intermediate accounting 14th edition k. fred skousen earl k. stice james d. stice
TRANSCRIPT
INTERMEDIATE INTERMEDIATE ACCOUNTINGACCOUNTING
14th EDITION
K. Fred SkousenEarl K. Stice
James D. Stice
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This electronic presentation prepared by
Douglas Cloud, Pepperdine University
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Task Force Clip Art Task Force Clip Art included included in this electronic presentation in this electronic presentation is used with the permission of is used with the permission of
New Vision Technology of New Vision Technology of Nepean Ontario, CanadaNepean Ontario, Canada
Task Force Clip Art Task Force Clip Art included included in this electronic presentation in this electronic presentation is used with the permission of is used with the permission of
New Vision Technology of New Vision Technology of Nepean Ontario, CanadaNepean Ontario, Canada
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FINANCIAL FINANCIAL REPORTINGREPORTING
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Learning Objectives
Describe the purpose of financial reporting and identify the primary financial statements.
Explain the function of accounting standards and describe the role of the FASB in setting these standards in the United States.
Recognize the importance to financial reporting of the SEC, AICPA, AAA, and IRS.
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Learning Objectives Realize the growing importance and relevance of
international accounting issues to the practice of accounting in the United States and understand the role of the IASC in international accounting standard setting.
Understand the significance of the FASB’s conceptual framework in outlining the qualities of good accounting information, defining terms such as asset and revenue, and providing guidance about appropriate recognition, measurement, and reporting.
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Learning Objectives
Identify career opportunities related to accounting and financial reporting in the fields of public accounting, corporate accounting, financial analysis, banking, and consulting.
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Definition for Accounting
“Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions--in making reasoned choices among alternative courses of action.” (APB 4.40).
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• Accounting provides a vital service in today’s business environment.
• Accounting is concerned primarily with quantitative financial information that is used in conjunction with qualitative evaluations in making judgments.
Definition for Accounting
Key features of this definition:
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• Accounting information is used in making decisions about how to allocate scarce resources.
• Although accountants place much emphasis on reporting what has already occurred, this past information is intended to be useful in making economic decisions about the future.
Definition for Accounting
Key features of this definition:
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Users of Accounting Information
All parties interested in the financial health of a
company are called stakeholders.
All parties interested in the financial health of a
company are called stakeholders.
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Users of Accounting Information
Internal users, Internal users, who who make decisions make decisions
directly affecting the directly affecting the internal operations internal operations of the enterprise.of the enterprise.
Internal users, Internal users, who who make decisions make decisions
directly affecting the directly affecting the internal operations internal operations of the enterprise.of the enterprise.
External users, External users, who make decisions who make decisions
concerning their concerning their relationship to the relationship to the
enterprise.enterprise.
External users, External users, who make decisions who make decisions
concerning their concerning their relationship to the relationship to the
enterprise.enterprise.
Two major classifications of stakeholders
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InvestorsCommunity
Board of DirectorsManagementEmployees
Suppliers
Employees
CreditorsCustomers
Analysts
Government
Major Internal and External Stakeholder Groups
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Financial Reporting
The balance sheet reports, as of a certain
point in time, the resources of a
company (the assets), the company’s obligations (the
liabilities), and the equity of the owners.
The balance sheet reports, as of a certain
point in time, the resources of a
company (the assets), the company’s obligations (the
liabilities), and the equity of the owners.
The income statement reports, for a certain
interval, the net assets generated through
business operations (revenues), the net
assets consumed (the expenses), and the net
income.
The income statement reports, for a certain
interval, the net assets generated through
business operations (revenues), the net
assets consumed (the expenses), and the net
income.
The statement of cash flows reports, for a certain interval, the
amount of cash generated and consumed by a company through
operating, financing, and investing activities.
The statement of cash flows reports, for a certain interval, the
amount of cash generated and consumed by a company through
operating, financing, and investing activities.
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Accounting estimates and judgments are
outlined in the notes to financial statements.
Accounting estimates and judgments are
outlined in the notes to financial statements.
