1. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-1 Intermediate Accounting I Philip Laube, CPA

2. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-2 About Me Philip Laube CPA, Controller & Senior Finance Mgr plaube@muskingum.edu x8101 or x8111 (Lisa) OFFICE HOURS: e-mail or call for appointment http://fates.cns.muskingum.edu/~plaube/acct301/default.htm

3. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-3 Expectations What do you want to be when you grow up? Accounting majors Public Accounting Audit Tax Industry Accounting minors Management Sales/Marketing (can these coexist?)

4. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-4 Points Three exams300 pts Manual project (practice set)50 pts Ten homework assignments100 pts Final exam (not comprehensive)100 pts 550 pts

5. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-5 Chapter One Environment and Theoretical Structure of Financial Accounting

6. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-6 Financial Accounting What is Financial Accounting vs. Managerial Accounting? Who is the target audience?

7. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-7 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

8. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-8 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

9. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-9 Investment-Credit Decisions A Cash Flow Perspective Accounting information should help investors evaluate the amount, timing, and uncertainty of the enterprise’s future cash flows.

10. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-10 Cash Versus Accrual Accounting Cash Basis Accounting Revenue is recognized when cash is received. Expenses are recognized when cash is paid.

11. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-11 Cash Versus Accrual Accounting Cash Basis Accounting Carter Company has sales on account totaling $100,000 per year, and collected as shown on the following slide. 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.

12. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-12 Cash Versus Accrual Accounting Cash Basis Accounting

13. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-13 Cash Basis Accounting Cash Versus Accrual Accounting Cash flows in any one year may not be a predictor of future cash flows.

14. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-14 Cash Versus Accrual Accounting Accrual Accounting Revenue is recognized when earned. Expenses are recognized when incurred. Let’s reconsider the Carter Company information.

15. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-15 Accrual Accounting Revenue is recognized when earned. Expenses are recognized when incurred. Let’s reconsider the Carter Company information. Cash Versus Accrual Accounting

16. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-16 The Development of Financial Accounting and Reporting Standards Concepts, principles, and procedures were developed to meet the needs of external users (GAAP).

17. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-17 Early Standard Setting Evolution of Standard-Setting Process 1938 - 1959: Committee on Accounting Procedures (CAP) 1959 - 1973: Accounting Principles Board (APB)

18. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-18 Current Standard Setting - FASB www.fasb.org Supported by the Financial Accounting Foundation. Seven full-time, independent voting members serving for 10 years. Answerable only to the Financial Accounting Foundation. Members not required to be CPAs.

19. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-19 Establishment of Accounting Standards A Political Process GAAP Internal Revenue Service www.irs.gov American Institute of CPAs www.aicpa.org Securities and Exchange Commission www.sec.gov American Accounting Association www.aaa-edu.org Governmental Accounting Standards Board www.gasb.org Financial Executives Institute www.fei.org SOX

20. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-20 FASB’s Standard-Setting Process  Identification of problem.  The task force.  Research and 1nalysis.  Discussion memorandum.  Public response.  Exposure draft.  Public response.  Statement issued.

21. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-21 International Accounting Standards Board (IASB) Established in 1973 to narrow the range of differences in accounting standards. Increase in international trade has motivated the IASB to attempt to eliminate alternative accounting treatments.

22. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-22 Role of the Auditor Independent intermediary to help insure that management has in fact appropriately applied GAAP.

23. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-23 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, commonly referred to as the Sarbanes-Oxley Act for the two congressmen who sponsored the bill.

24. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-24 Financial Reporting Reform Key Provisions of the Act: 1.Oversight board. 2.Corporate executive accountability. 3.Non-audit services. 4.Retention of work papers. 5.Auditor rotation. 6.Conflict of interest. 7.Hiring of auditor. 8.Internal control assessment and effectiveness.

25. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-25 A lot of rules! The rule making bodies for a typical company: FASB SEC Congress (SOX) State (e.g. New York) AICPA How did all this get so complicated?

26. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-26 The Conceptual Framework (The key component) Maintain consistency among standards. Resolve new accounting problems. Provide user benefits.

27. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-27 The Conceptual Framework Recognition and Measurement Criteria (SFAC No. 5 & SFAC No. 7) Environment Implementation Implementation assumptions principles constraints Objectives of Financial Reporting (SFAC No. 1) Qualitative Characteristics of Accounting Information (SFAC No. 2) Elements of Financial Statements (SFAC No. 6)

28. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-28 To provide information:  Useful for decisions.  That helps predict cash flows.  About economic resources, claims to resources, and changes in resources and claims. Elements Recognition and Measurement Concepts Constraints Conceptual Framework Objectives Qualitative Characteristics Financial Statements Continued

29. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-29 Elements Recognition and Measurement Concepts Objectives Financial Statements Constraints Qualitative Characteristics Understandability Primary Relevance Reliability Secondary Comparability Consistency

30. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-30 Elements Assets Liabilities Equity Investments by Owners Distributions to owners Revenues Expenses Gains Losses Comprehensive Income Recognition and Measurement Concepts Objectives Financial Statements Constraints Qualitative Characteristics

31. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-31 Elements Recognition and Measurement Concepts Assumptions Economic entity Going concern Periodicity Monetary unit Principles Historical cost Realization Matching Full Disclosure Objectives Financial Statements Constraints Qualitative Characteristics

32. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-32 Elements Recognition and Measurement Concepts Objectives Financial Statements Constraints Cost effectiveness Materiality Conservatism Qualitative Characteristics

33. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-33 Elements Recognition and Measurement Concepts Objectives Financial Statements Balance sheet Income statement Statement of cash flows Statement of shareholders’ equity Related disclosures Constraints Qualitative Characteristics

34. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-34 RelevanceReliability Predictive Value Feedback Value TimelinessNeutrality Verifiability Representational Faithfulness ComparabilityConsistency Qualitative Characteristics - Understandability Decision Usefulness

35. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-35 Practical Constraints to Achieving Desired Qualitative Characteristics Cost Effectiveness Materiality Conservatism

36. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-36 SFAC No. 6 - Elements Revenues “Inflows of assets or settlements of liabilities during a particular accounting period. Such inflows or settlements stem from delivery or production of goods or rendering of services.”

37. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-37 SFAC No. 6 - Elements Expenses “Outflows of assets or incurrences of liabilities during a particular accounting period. Such outflows are necessary for delivery or production of goods or rendering of services.”

38. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-38 SFAC No. 6 - Elements Gains and Losses Gains: “Increases in equity resulting from incidental transactions not associated with the company’s major business.” Losses: “Decreases in equity resulting from incidental transactions not associated with the company’s major business.”

39. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-39 SFAC No. 6 - Elements Assets and Liabilities Assets: “Business resources that have probable future economic benefits.” Liabilities: “Probable future sacrifices of economic benefits.”

40. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-40 SFAC No. 6 - Elements Equity Residual interest in the assets of a business entity is also known as net assets.

41. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-41 SFAC No. 6 - Elements Investments and Distributions Investments by owners: “Increases in equity resulting from asset contribution by other entities (owners/stockholders).” Distribution to owners: “Decreases in equity resulting from the distribution of assets to other entities.”

42. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-42 SFAC No. 6 - Elements Comprehensive Income “The change in equity resulting from the aggregate of all transactions reported in a particular accounting period, except for investments by and distributions to owners.”

43. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-43 Recognition and Measurement Concepts

44. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-44 The Realization Principle Reasonable Assurance of Collection Substantial Completion of Transaction Two conditions must be met if the realization principle is to be satisfied. Two conditions must be met if the realization principle is to be satisfied.

45. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-45 Question The function of financial accounting is to identify, measure and communicate financial information about economic entities to interested parties. a. True b. False

46. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-46 Question The function of financial accounting is to identify, measure and communicate financial information about economic entities to interested parties. a. True b. False

47. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-47 Question Accrual accounting provides a better indication of ability to generate cash flows than does information limited to the financial effects of cash receipts and cash payments. a. True b. False

48. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-48 Question Accrual accounting provides a better indication of ability to generate cash flows than does information limited to the financial effects of cash receipts and cash payments. a. True b. False

49. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-49 Question The primary objective of accrual basis accounting is the measurement of income. a. True b. False

50. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-50 Question The primary objective of accrual basis accounting is the measurement of income. a. True b. False

51. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-51 Question Generally accepted accounting principles include both standards set by various rule making bodies and certain accounting practices that have evolved over time. a. True b. False

52. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-52 Question Generally accepted accounting principles include both standards set by various rule making bodies and certain accounting practices that have evolved over time. a. True b. False

53. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-53 Question The major financial accounting standard setting body is the a. Accounting Principles Board b. Securities and Exchange Commission c.Financial Accounting Standards Board d. American Institute of CPAs

54. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-54 Question The major financial accounting standard setting body is the a. Accounting Principles Board b. Securities and Exchange Commission c.Financial Accounting Standards Board d. American Institute of CPAs

55. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-55 Question The FASB issues which of the following types of pronouncements? a. Standards b. Interpretations c. Financial Accounting Concepts d. Technical Bulletins e. All of the above

56. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-56 Question The FASB issues which of the following types of pronouncements? a. Standards b. Interpretations c. Financial Accounting Concepts d. Technical Bulletins e. All of the above

57. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-57 Question The Financial Accounting Standards Board develops accounting and reporting standards independent of public, business and political pressures. a. True b. False

58. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-58 Question The Financial Accounting Standards Board develops accounting and reporting standards independent of public, business and political pressures. a. True b. False

59. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-59 Ethics in Accounting To be useful, accounting information must be objective and reliable. Management may be under pressure to report desired results and ignore or bend existing rules.

60. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-60 Model for Ethical Decisions  Determine the facts of the situation.  Identify the ethical issue and the stakeholders.  Identify the values related to the situation.  Specify the alternative courses of action.  Evaluate the courses of action.  Identify the consequences of each course of action.  Make your decision and take any indicated action.

61. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-61 Ethics in Accounting Our role as accountants: Accurate, impartial reporting Is (was) the last ‘honest’ profession Devil’s advocate Valuable decision making component Can force preparation for the inevitable problems

62. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 1-62 End of Chapter 1