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Essential Characteristics of accounting are

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1. the identification, measurement, and communication of financial information about 2. economic entities to 3. interested Parties

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Financial Accounting is

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the process that culminates in the preparation of financial reports on the enterprise for use by both internal and external parties

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Managerial Accounting is

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the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, control and evaluate a company's operations

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Financial Reporting -

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The financial information a company provides to help users with capital allocation decisions about the company

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Users (present and potential)

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Investors and creditors use financial reports to make their capital allocation decisions

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Capital Allocation -

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The process of determining how and at what cost money is allocated among competing interests

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Objective of Financial Reporting -

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Provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors

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general-purpose financial statements

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statements that provide financial reporting information to a wide variety of users.

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Entity Perspective -

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Companies are viewed as separat end distinct from their owners (present shareholders)

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Proprietary Perspective -

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a perspective that financial reporting should be focused only on the needs of shareholders (not considered appropriate)

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decision-usefulness approach

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Financial reporting using this approach and, investors like it, because it provides information that is useful for making decisions.

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Accrual-basis accounting -

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ensures that a company records events that change its financial statements in the periods in which the events occur

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Generally Accepted accounting principles (GAAP)

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Common set of accounting standards and procedures

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The three organizations that were/are instrumental in the development of financial accounting standards (GAAP) in the United States

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1. Security and Exchange Commission (SEC) 2. American Institute of Certified Public Accountants (AICPA) 3. Financial Accounting Standards Board (FASB)

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Federal Government established this commission to help develop and standardize financial information presented to stockholders following the Great Depression. It is a federal agency

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Securities and Exchange Commission (SEC)

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The SEC administers this act among several others

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Securities Exchange Act of 1934

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The SEC relies on...

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FASB to develop accounting standards

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The American Institute of Certified Public Accountants (AICPA) -

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is the national professional organization of practicing Certified Public Accountants (CPA's)

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AICPA Developed ___ in 1939 and ___ in 1959 and ____ in 1973 at the urging of SEC

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1. CAP (Committee on Accounting Procedure) 2. APB (Accounting Principles Board) 3. FASB (Financial Accounting Standards Board)

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Major Purposes of the APB (Accounting Principles Board) -

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1.advance the written expression of accounting principles 2. determine appropriate practices and 3. narrow the areas of difference and inconsistency in practice

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APB Opinions

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APB board's official pronouncements, they were intended to be based mainly on research studies and be supported by reason and analysis.

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Wheat Committee

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a study group on establishment of accounting principles that examined the organization and operation of the APB and determined the necessary changes to attain better results. Reported results to AICPA and this was used to replace APB with the FASB

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The Wheat Committee's recommendations resulted in the creation of a new standard-setting structure composed of three organizations

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1. The Financial Accounting Foundation (FAF) 2. The Financial Accounting Standards Board (FASB) 3. The Financial Accounting Standards Advisory Council (FASAC)

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Financial Accounting Foundation (FAF) purpose:

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1. select members of FASB and Advisory Council 2. Funds their activities 3. oversees the FASB's activities

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Financial Accounting Standards Board (FASB) purpose:

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establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors and users of financial information

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Differences between FASB and APB

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1. Smaller Membership 2. Full-time, remunerated membership 3. Greater autonomy 4. Increased independence 5. Broader representation

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The passage of new FASB guidance in the form of an Accounting Standards Update requires the support of how many of the 7 board members?

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4 of the 7 Board members

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Financial Accounting Standards Advisory Council (FASAC) purpose:

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to consult on major policy issues, technical issues, project priorities and selection and organization of task forces

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FASB issues two major types of pronouncements:

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1. Accounting Standards Updates 2. Financial Accounting Concepts

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Accounting Standards Update

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These updates amend the Accounting Standards Codification, which represents the source of authoritative accounting standards, other than standards issued by the SEC

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Emerging Issues Task Force (EITF)

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the purpose of the task force is to reach a consensus on how to account for new and unusual financial transactions that may potentially create differing financial reporting practices.

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This task force deals with short-term emerging issues so that FASB can hopefully work on more pervasive long-term problems

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EITF

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Statements of Financial Accounting Concepts

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The series sets forth fundamental objectives and concepts that the Board uses in developing future standards of financial accounting and reporting. The board intends to form a cohesive set of interrelated concepts, conceptual framework, that will serve as tools for solving existing and emerging problems in a consistent manner.

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The FASB issues___,____,____

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1. Standards (160) 2. Interpretations (48) 3. FASB staff Positions (100)

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FASB developed the Financial Accounting Standards Board Accounting Standards Codification (The Codification) to provide...

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in one place all the authoritative literature related to a particular topic

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To provide easy access to the Codification, FASB developed -

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Financial Accounting Standards Board Codification Research System (CRS)

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CRS is an ...

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online, real-time database that provides easy access to the Codification

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User groups

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Quite possibly the most powerful force influencing the development of GAAP.

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GAAP is as much a product of -

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political action as it is of careful logic or empirical findings

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Economic Consequences -

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means the impact of accounting reports on the wealth positions of issuers and users of financial information and the decision-making behavior resulting from that impact

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Public Company Accounting Oversight Board (PCAOB)

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oversight board established und SOX for accounting practices. They have oversight and enforcement authority and establish auditing, quality control, and independence standards and rules.

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Section 404 of the Sarbanes-Oxley Act

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requires public companies to attest to the effectiveness of their internal controls

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Internal controls

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a system of checks and balances designed to prevent and detect fraud and errors

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eXtensible Business Reporting language (XBRL)

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a way for companies to format their financial reports which permits quicker and lower-cost access to companies' financial information

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Sarbanes-Oxley Act

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increased the resources for the SEC to combat fraud and curb poor reporting practices. This led to approving new auditor independence rules and materiality guidelines for financial reporting.

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Expectations Gap

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what the public thinks accountants should do and what accountants think they can do

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Two sets of rules accepted for international use

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1. GAAP 2. IFRS (International Financial Reporting Standards)

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Who issues the IFRS

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International Accounting Standards Board (IASB)

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Norwalk agreement

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a memorandum of understanding by FASB and IASB formalizing their commitment to the convergence of GAAP and IFRS

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