Financial Reporting
16Financial Statement Relationships
Balance Sheet 12/31/X0
Cash $ 80,000Other 4,550,000Total $4,630,000
Liabilities $2,970,000Stock 900,000R/E 760,000Total $4,630,000
Statement of Cash Flows
Cash From Op $ 973,000Cash From Inv (1,188,000)Cash From Fin 245,000Net Increase $ 30,000Beg. Cash 80,000End. Cash $ 110,000
Statement ofRetained Earnings
R/E 12/31/X0 $ 760,000Net Income 864,600Dividends (400,000)R/E 12/31/X1 $1,224,600
Revenues $12,443,000Expenses 11,578,400Net Income $ 864,600
Income Statement
Cash $ 110,000Other 4,975,000Total $5,085,000
Liabilities $2,860,400Stock 1,000,000R/E 1,224,600Total $5,085,000
Balance Sheet 12/31/X1
17Relative Frequency of Audit Opinions (1998)
Companies
Unqualified 5,978
Unqualified With Explanatory Language 1,030
Qualified 6
No opinion 2
Adverse 0
Total 7,016
18Accounting Standard-Setting Organizations
FASAC FASB
FAF SEC
AcSEC
AICPA
IASC
IAPC
Other
EITF
GASAC GASB U.S. Gov't
19Securities and Exchange Commission (1934-present)
1929 stock market crash blamed on nonstandard accounting.
1934 Securities Act established SEC to standardize accounting.
Created to protect the interests of investors by ensuring full and fair disclosure.
Granted legal authority to dictate GAAP.Has tended to defer setting GAAP to the
accounting profession.
20U.S. Accounting Standard- Setting Bodies
Committee on Accounting Procedures
(CAP)Born: 1939Died: 1959
Pronouncements: Accounting Research Bulletins
21U.S. Accounting Standard- Setting Bodies
Accounting Principles
Board(APB)
Born: 1959Died: 1973
Pronouncements: APB Opinions
22U.S. Accounting Standards Setting Bodies
Financial Accounting
Standards Board(FASB)
Born: 1973Died:
Pronouncements: Statements of Financial Accounting Standards
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FASAC FASB
FAF SEC
AcSEC
AICPA
IASC
IAPC
Other
EITF
GASAC GASB U.S. Gov't
Accounting Standard-Setting Organizations
24Financial AccountingStandards Board (1973-present)
Seven full-time members comprise this independent body.
Issues Statements of Financial Accounting Standards. Determines GAAP by “due process.” Works within the conceptual framework.
Statement PreparersStatement Preparers• Financial Executives
Institute• IMA• Individual Corps
FASB
FASB Authority Sources-- Overview
Gov’t RegulatorsGov’t Regulators• SEC• State Boards
of Public Acct.
• American Acct.InstructorsInstructors
Association
AuditorsAuditors• AICPA• State societies of
CPAs• Major audit firms
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• Maintains power to regulate registrant companies.
Congress
FASB Authority Sources--SEC
SEC
FASB
Registrant Companies
27FASB Authority Sources-- AICPA
Provides authority to the FASB through its Code of Professional Conduct Rule 203.
AICPA members must show that client financial statements comply with FASB pronouncements (GAAP).
AICPA grants continuing membership to its members who comply with Rule 203.
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AICPAAICPAAICPAAICPA FASBFASBFASBFASBMembers of Members of the AICPAthe AICPA
Members of Members of the AICPAthe AICPA
Endorsement of FASB through Rule 203
GAAPContinuing Membership
FASB Authority Sources -- AICPA
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FASB “Due Process”
Topic or project added to agenda.Task force assembled to study topic.Research and analysis performed by FASB
technical staff.Discussion Memorandum drafted and released.Public hearing, usually 60 days later, is held.
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Board analyzes and evaluates public response.Exposure Draft prepared and released.Sixty-day exposure period allows for public
comment.Committee studies public response to exposure
draft and prepares final draft.Board votes on final draft (5-2 margin required
for passage).
FASB “Due Process”
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SEC Authoritative Literature
Financial Reporting ReleasesStaff Accounting BulletinsAccounting and Auditing
Enforcement ReleasesAccounting Series Releases
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What is GAAP?
• Level A– FASB Statements and
Interpretations– APB Opinions– CAP Accounting
Research Bulletins• Level B
– FASB Technical Bulletins
– AICPA Industry Audit and Accounting Guides
– AICPA Statements of Position
• Level C– Consensus Positions of
EITF– AICPA Practice Bulletins
• Level D– AICPA Accounting
Interpretations– FASB “Question and
Answer” guides– Other widely recognized
industry practices
33International Accounting Standards Committee
The International Accounting Standards Committee (ISAC) was
formed in 1973 to develop worldwide accounting standards.
