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FINANCIAL ACCOUNTING RICHARD G. SCHROEDER MYRTLE W. CLARK JACK M. CATHEY THEORY AND ANALYSIS: TEXT AND CASES 11 TH EDITION.

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Presentation on theme: "FINANCIAL ACCOUNTING RICHARD G. SCHROEDER MYRTLE W. CLARK JACK M. CATHEY THEORY AND ANALYSIS: TEXT AND CASES 11 TH EDITION."— Presentation transcript:

1 FINANCIAL ACCOUNTING RICHARD G. SCHROEDER MYRTLE W. CLARK JACK M. CATHEY THEORY AND ANALYSIS: TEXT AND CASES 11 TH EDITION

2 CHAPTER 1 THE DEVELOPMENT OF ACCOUNTING THEORY

3 Introduction What is theory?  Webster defines theory as: “Systematically organized knowledge, applicable in a relatively wide variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.” Normative theory Positive theory Why is the development of a general theory of accounting important?  Allocating scare resources What is the relationship of accounting research to accounting theory?  Various theories of accounting will be discussed in Chapter 4

4 THE EARLY HISTORY OF ACCOUNTING Denise Schmandt-Besserat  Origins of writing are actually found in counting.  Pieces of fired clay in Middle Eastern archeological sites.  Tokens comprised an elaborate system of accounting that was used throughout the Middle East from approximately 8000 to 3000 B. C.  Each token stood for a specific item Used to take inventory and keep accounts Other accounting records dating back several thousand years have been found in various parts of the world.  These records indicate that at all levels of development, people desire information about their efforts and accomplishments.

5 THE EARLY HISTORY OF ACCOUNTING For example the Zenon Papyri  Who was Zenon?  Information about the construction projects, agricultural activities, and business operations of the private estate of Apollonius for a period of about thirty years during the third century B.C. Renaissance  Italians pursuing trade and commerce needed records  Fra Luca Pacioli

6 THE EARLY HISTORY OF ACCOUNTING The evolution of joint ventures into ongoing businesses  Caused need for external financial reporting The impact of the industrial revolution and the progressive movement  Widespread speculation in the securities markets, watered stocks, and large monopolies that controlled segments of the U.S. economy.  1900 report suggested that independent public accounting profession should be established to curtail observed corporate abuses.

7 THE EARLY HISTORY OF ACCOUNTING The concept of capital maintenance  Viewed as a way to curb corporate abuses The accountant as a protector of business interests  American Institute of Accountants (AIA)  American Association of the University Instructors in Accounting

8 ACCOUNTING IN THE UNITED STATES SINCE 1930 Because of fear of government intervention  Meetings between NYSE and AIA  AAA  SEC What caused formation of SEC?  Securities Act of 1933  Securities Exchange Act of 1934 Difference between public and private sector formulation of accounting principles

9 ACCOUNTING IN THE UNITED STATES SINCE  SEC: internal debate about whether it should develop accounting standards  Accounting Series Release (ASR No. 4) SEC allowed private sector to set accounting principles Reports filed with SEC must be prepared in accordance with accounting principles that have “substantial authoritative support{. A Statement of Accounting Principles  Sanders, Hatfield & Moore  Because accounting profession did not think it had time to develop theoretical framework of accounting  “Do what you think is best.”

10 American Institute of Certified Public Accountants (AICPA) Formed in 1936 Influence on development of accounting theory  Committee on Accounting Procedure  Accounting Principles Board  Financial Accounting Standards Board Each has issued pronouncements  Have become primary source of today’s generally accepted accounting principles

11 Committee on Accounting Procedure (CAP) Formed in 1936  Professional accountants Accounting Research Bulletins (ARBs)  Pronouncements  Did not dictate mandatory practice  Received authority only from general acceptance ARBs consolidated in 1953  Accounting Terminology Bulletin NO. 1, “Review and Resume” and ARB No. 43  ARB published 1953 – 1959  FASB Accounting Standards Codification (Discussed later in the chapter) includes recommendations of these bulletins that have not been superseded

