Chapter 1: Financial Accounting and Accounting Standards

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Who are the major international players
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The FASB and IASB are working on a convergence project
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managerial accounting
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is the process of identifying, measuring, analyzing, and communicating financial information needed by manage- ment to plan, control, and evaluate a company’s operations.
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Financial accounting
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is 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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Note disclosures
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are an integral part of each financial statement.
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Financial statements
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are the principal means through which a company communi- cates its financial information to those outside it.
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Financial statements
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provide a company’s history quantified in money terms.
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financial statements
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are (1) the balance sheet, (2) the income statement, (3) the statement of cash flows, and (4) the statement of owners’ or stockholders’ equity.
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financial reporting
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Companies may need to provide such infor- mation because of authoritative pronouncement, regulatory rule, or custom. Or they may supply it because management wishes to disclose it voluntarily.
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relevant and reliable financial information
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relevant and reliable financial information allows investors and creditors to compare the income and assets employed by such companies
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two types of financial information:
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(1) the basic financial statements and (2) related disclosures.
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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 in decisions about providing resources to the entity.
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General-Purpose Financial Statements
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provide at the least cost the most useful information possible.
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primary users for general-purpose financial statements.
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Identifying investors and creditors as the primary users provides an important focus of general-purpose financial reporting. the primary user groups are not management, regulators, or some other non-investor group.
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management also is accountable to inves- tors
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for the custody and safekeeping of the company’s economic resources and for their efficient and profitable use.
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the management
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has the responsibility for protecting its economic resources from unfavorable effects of economic factors
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financial reporting
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may also provide decision-useful information to assess management performance in this role.
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Entity Perspective
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Companies are viewed as separate and distinct from their owners (present shareholders) using this perspective.
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Decision-Usefulness
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(1) the company’s ability to generate net cash inflows and (2) management’s ability to protect and enhance the capital providers’ investments.
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accrual accounting
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continuing ability to generate favorable cash flows
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accrual basis to determine net income
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company recognizes revenues when it provides the goods or services rather than when it receives cash.
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GAAP
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standards and procedures
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Three organizations are instrumental in the development of financial accounting standards (GAAP) in the United States:
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(SEC), IACPA, FASB
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The SEC’s mandate
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Establish accounting principles
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FASB
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Developes accounting standards
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SEC
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Requires registrants to adhere to GAAP
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SEC Enforcement
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Deficiencies letters; stop orders
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AICPA
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An important contributor to the development of GAAP.
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SOX 2002
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Requires PCAOB to oversee the development of auditing standards.
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FAF
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selects the members of the FASB and the Advisory Council, funds their activities, and generally oversees the FASB’s activities.
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FASB
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Its mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, which includes issuers, auditors, and users of financial information.
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FASAC
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consults with the FASB on major policy and technical issues and also helps select task force members.
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FASB
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it is not necessary to be a CPA to be a member of.
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FASB
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consists of seven members.
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FASB
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members are well-paid, full-time mem- bers appointed for renewable 5-year terms
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FASB
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appointed by and answerable only to the Financial Accounting Foundation.
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FASB
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members must sever all such ties.
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Structure for the development of financial reporting standards
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