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1 - 1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D.,

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Presentation on theme: "1 - 1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D.,"— Presentation transcript:

1 1 - 1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved Environment and Theoretical Structure of Financial Accounting 1

2 1 - 2 Financial Accounting Environment Profit-oriented companies Not-for-profit entities Households Providers of Financial Information External User Groups Investors Creditors Employees Labor unions Customers Suppliers Government agencies Financial intermediaries Relevant Financial Information

3 1 - 3 Financial Accounting Environment Relevant financial information is provided primarily through financial statements and related disclosure notes.  Balance Sheet  Income Statement  Statement of Cash Flows  Statement of Shareholders’ Equity

4 1 - 4 The Economic Environment and Financial Reporting A sole proprietorship is owned by a single individual. A partnership is owned by two or more individuals. A corporation is owned by shareholders. A highly-developed system communicates financial information from a corporation to its many shareholders.

5 1 - 5 Investment-Credit Decisions ─ A Cash Flow Perspective Shareholders Receive Cash 1.Dividends 2.Sale of Stock Creditors Receive Cash 1.Interest 2.Loan Repayment Accounting information should help investors and creditors evaluate the amount, timing, and uncertainty of the enterprise’s future cash flows.

6 1 - 6 Cash versus Accrual Accounting Cash Basis Accounting Revenue is recognized when cash is received. Expenses are recognized when cash is paid. OROROROROROR OR Accrual Accounting Revenue is recognized when earned. Expenses are recognized when incurred.

7 1 - 7 Cash versus Accrual Accounting Cash Basis Accounting Carter Company has sales on account totaling $100,000 per year for three years. Carter collected $50,000 in the first year and $125,000 in the second and third years. The company prepaid $60,000 for three years’ rent in the first year. Utilities are $10,000 per year, but in the first year only $5,000 was paid. Payments to employees are $50,000 per year. Let’s look at the cash flows.

8 1 - 8 Cash versus Accrual Accounting Cash Basis Accounting Cash flows in any one year may not be a predictor of future cash flows.

9 1 - 9 Cash versus Accrual Accounting Accrual Basis Accounting Net Income is considered a better indicator of future cash flows.

10 The Development of Financial Accounting and Reporting Standards Concepts, principles, and procedures were developed to meet the needs of external users (GAAP).

11 Historical Perspective and Standards

12 Current Standard Setting Supported by the Financial Accounting Foundation Five full-time, independent voting members Answerable only to the Financial Accounting Foundation Members not required to be CPAs Financial Accounting Standards Board

13 FASB Accounting Standards Codification The objective of the codification project was to integrate and organize by topics all relevant accounting pronouncements into a searchable, online database.

14 Establishment of Accounting Standards A Political Process GAAP Internal Revenue Service American Institute of CPAs Securities and Exchange Commission American Accounting Association Governmental Accounting Standards Board Financial Executives International International Accounting Standards Board

15 FASB’s Standard-Setting Process  Board receives recommendations for projects.  Board votes to add the project to its agenda.  Board deliberates the issues at a series of public meetings.  Board issues an Exposure Draft (ED).  Board holds a public roundtable meeting on the ED.  Staff analyzes feedback and the Board re-deliberates the proposed revisions at public meetings.  Board issues a Standards Update describing amendments to the Codification.

16 Toward Global Accounting Standards The main objective of the International Accounting Standards Board (IASB) 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.

17 Role of the Auditor Auditors serve as independent intermediaries to help insure that management has appropriately applied GAAP in preparing the company’s financial statements.

18 Financial Reporting Reform Public Company Accounting Reform and Investor Protection Act of 2002 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.

19 A Move Away from Rules-Based Standards? Rules based accounting standards vs. objectives-oriented approach Objectives oriented (principles-based) approach stressed professional judgment

20 Ethics in Accounting For financial information to be useful, it should possess the fundamental decision- specific qualities of relevance and faithful representation. Management may be under pressure to report desired results and ignore or bend existing rules.

21 Underlying Assumptions and Accounting Principles

22 Evolution of Accounting Principles The Move Toward Fair Value Fair value is the price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market Approaches Income Approaches Cost Approaches

23 Fair Value Hierarchy GAAP gives companies the option to report some or all of their financial assets and liabilities at fair value.


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