12 THE ACCOUNTING PRINCIPLES BOARD (APB) CAP criticized  Methods of formulating accounting principles didn’t arise from research based on theory  Acting in piecemeal fashion & Issuing inconsistent standards Resulted in APB  Formation and structure  Types of pronouncements APB Opinions Accounting for the investment tax credit (1961)  APB Opinions 2 & 4  Rule 203

13 THE ACCOUNTING PRINCIPLES BOARD (APB) Criticism of the APB  Independence of members Members had full-time responsibilities elsewhere that could influence views  Structure “Big 8” automatically awarded 1 member Usually 5 or 6 other public accountants on board  Response time Part-time members not able to investigate and resolve emergency issues in timely manner

14 THE FINANCIAL ACCOUNTING STANDARDS BOARD Because of growing criticism of APB 1971: Board of Directors of AICPA appointed 2 committees:  The Wheat Committee How to establish accounting principles  The Trueblood Committee Objectives of financial statements The FASB was established

15 Structure of the FASB Financial Accounting Foundation Board of Trustees Appoint Electors Govern Appoint and fund Financial Accounting Standards Advisory Committee (approx. 20 members) Financial Accounting Standards Board ( 7 members) Task Forces of the Standards Board t Appoin t Admin. Staff Research Staff ||| Appoint and fund

16 FASB Mission – establish standards Types of pronouncements Statements of Financial Accounting Concepts Statements of Financial Accounting Standards Interpretations Technical Bulletins

17 FASB Emerging Issues  Lack of timely guidance Standards Overload  Too many standards Standard setting as a political process  Some users found that best way to influence formulation of accounting standards is to attempt to influence standard setters  Example: SFAS No. 123 and 123R Economic Consequences

18 GAAP Evolution of phrase:  Changed wording of auditor’s certificate brought about by meetings between NYSE and AIA  The APB’s definition “present fairly…in conformity with generally accepted accounting principles:  The Auditing Standards Executive Committee’s definition No singular reference source exists for all principles Makes general acceptance of a specific principle difficult SAS 69: determining acceptance of a specific principle is difficult

19 SFAS No. 162  Hierarchy of GAAP  Four levels FASB codification project reduced this to 2 levels:  Authoritative  Not authoritative A B C D

20 The FASB’s Accounting Standards Codification Hundreds of accounting standards promulgated by several different accounting standard setters. Accounting standards had evolved to the point that professionals could not keep up. September, 2004: the FAF Trustees approved funding for the FASB’s codification and retrieval project

21 The FASB’s Accounting Standards Codification June 2009  FASB announced Codification would be single source of all nongovernmental US GAAP effective 9/15/09. Involved following steps: 1. Restructure all U.S. GAAP literature by topic into a single authoritative codification. 2. Modify the standard-setting process to focus on updating the codification.

22 The FASB’s Accounting Standards Codification Reasons for codification  Researching multiple authoritative sources complicated research process FASB, EITF, AICPA & SEC literature FASB ASC contains all current authoritative accounting literature  If guidance is not specified, first source to consider is accounting principles for similar issue with a source of authoritative GAAP  Nonauthoritative guidance from other sources may be considered if similar transactions aren’t discovered in GAAP.

23 THE ROLE OF ETHICS IN ACCOUNTING The public accountant as a watchdog What is basic conflict of interest facing public accountants?

24 Accounting in Crisis – The Events of the Early 2000s Enron and the Accounting Scandals  “Special-purpose entities” (SPEs) Now termed variable interest entities (VIEs) Purpose:  Access capital  Hedge risk Allowed company to increase financial leverage and return on assets without reporting debt on balance sheet Losses were kept off Enron’s books Enron filed for bankruptcy and stock became virtually worthless.

25 Accounting in Crisis – The Events of the Early 2000s Two major changes in the accounting profession have taken place in the wake of the accounting scandals: 1. Arthur Andersen formerly one the Big 5 audit firms has gone out of business 2. Sarbanes-Oxley Act President Bush signed into law July 2002 imposes a number of corporate governance rules on publicly traded companies (Discussed in chapter 17)

26 International Accounting Standards The concept of harmonization The IASB The IASB’s objectives: 1. To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance 2. To work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements. 41 Statements of Accounting Standards and 13 Statements of Financial Reporting Standards to date

27 Copyright © 2014 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back- up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Prepared by Kathryn Yarbrough, MBA End of Chapter 1


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