute of Accountants AIA Renamed American Institute of Certified Public Accountants AICPA APB Accounting Principles Board 1959 1973 Was never able to establish conceptual framework Lacked independence FASB Financial Accounting Standards Board 1973 Present Supported by Financial Accounting Foundation FAF FASB Accounting Standards Codification Integrates and organizes all relevant accounting pronouncements into a searchable online database EITF Emerging Issues Task Force Identifies financial reporting issues and attempts to resolve them without involving the FASB IASB International Accounting Standards Board Goal is to develop a single set of high quality understandable and enforceable global accounting standards to help participants in the world s capital markets and other users make economic decisions Efforts to Converge U S and International Standards Issues and Concerns Desire for a single set of global standards ACG3101 Financial Accounting and Reporting 1 Exam 1 Chapters 1 4 Chapter 1 Environment and Theoretical Structure of Financial Accounting 3 Need for standards that are customized to fit stringent legal and regulatory requirements of U S Progress Possible differences in implementation and enforcement September 2002 FASB and IASB sign Norwalk agreement November 2008 SEC issues Roadmap with milestones July 2012 The SEC staff issued its Final Staff Report Concluded it is not feasible for the U S to adopt IFRS due to Need for use to have stronger influence over standards High cost to companies of convergence The fact that many laws regulations and contracts reference U S GAAP Financial Reporting Reform As a result of numerous financial scandals Congress passed the Public Company Accounting Reform and Investor Protection Act of 2002 Sarbanes Oxley Act The goal was to restore credibility and investor confidence in the financial reporting process EX Enron Worldcom Role of Auditor Serve as independent intermediaries to help ensure that management has appropriately applied U S GAAP in preparing the company s financial statements Ethics in Accounting Provides guidance and rules to help accounting professionals perform their professional responsibilities in an ethical manner Conceptual Framework has been described as Accounting Constitution It provides the underlying foundation for accounting standards Evolving U S GAAP U S GAAP has been evolving from an emphasis on revenues and expenses to an emphasis on assets and liabilities Revenues Expenses Approach Emphasizes principals for recognizing revenues and expenses which some assets and liabilities recognized as necessary to make the balance sheet reconcile with the income statement Asset Liability Approach Emphasizes principals for recognizing assets and liabilities first and then recognize and measure the revenues expenses gains and losses