The International Accounting Standards Committee (ISAC) was
formed in 1973 to develop worldwide accounting standards.
The accounting standards produced by the International Accounting
Standards Committee are referred to as International Accounting
Standards (IASs).
The accounting standards produced by the International Accounting
Standards Committee are referred to as International Accounting
Standards (IASs).
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Conceptual Framework Overview
Objectivesof FinancialReporting
QualitativeCharacteristicsof Information
Accounting
Elementsof FinancialStatements
Recognition and Measurement Concepts
Assumptions Principles Constraints
35Objectives of Financial Reporting
Usefulness.
Understandability.
Target audience: investors and creditors.
Assessing future cash flows.
Evaluating economic resources.
Primary focus on earnings.
36Objectives of Financial Reporting
UsefulnessUsefulnessUsefulnessUsefulness
Financial reporting should provide information that is useful to present and
potential investors and creditors and other users in making rational
investment, credit, and similar decisions.
37Objectives of Financial Reporting
UnderstandabilityUnderstandabilityUnderstandabilityUnderstandability
Financial reporting should provide information that is understandable to one
who has a reasonable knowledge of accounting and business and who is
willing to study and analyze the information presented.
38Objectives of Financial Reporting
Target AudienceTarget AudienceTarget AudienceTarget Audience
While there are many potential users of financial reports, the objectives are directed
primarily toward investors and creditors.
39Objectives of Financial Reporting
Assessing Future Cash FlowsAssessing Future Cash FlowsAssessing Future Cash FlowsAssessing Future Cash Flows
Financial reporting should provide information that is useful in assessing
amounts, timing, and uncertainty (risk) of prospective cash flows.
40Objectives of Financial Reporting
Evaluating Economic ResourcesEvaluating Economic ResourcesEvaluating Economic ResourcesEvaluating Economic Resources
Financial reporting should also provide information about an enterprise’s assets,
liabilities, and owners’ equity to help investors, creditors, and others evaluate the financial strengths and weaknesses of the enterprise and its liquidity and solvency.
41Objectives of Financial Reporting
Primary Focus on EarningsPrimary Focus on EarningsPrimary Focus on EarningsPrimary Focus on Earnings
Information about enterprise earnings, measured by accrual accounting, generally
provides a better basis for forecasting future performance than does information
about current cash receipts and disbursements.
42Qualitative Characteristics of Accounting Information
Primary Qualities A. Relevance 1. Predictive Value 2. Feedback Value 3. Timeliness B. Reliability 1. Verifiability 2. Representational Faithfulness 3. Neutrality Secondary Qualities A. Comparability B. Consistency
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Comparability Consistency
PredictiveValue
FeedbackValue
Timeliness
Relevance
Verifiability Neutrality RepresentationalFaithfulness
Reliability
DecisionUsefulness
Understandability
Decision Makers
Qualitative Characteristics of Accounting Information
Benefits > Cost
Materiality
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What About Conservatism?
The concept of conservatism can be summarized as follows: When in doubt, recognize all losses but
don’t recognize any gains.
The concept of conservatism can be summarized as follows: When in doubt, recognize all losses but
don’t recognize any gains.
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Elements of Financial Statements
• Assets• Liabilities• Equity• Investment• Distribution• Comprehensive Income• Revenues• Expenses• Gains• Losses
46Recognition andMeasurement Concepts
Assumptions Principles Constraints• Economic Entity• Going Concern• Arm’s-Length
Transactions• Monetary Unit• Periodicity
• Historical Cost• Revenue
Recognition• Matching• Full Disclosure
• Cost-Benefit• Materiality• Industry Practice• Conservatism
47Financial Statements v.Financial Reporting
A “full set of financial statements” is necessary to meet the objectives of financial reporting. Included in the recommended set of general-purpose financial statements are reports that show:
Financial position at the end of the period. Earnings (net income) for the period. Cash flows during the period. Investments by and distributions to owners
during the period. Comprehensive income for the period.
48Traditional Assumptions of the Accounting Model
• Economic entity.
• Going concern.
• Arm’s-length transactions.
• Stable monetary unit.
• Accounting period.
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Careers in Financial Accounting
• Public accounting.
• Company accounting.
• User (analyst, banker, consultant).
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The EndThe End