GAAP PowerPoint #1

 Generally Accepted Accounting Principles  Defined as the set of accepted industry rules, practices and guidelines for financial accounting  Includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements

 AICPA  FASB  SEC ◦ Define: Security ◦ Securities Act of 1933 ◦ Securities Act of 1934  GASB

 American Institute of Certified Public Accountants (CPA)  Founded in 1887  Sets ethical standards for the CPA profession  Sets U.S. auditing and GAAP standards  Develops and grades the Uniform CPA Examination 

 Financial Accounting Standards Board  Established in 1973  Establishes and improves standards of financial accounting by non- governmental entities (GAAP) 

 Securities and Exchange Commission  Created by the Securities Act of 1933 and the Securities and Exchange Act of 1934  Holds the primary responsibility for: ◦ Enforcing federal securities laws ◦ Regulating the securities industry ◦ Regulating the stock market and ◦ Preventing corporate abuse of investors

 Enforcement authority granted by Congress  Bring civil enforcement actions against individuals and companies who: ◦ Commit accounting fraud ◦ Provide false information ◦ Engage in insider trading ◦ Violate securities laws  Bring criminal enforcement actions to prosecute individuals and companies for criminal offenses

 Maintains fair, orderly and efficient security markets  Ensures that securities industry professionals deal fairly with their customers  Ensures that corporations make all material information about themselves public  Facilitates capital formation for corporations 

 notes  stock  treasury stock  security future  bond  debenture  certificate of interest  participation in any profit-sharing agreement

 Referred to as the Truth in Securities Law  Two basic objectives: ◦ Requires that investors receive financial/significant information concerning securities offered for public sale ◦ Prohibits deceit, misrepresentations, and fraud in the sale of securities

 Empowers the SEC with broad authority over the securities industry  Includes the power to register, regulate, and oversee ◦ Brokerage firms ◦ Transfer agents ◦ Clearing agencies ◦ Self-regulatory organizations  New York Stock Exchange  American Stock Exchange  NASDAQ  Empowers SEC to require periodic reporting by companies with publicly traded securities (GAAP)

 Governmental Accounting Standards Board  Established in 1984  To establish and improve standards of state and local governmental accounting and financial reporting (GAAP) 

 What is meant by GAAP?  Why should all companies follow GAAP in reporting to external users of financial information?  Explain the roles of each of the governing bodies in the setting of accounting standards.

GAAP PowerPoint #2

Understandability Decision Usefulness Relevance Predictive Value Feedback Value Timeliness Reliability Verifiability Neutrality Representational Faithfulness Comparability and Consistency Cost/Benefit (discussed in PPT #3) Materiality (discussed in PPT #3)

 To provide useful, understandable information to users of financial statements for decision making  For present and potential investors and creditors and other users in making rational investment, credit, and similar decisions  To help present and potential investors and creditors and other users to assess the amounts, timing, and uncertainty of prospective cash receipts  To inform users about the ◦ economic resources of an enterprise; ◦ the claims to those resources (obligations); ◦ the effects of transactions, events, and ◦ circumstances that cause changes in resources and claims to those resources

 Decision usefulness ◦ the quality of being useful to decision making  Understandability ◦ users must understand the information within the context of the decision being made

 Relevance ◦ Definition: relating to the matter at hand  Reliability ◦ Definition: the quality or state of being reliable; and the extent to which an experiment, test, or measuring procedure yields the same results on repeated trials 

 Capable of making a difference in the decision making of the user  Must have predictive or feedback value ◦ Predicts or forecasts for users about the outcome of events of a company ◦ Provides feedback value for users to confirm or correct prior expectations of a company  Must be presented in a timely manner ◦ Provides current information to users to help with decision making

 Must be verifiable ◦ Able to be proven; not subject to opinion  Must be a faithful representation ◦ Agreement between the accounting numbers and supporting documentation  Must be reasonably free from error ◦ No mistakes or inaccuracies should be found in the financial statements  Must be reasonably free from bias; should be neutral ◦ Accounting information should not favor any groups or companies but be a true and factual representation of a company’s financial position.

 Comparability ◦ Definition: The quality of information that enables users to identify similarities in and differences between two sets of economic phenomena.  Consistency ◦ Definition: Conformity from period to period with unchanging policies and procedures.  Information about a particular enterprise gains greatly in usefulness if it can be compared with similar information. 

 The purpose of comparison is to detect and explain similarities and differences.  Accounting information should be comparable across different companies and over different time periods.

 Consistent use of accounting principles from one accounting period to another enhances the utility of financial statements to users.  A quality of the relationship between two accounting numbers

 Explain the concept of the FASB’s conceptual framework. (Slide 2)  What is the primary objective of financial accounting?  Explain relevance and reliability of financial statements.  What are the components of relevant information?  What are the components of reliable information?  Why should financial statements be both comparable and consistent?

GAAP PowerPoint #3

Understandability Decision Usefulness Relevance Predictive Value Feedback Value Timeliness Reliability Verifiability Neutrality Representational Faithfulness Comparability and Consistency Cost/Benefit Materiality Discussed in PPT #2

 A constraint is a limit, regulation, or confinement within prescribed bounds.  This term refers to the accounting guidelines that border the Hierarchy of Qualitative Information  They consist of: ◦ Cost Effectiveness ◦ Materiality ◦ Conservatism

 Also called Cost Benefit Constraint  The cost of providing accounting information should not exceed the benefit of the information it is reporting.  Example: A company purchases pencils and pens to use in its business. Rather than inventory these items, they are included as supplies and are expensed periodically because of the minor cost of the items.

