Chapter 1 Partial Outline Kieso 14th

8/12/2019 Chapter 1 Partial Outline Kieso 14th

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CHAPTER 1Financial Accounting and Accounting Standards

LEARNING OBJECTIVES

1.Identify the major financial statements and other means of financial reporting.

2.Explain how accounting assists in the efficient use of scarce resources.

3.Identify the objective of financial reporting.

4.Explain the need for accounting standards.

5.Identify the major policy-setting bodies and their role in the standard-setting process.

6.Explain the meaning of generally accepted accounting principles (GAAP) and the rol

the Codification for GAAP.

7.Describe the impact of user groups on the rule-making process.

8.Describe some of the challenges facing financial reporting.9.Understand issues related to ethics and financial accounting.

Copyright 2012 John Wiley & Sons, Inc. Kieso,Intermediate Accounting,14/e


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Partial Outline Chapter 1A.(L.O. 1)Major financial statements and financial reporting.

1. Identification, measurement,andcommunicationof financial information (discussdifference between financial statements and financial reporting).

a. Financial statements:

(1)Income statement.

(2)Balance sheet.

(3)Statement of cash flows.

(4)Statement of owners or stockholders equity.

b. Financial reporting:

(1)Presidents letter or supplementary schedules in the annual report.

(2)Prospectuses.

(3)Reports filed with the SEC and other government agencies.

(4)News releases and management forecasts.

(5)Social or environmental impact statements.

2. Tointerested parties(discuss stockholders, creditors, government agencies, management,employees, consumers, labor unions, etc.).

B.(L.O. 2)How accounting assists in the use of scare resources.

1. A world of scarce resources. Accounting helps to identify efficient and inefficient usersof resources.

2. Capital allocation. Accounting assists in the effective capital allocation process byproviding financial reports to interested users.

3. Changing user needs. Accounting will continue to be faced with challenges to providinginformation needed for an efficient capital allocation process.

C.(L.O. 3)Objective of financial reporting.

1. To provide financial information about the reporting entity that is useful to present andpotential equity investors, lenders, and other creditors in making decisions in theircapacity as capital providers.

D.(L.O. 4)Need for accounting standards.

-2 Copyright 2012 John Wiley & Sons, Inc. Kieso,Intermediate Accounting,14/e


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1. To meet the various needs of users, companies prepare a single set of genepurpose financial statements.

2. Users expect financial statements to present fairly, clearly, and completely companys financial operations.

3. The accounting profession has developed a set of standards and procedures cagenerally accepted accounting principles (GAAP).

E.(L.O. 5)Parties involved in standard-setting.

1. Standard setting in the public sector:

a. Discuss the role of the SEC, reasons for its establishment, SEC jurisdiction.

b. Delegation of SECs authority to the private sector (AICPA and FASB).

2. Standard setting in the private sector.

a. History of private-sector standard setting from the CAP to the APB to the FASB

b. Reasons for establishment of the FASB.

c. Composition, membership, and voting rules of the FASB.

d. Organization and funding of the FASB.

e. Description of the FASBs due process system in setting standards.

f. Emerging Issues Task ForceCreated by FASB for the purpose of reachinconsensus on how to account for new and unusual financial transactions have a potential for creating differing financial reporting practices.

3. The SEC continues to play an active role in influencing standards, e.g., accountingbusiness combinations and intangible assets; and concerns about the accountingoff-balance sheet items raised by the failure of Enron.

F.(L.O. 6)Meaning of GAAP.

1. Generally accepted accounting principles (GAAP) have substantive authoritative supp

2. The AICPAs Code of Professional Conduct requires that members prepare finanstatements in accordance with GAAP.

3. GAAP includes:

a. FASB Standards and Interpretations, APB Opinions, AICPA Accounting ReseaBulletins. (Most authoritative.)



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b. AICPA Industry Audit and Accounting Guides, AICPA Statements of Position, FASBTechnical Bulletins.

c. FASB Emerging Issues Task Force, AICPA AcSEC Practice Bulletins, widelyrecognized/prevalent industry practices.

(1)Mention that the AICPA will no longer issue authoritative accounting guidance

for public companies.

d. AICPA Accounting Interpretations, FASB Implementation Guides (Q and A)

4. The FASB developed the Financial Accounting Standards Board Accounting StandardsCodification (the Codification).

a. The Codification changes the way GAAP is documented, presented and updated.

b. Explains what GAAP is and eliminates nonessential information.

G.(L.O. 7)Impact of user groups.

1. Describe user (pressure) groups, their composition and their interests.

2. Discuss impact of accounting on the interests of each group.

3. Discuss impact ofeconomic consequences.Although accounting standards should bebased on sound concepts, the FASB must be attentive to the economic consequencesof its pronouncements.

