Environ - 1

The Environment of Accounting

Environ - 2

NATURE OF ACCOUNTING An information system designed to . . .

Identify Collect Measure Process Communicate,

economic data to interested parties to assist decision-making.

“Accounting is the language of business”

Environ - 3

Accounting Environment

Accounting information helps decision makers evaluate

economic opportunities for gain and the related inherent risks of providing capital to a particular

venture.“Resource Allocation”

Environ - 4

Financial Accounting External Users

For those who lackdirect access to the

information generatedby the internal operations of a

company.

Concepts, principles, andprocedures known as

Generally Accepted AccountingPrinciples (GAAP) weredeveloped to meet the

needs of external users.

GAAP

Environ - 5

Management Accounting Internal Users

Developed tomeet the needsof management.

Information thataids planning and

control.

Much of theinformation isconfidential.

Environ - 6

The Interaction of Financial Accounting with Its Environment

FinancialAccounting

Determineregulatory

tax payments.

Establish theattractivenessof a company

as an acquisition.

Evaluate theeffectiveness of

individual managers.

Determinewhether bond

and other contractprovisions are

satisfied.

Help lendersevaluate risk ofa potential loan.

Serve as input tolocal, state, and

federal regulators.

Fin Acctg Concepts - 7

GENERALLY ACCEPTEDACCOUNTING PRINCIPLES

Reasons for Generally Accepted Accounting Principles (GAAP)

Entities influencing GAAPGAAP

Fin Acctg Concepts - 8

GAAP

Generally Accepted Accounting Principles (GAAP)– The guidance U.S. companies currently use to

measure and report performance– Is very flexible

•Allows management judgment•Different methods of measurement allowed

@Cambridge Business Publishers, 2009

Who prepares a company’s

financial statements?

Management

Fin Acctg Concepts - 9

GAAP FAQs

Why did GAAP arise?– To mutually benefit the capital market

participants who use financial statements– To help evaluate risk and return– To give confidence to users that information

helps make better decisions Created by Financial Accounting Standards Board

(FASB)• Overseen by the Securities and Exchange

Commission (SEC)SEC has the ultimate power to set accounting

standards@Cambridge Business Publishers, 2009

Fin Acctg Concepts - 10

International Accounting Standards

Attempt to harmonize accounting standards through creation of International Financial Reporting Standards (IFRS)

Some countries are using IFRS– European Union converted in 2005

Recent impact on U.S.– Late 2007, U. S. SEC voted to allow foreign

registrants to file financial statements with the U.S. using IFRS•Previously required to use or reconcile to

U.S. GAAP

@Cambridge Business Publishers, 2009

10

Fin Acctg Concepts - 11

Proposed SEC Roadmap for IFRS

#-Staggered adoption possible based on earliest adoption in 2015 or 2016.

11

Environ - 12

FASBFinancial

Independence

Smaller Size

ReportingAutonomy

BroadRepresentation

IncreasedStaff

F FASB

Environ - 13

Impact of Other Organizations on GAAP

GAAP

Internal RevenueService

American Instituteof CPAs

Securities andExchange

Commission

AmericanAccountingAssociation

GovernmentalAccounting

Standards Board

Financial ExecutivesInstitute

Institute ofManagement Accountants

Environ - 14

“FINANCIAL STATEMENT PACKAGE”

Formal financial statements

Footnotes

Supplementary information

Attestation reports

Environ - 15

FINANCIAL STATEMENTS

Statement of Financial Position (Balance Sheet)

Income Statement (Earnings Statement)– Statement of Comprehensive Income

Statement of Retained Earnings (Stockholders’ Equity)

Statement of Cash Flows

Environ - 16

ATTESTATION REPORTS

Management Report

Audit Committee Report

Independent Auditor’s Report