6-1 Full and Fair Reporting Electronic Presentation by Douglas Cloud Pepperdine University Chapter F6

6-2 1.Explain the purpose of accounting regulation. 2.Describe how accounting standards are established in the United States. 3.Explain the purpose of the Financial Accounting Standards Board’s conceptual framework. ObjectivesObjectives Once you have completed this chapter, you should be able to: ContinuedContinued

6-3 4.Identify supplementary information to the financial statements in a corporate annual report. 5.Describe the purpose of internal controls and types of controls that should be evident in business organizations. ObjectivesObjectives

6-41 ObjectiveObjective Explain the purpose of accounting regulation.

6-5 Accounting regulations protect the interests of external decision makers by ensuring that information for evaluating the performance and financial condition of a business is available and that the information is prepared according to specific guidelines.

6-6 What specific guidelines?

6-7 Specific guidelines that provide assurance that the information is reliable and comparable over time and across companies.

6-8 The purchaser of a corporation’s stock needs assurance that the shares are reasonably priced and represent a legitimate business.

6-9

6-10 The Securities Act of 1933 requires most corporations to file registration statements before selling stock to investors. Sources of Accounting Regulations

6-11 The Securities Exchange Act of 1934 requires corporations to provide annual financial reports to stockholders. Sources of Accounting Regulations

6-12 Sources of Accounting Regulations The 1934 act also created the Securities and Exchange Commission (SEC). The SEC is responsible for overseeing external financial reporting for publicly traded corporations. Securities and Exchange Commission

6-13 The failure of a corporation to report fairly their activities to stockholders is a major concern in a capitalistic economy.

Describe how accounting standards are established in the United States. ObjectiveObjective

6-15 Standard Setting Organizations The Financial Accounting Standards Board (FASB) has been the primary organization for setting accounting standards for businesses in the U.S. since 1973.

6-16 The Governmental Accounting Standards Board (GASB) is a private organization that sets standards for state and local governmental units. Standard Setting Organizations

6-17 Standard Setting Organizations The General Accounting Office is the primary federal government agency that oversees accounting in the federal government.

6-18 Standard Setting Organizations The International Accounting Standards Board (IASB) recommends accounting standards that it believes are appropriate for a broad range of global activities involving companies in many nations.

6-19 The Standard-Setting Process 1.Accounting issues are identified and evaluated for consideration. 2.A discussion memorandum is issued and responses are solicited.

6-20 The Standard-Setting Process 1.Accounting issues are identified and evaluated for consideration. 2.A discussion memorandum is issued and responses are solicited. A discussion memorandum is a document that identifies accounting issues and alternative approaches to resolving the issue.

6-21 The Standard-Setting Process 3.Public hearings are held. 1.Accounting issues are identified and evaluated for consideration. 2.A discussion memorandum is issued and responses are solicited.

6-22 The Standard-Setting Process 3.Public hearings are held. 4.An exposure draft is issued and responses are solicited. 1.Accounting issues are identified and evaluated for consideration. 2.A discussion memorandum is issued and responses are solicited.

6-23 The Standard-Setting Process 3.Public hearings are held. 4.An exposure draft is issued and responses are solicited. 1.Accounting issues are identified and evaluated for consideration. 2.A discussion memorandum is issued and responses are solicited. An exposure draft is a document that describes a proposed accounting standard.

6-24 The Standard-Setting Process 3.Public hearings are held. 4.An exposure draft is issued and responses are solicited. 1.Accounting issues are identified and evaluated for consideration. 2.A discussion memorandum is issued and responses are solicited. 5.Additional public hearings are held as needed.

6-25 An accounting standard is an official pronouncement establishing acceptable accounting procedures or financial report content. 6.A standard is issued. The Standard-Setting Process 3.Public hearings are held. 4.An exposure draft is issued and responses are solicited. 1.Accounting issues are identified and evaluated for consideration. 2.A discussion memorandum is issued and responses are solicited. 5.Additional public hearings are held as needed.

Existing standards are reviewed and modified as needed. 6.A standard is issued. The Standard-Setting Process 3.Public hearings are held. 4.An exposure draft is issued and responses are solicited. 1.Accounting issues are identified and evaluated for consideration. 2.A discussion memorandum is issued and responses are solicited. 5.Additional public hearings are held as needed.

Explain the purpose of the Financial Accounting Standards Board’s conceptual framework. ObjectiveObjective

6-28 The FASB’s Conceptual Framework The FASB conceptual framework is a set of objectives, principles, and definitions to guide the development of new accounting standards.

6-29 The FASB’s Conceptual Framework The FASB conceptual framework includes four major components: 1.Objectives of financial reporting 2.Qualitative characteristics of accounting information 3.Elements of financial statements 4.Recognition and measurement in financial statements

6-30 The FASB’s Conceptual Framework To be relevant, information should be timely and have predictive or feedback value.

6-31 The FASB’s Conceptual Framework To be reliable, information should faithfully represent economic events and should be verifiable and neutral.

Identify supplementary information to the financial statements in a corporate annual report. ObjectiveObjective

6-33 Corporate annual reports usually include:  A letter from the president or chief executive officer of the company

6-34 Corporate annual reports usually include:  A description of the company’s products and business activities

6-35 Corporate annual reports usually include:  A summary of selected business data Financial data, such as financial statements for a number of years An example of such data is shown in the next slide.

6-36 Exhibit 1 Summary Business Data from a Corporate Report

6-37 Corporate annual reports usually include:  A discussion by management of the company’s performance (MD&A) This section explains important events and changes in performance during the years presented in the financial statements.

6-38 Corporate annual reports usually include:  Notes to the financial statements Notes to financial statements describe how some of the numbers were computed and provide additional information about items reported on the statements.

6-39 Corporate annual reports usually include:  A statement of management responsibilities for the financial statements Management is responsible for preparing statements and related information that fairly reports the business activities of a corporation.

6-40 Corporate annual reports usually include:  An audit report An audit involves a detailed, systematic investigation of a company’s accounting records and procedures for the purpose of determining the reliability of financial reports.

6-41 Corporate annual reports usually include:  An audit report An unqualified opinion states that the auditor believes that the financial statements fairly present the company’s actual economic events for the period covered by the audited statements.

Describe the purpose of internal controls that should be evident in business organizations. ObjectiveObjective

6-43 Management Philosophy Top management should develop and enforce policies to ensure an effective system of internal controls.

6-44 ConductConductConductConduct CodeCodeCodeCode Business Ethics Management should create a code of ethics and other documents that establish company policy and inform employees of acceptable and expected behavior.

6-45 Computer System Controls Internal controls should be built into computer information systems to protect a company’s information resources from unauthorized access, improper use, and destruction.

6-46 Human Resources Controls Hiring qualified employees who have the appropriate skills for a particular job. Conducting background checks to identify employees who have a history of improper behavior. Maintaining a good training program to ensure employee development and maintenance of skills.

6-47 Physical Controls  Merchandise and materials can be secured in warehouses or display cases.  Merchandise can be tagged electronically to make shoplifting or theft difficult.  Surveillance equipment can monitor important resources.  Cash registers, vaults, and safety deposit boxes can be used to secure financial resources

6-48 T HE E ND C HAPTER F6

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