H.Theexpectations gap.

1. What people think accountants should do vs. what accountants think they can do.2. Discuss the Sarbanes-Oxley Act and the Public Company Accounting Oversight Board.

.(L.O. 8)Challenges facing financial reporting.

1. Nonfinancial measurements.

2. Forward-looking information.

3. Soft assets.

4. Timeliness..(L.O. 9)Ethics and financial accounting.

1.In accounting, companies frequently encounter ethical dilemmas. Some of thesedilemmas are easy to resolve but many are not, requiring difficult choices amongallowable alternatives.



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2.Time, job, client, personal, and peer pressures can complicate the process of ethsensitivity and selection among alternatives.

3.Decisions are sometimes difficult because a public consensus has not emergedformulate a comprehensive ethical system that provides guidelines in making ethjudgments.

K.International accounting standards.

1. Companies outside the U.S. often prepare financial statements using standadifferent from GAAP.

2. There is a growing demand for one set of high-quality international standards.

3. There are two sets of acceptable rules for international useGAAP and InternatioFinancial Reporting Standards issued by the International Accounting Standards Bo(IASB).

4. The FASB and the IASB have agreed to use their best efforts to:

a. Make their existing financial reporting standards fully compatible as soonpracticable, and

b. Coordinate their future work programs to ensure that once achieved, compatibis maintained.



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*IFRS InsightsMost agree that there is a need for one set of international accounting standards. Here is why:

Multinational corporations.Todays companies view the entire world as their market. Forexample, Coca-Cola, Intel, and McDonalds generate more than 50 percent of their salesoutside the United States, and many foreign companies, such as Toyota, Nestl, and Sony, findheir largest market to be the United States.

Mergers and acquisitions.The mergers between Fiat/Chrysler and Vodafone/Mannesmannsuggest that we will see even more such business combinations in the future.

nformation technology.As communication barriers continue to topple through advances inechnology, companies and individuals in different countries and markets are becoming morecomfortable buying and selling goods and services from one another.

Financial markets.Financial markets are of international significance today. Whether it iscurrency, equity securities (stocks), bonds, or derivatives, there are active markets throughouthe world trading these types of instruments.

RELEVANT FACTS

International standards are referred to asInternational Financial Reporting Standards(IFRS),developed by the International Accounting Standards Board (IASB). Recent eventsin the global capital markets have underscored the importance of financial disclosure andtransparency not only in the United States but in markets around the world. As a result,many are examining which accounting and financial disclosure rules should be followed.

U.S. standards, referred to as generally accepted accounting principles (GAAP), aredeveloped by the Financial Accounting Standards Board (FASB). The fact that there aredifferences between what is in this textbook (which is based on U.S. standards) and IFRS

should not be surprising because the FASB and IASB have responded to different userneeds. In some countries, the primary users of financial statements are private investors; inothers, the primary users are tax authorities or central government planners. It appears thatthe United States and the international standard-setting environment are primarily driven bymeeting the needs of investors and creditors.

The internal control standards applicable to Sarbanes-Oxley (SOX) apply only to largepublic companies listed on U.S. exchanges. There is a continuing debate as to whethernon-U.S. companies should have to comply with this extra layer of regulation. Debate aboutinternational companies (non-U.S.) adopting SOX-type standards centers on whether thebenefits exceed the costs. The concern is that the higher costs of SOX compliance are

making the U.S. securities markets less competitive.IFRS tends to be simpler in its accounting and disclosure requirements; some people saymore principles-based. GAAP is more detailed; some people say more rules-based. Thisdifference in approach has resulted in a debate about the merits of principles-basedversus rules-based standards.



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ILLUSTRATION 1-1

THE ESSENTIAL CHARACTERISTICS

OF ACCOUNTING AND FINANCIAL REPORTING



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LLUSTRATION 1-2

ORGANIZATIONAL STRUCTURE FOR SETTING ACCOUNTING

STANDARDS



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LLUSTRATION 1-3

STEPS TAKEN IN THE EVOLUTION OF A FASB STATEMENT OF

THE FINANCIAL ACCOUNTING STANDARDS BOARD



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ILLUSTRATION 1-4

GAAP DOCUMENTS



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LLUSTRATION 1-5

USER GROUPS THAT INFLUENCE THE

FORMULATION OF ACCOUNTING STANDARDS



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ILLUSTRATION 1-6

KEY PROVISIONS OF THE SARBANES-OXLEY ACT



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LLUSTRATION 1-7

THE CHALLENGES FACING FINANCIAL REPORTING


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Chapter 1 Partial Outline Kieso 14th