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CH'1 FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS

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II.FINANCIAL ACCOUNTING ... IV.HISTORY OF ACCOUNTING STANDARDS SETTING. IN 1934 ... SEC has generally delegate the accounting standards setting to the private sector. ... – PowerPoint PPT presentation

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Title: CH'1 FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS


1
  • CH.1 FINANCIAL ACCOUNTING AND ACCOUNTING
    STANDARDS

2
I. ACCOUNTING
  • - is an information system that identifies,
    measures, and communicates financial information
    about economic entities to interested persons.

3
II.FINANCIAL ACCOUNTING
  • - is the process of preparation of a set of
    general-purpose financial statements on
    enterprises as a whole for use by parties both
    internal and external to the enterprise, such as
    investors, creditors, managers, unions and
    government agencies.

4
Financial Statements
  • - B/S
  • - I/S
  • - STATEMENT OF CASH FLOWS
  • - STATEMENT OF SHAREHOLDERS' EQUITY

5
III.GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP)
  • - those principles that have "substantial
    authoritative support" (meaning established by an
    authoritative rule making body

6
IV.HISTORY OF ACCOUNTING STANDARDS SETTING
  • PRIOR TO 1929 (STOCK MKT CRASH)
  • - No GAAP
  • - No auditing requirement

7
IV.HISTORY OF ACCOUNTING STANDARDS SETTING
  • IN 1934
  • Securities and Exchange Commission (SEC) was
    created to administer the securities laws.
  • - SEC has the legal authority to prescribe
    accounting standards for companies that fall
    within its jurisdiction (about 12,000 public
    companies).
  • - SEC has generally delegate the accounting
    standards setting to the private sector.

8
IV.HISTORY OF ACCOUNTING STANDARDS SETTING
  • 1939 - 1959
  • Committee on Accounting Procedure (CAP)
  • - Appointed by AICPA
  • - Issued 51 Accounting Research Bulletins

9
IV.HISTORY OF ACCOUNTING STANDARDS SETTING
  • 1959 - 1973
  • Accounting Principles Board (APB)
  • - Created by the AICPA
  • - Issued 31 APB Opinions

10
IV.HISTORY OF ACCOUNTING STANDARDS SETTING
  • 1973 - present
  • Financial Accounting Standards Board (FASB)
  • - Appointed by Financial Accounting Foundation
  • - The most significant current source of GAAP
  • - The FASB issues
  • - Standards and interpretations (over 12140)
  • - Technical bulletins (implementation guides)
  • - Emerging Issues Task Force (EITF) statement
  • - Financial Accounting Concepts

11
Ch. 2 Conceptual Framework underlying
Financial Reporting
12
What is the conceptual framework?
  • The conceptual framework is, like a constitution,
    a coherent set of objectives and fundamentals
    that can lead to consistent standards and that
    prescribes the nature, function, and limits of
    financial accounting and financial statements.

13
I. Need for a Conceptual Framework
  • 1. Coherence in rules and standards.
  • 2. Quick solutions to new and emerging practical
    problems by reference to an existing framework of
    basic theory.

14
First Level Objectives.
  • To provide information that is useful to present
    and potential investors and creditors in making
    rational investment, credit, and similar
    decisions.

15
Second Level Qualitative Characteristics and
Elements.
  • For information to be useful, it must be
  • (1) Relevance. Accounting information is
    relevant if it is capable of making a difference
    in a decision. Relevant information has
  • (a) Predictive value.
  • (b) Feedback value.
  • (c) Timeliness.
  • (2) Reliability. Accounting information is
    reliable to the extent that users can depend on
    it to represent the economic conditions or events
    that it purports to represent. Reliable
    information has
  • (a) Verifiability.
  • (b) Representational faithfulness.
  • (c) Neutrality.
  • In addition, the information must also be
    comparable and consistent.

16
Third Level Recognition and Measurement Concepts
  • Assumptions
  • Principles
  • Constraints

17
Third Level Recognition and Measurement Concepts
  • 1. Assumptions.
  • a. Economic entity assumptioneconomic activity
    can be identified with a particular unit of
    accountability.
  • b. Going concern assumptionbusiness enterprises
    will have a long enough life to justify the use
    of accruals and deferrals.
  • c. Monetary unit assumptionthe monetary unit
    (i.e., the dollar) is the most effective means of
    expressing to interested parties changes in
    capital and exchanges of goods and services. A
    second assumption is that the monetary unit
    remains reasonably stable. Note that during the
    inflationary period of the 1970s this assumption
    was criticized by many accountants.
  • d. Periodicity assumptionactivities of an
    enterprise can be divided into artificial time
    periods.

18
Third Level Recognition and Measurement Concepts
  • 2. Principles.
  • a.Historical cost principleacquisition cost is
    the most objective and verifiable basis to
    account for assets and liabilities. Definite and
    objective, not subject to interpretation.
  • b.Revenue recognition principlerevenue is
    recognized when (1) its earned and (2) Its
    realized or realizable.
  • c.Matching principleefforts (expenses) should
    be matched with accomplishments (revenues) if
    feasible.
  • (a) When direct association exists, expense
    costs against revenues in the period when the
    revenue is recognized.
  • (b) When association exists but is difficult to
    identify, allocate costs rationally and
    systematically to expense in the periods
    benefited.
  • (c) When little if any association exists,
    expense immediately.
  • d.Full disclosure principlerevealing in
    financial statements any facts of sufficient
    importance to influence the judgment and
    decisions of an informed reader. Companies use
    of notes and supplementary information in
    financial reporting.

19
Third Level Recognition and Measurement Concepts
  • 3. Constraints modifying basic theory
  • a. Cost-benefitthe benefit to be derived from
    having accounting information should exceed the
    cost of providing it. Frequently it is easier to
    assess the costs than it is to determine the
    benefits of providing a particular item of
    information.
  • b. Materialityif the amount is significant when
    compared with other items, sound and acceptable
    standards should be followed.
  • (1) The determination of materiality requires
    considerable judgment, a potential for abuse
    exists.
  • (2) Immaterial items are recorded but need not
    be separately disclosed.
  • c. Industry practicepeculiar nature of industry
    or business may result in variation.
  • d. Conservatismwhen in doubt choose the
    solution that will be least likely to overstate
    assets and income.
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