 Material means big enough to make a difference in the user’s decision-making process.  States that the requirements of any accounting principle may be ignored when there is no effect on the decisions of the user of financial information.  Example: A company purchases a Trashcan for $10. Per GAAP, this amount should be capitalized as an asset and depreciated. Because the amount is immaterial, the $10 can be recorded as an expense.

 Accountants use their judgment to record transactions that require estimation.  Conservatism helps the accountant choose between 2 equally likely alternatives.  Requires the accountant to record the transaction using the less optimistic choice.  Example: There is the potential for a customer to sue the company. Although, the customer may choose not to sue, the accountant will disclose this potential lawsuit to investors.

 Concepts are the ground rules of accounting that should be followed when preparing financial statements.  These are: ◦ Recognition Concept ◦ Measurement Concept

 States that an item should be recognized (recorded) in the financial statements when: ◦ It can be defined by GAAP assumptions and principles ◦ It can be measured ◦ It is relevant to decision-making by users ◦ It is reliable

 States that every transaction is measured by the stated unit of measurement, such as the dollar  The stated procedure of valuing assets, liabilities, equity, revenue, and expenses as defined by GAAP

 Assumptions are agreed upon rules of accounting, and are basic, understood beliefs.  There are Four Basic Assumptions of Accounting: ◦ Economic Business Entity ◦ Going Concern ◦ Monetary Unit ◦ Time Period

 All of the business transactions should be separate from the business owner’s personal transactions  There should be no co-mingling of personal funds with business funds.

 Financial statements are prepared under the assumption that the company will remain in business indefinitely unless there is sufficient evidence otherwise.  If there is evidence that a company may possibly have a going concern issue, this must be disclosed in the financial statements.

 Assumes a stable currency is going to be the unit of record.  FASB accepts the nominal value of the US Dollar as the monetary unit of record unadjusted for inflation.

 The entity’s activities are separated into periods of time such as months, quarters or years.  Transactions must be accounted for within the time period they occur regardless of when cash is exchanged.

 Principles are accounting rules used to prepare, present, and report financial statements.  Principles dictate how events should be recorded and reported.

 Assets are recorded at historical cost, not fair market value.  For example, if a company purchases a building for $500,000 it should be recorded as such, and should remain on the books for that amount until disposed of.  If the building appreciates to $700,000 in the next few years, no adjustment should be made.

 All information pertaining to the operations and financial position of the entity must be reported within the period of time in question.  Circumstances and events that make a difference to financial statement users should be disclosed.

 Revenue is earned and recognized upon product delivery or service completion, without regard to when cash is actually received.  Also called accrual basis accounting  Example: A customer purchases inventory from a company on credit. Even though no cash has yet been received, the sale is recorded.

 The costs of doing business are recorded in the same period as the revenue they help generate, regardless of when the money is actually paid.  Also called accrual basis accounting  Example: A company orders merchandise on credit and has 30 days in which to pay. This purchase is recorded immediately, even though no cash has been paid.

 Explain what is meant by “The benefits of accounting information must exceed the costs.”  What is meant by the term materiality in financial reporting?  What is meant by the term conservatism in financial reporting?  Explain the Going Concern assumption.  Explain the Time Period assumption.  Explain the accounting principles that guide accounting practice.

GAAP PowerPoint #4

 A formal record of the financial activities of a business  Includes four basic financial statements: ◦ Balance Sheet (Statement of Financial Position) ◦ Income Statement (Statement of Comprehensive Income) ◦ Statement of Cash Flows ◦ Statement of Changes in Equity

 Reports a company’s financial position/condition at a given point in time  Reports on: ◦ Assets ◦ Liabilities and ◦ Equity  Details about cash in bank, amounts owed to creditors, and value of company’s assets.

 Reports on a company’s income and expenses over a given period of time  Reports on ◦ Revenue (income) ◦ Expenses  Shows a company’s profit or loss over a given period of time

 Reports on a company’s cash flow activities into and out of the business from: ◦ Operating Activities ◦ Investing Activities and ◦ Financing Activities  Shows how changes in the balance sheet and income statement affect cash and cash equivalents

 Reports the changes in the company’s equity throughout the reporting period  Reports ◦ profit or loss from the company, ◦ dividends paid, and ◦ other items that are debited/credited to retained earnings

 Explain the purpose of the Balance Sheet.  Explain the purpose of the Income Statement.  Explain the purpose of the Statement of Equity.  Explain the purpose of the Statement of Cash Flows.

GAAP PowerPoint #5

 International Financial Reporting Standards  Adopted in 1989 by the International Accounting Standards Board  Composed of principles-based standards, interpretations, and framework that establish broad rules and treatments of events  Because of numerous companies operating globally, standards that are applicable to all countries need to be developed.

 States the basic principles for IFRS  Currently being updated and converged with the IASB and FASB  Objective is to create a sound foundation for future accounting standards

 In February 2010, the SEC voted unanimously to reaffirm its commitment to the goal of a single set of High Quality Global Accounting Standards.  In October 2010, the SEC began working on a plan to combine GAAP and IFRS.  US companies may move to IFRS in approximately 2015 or 2016.

 Explain the concept behind the IFRS.  Summarize the projected target date for US implementation of IFRS.