Accounting Principles and Reporting Standards Chapter 14 Accounting Principles and Reporting Standards Section 1: Generally Accepted Accounting Principles Section Objectives Chapter 13 reviewed the last five steps of a merchandising firm’s accounting cycle. Chapter 14 discusses how accounting principles are developed and the roles of various organizations and groups in that development. In addition, FASB’s Conceptual Framework is introduced as well as the importance of qualitative characteristics, principles, assumptions, procedures, and conventions of accounting. Section 1 focuses on the process used to develop generally accepted accounting principles and who creates those principles as well as the users of financial reports. Objective one explains the process used to develop generally accepted accounting principles. Understand the process used to develop generally accepted accounting principles. Identify the major standards-setting bodies and their roles in the standard-setting process. Describe the users and uses of financial reports.

The Need for Generally Accepted Accounting Principles Financial transactions and financial statements are prepared using accounting rules and principles.

Generally Accepted Accounting Principles (GAAP) Ensure that financial statements are meaningful and useful. Are used whether the business is large or small. Allow financial statements of different companies to be compared. Allow a company to compare its own financial statements from period to period. Owners, suppliers, investors, and others rely on financial records. Users can be satisfied only if a consistent set of rules, procedures, and principles of accounting are accepted and used.

Objective 1. The Development of Generally Accepted Accounting Principles How are GAAP developed?

In the United States, accounting principles are developed through a cooperative effort between the public sector and private sector. Public sector government represented by SEC Private sector business represented by FASB In the United States, accounting principles are developed through a cooperative effort between the public sector and private sector.

Objective 2. Identify the major accounting standards-setting bodies and their roles in the standards-setting process. Who are the major accounting standards-setting bodies in the U.S.?

Securities and Exchange Commission Regulates all publicly held companies and all companies with more than a specified number of shareholders or owners. Determines the form and content of accounting reports filed by companies under its jurisdiction. Has authority to define accounting terms and to prescribe accounting principles. Lets the accounting profession develop principles and standards, but has the final authority. The SEC is a legal rule-making body and represents the public sector.

Financial Accounting Standards Board Seven member board — each having distinguished accounting backgrounds — who are full-time employees. Responsible for developing financial accounting standards and principles. Develops and issues Statements of Financial Accounting Standards. Has issued about 150 standards that the SEC recognizes as authoritative. The FASB represents the private sector. The FASB is responsible for developing financial accounting standards and principles. The authoritative financial accounting pronouncements of the FASB are know as Statements of Financial Accounting Standards.

American Institute of Certified Public Accountants (AICPA) In the past, GAAP were developed by AICPA committees. In 1972 the AICPA and other organizations formed the FASB. The AICPA requires its members to confirm that audited companies follow the FASB Statements of Financial Accounting Standards. T The American Institute of Certified Public Accountants (AICPA) is a national professional organization of certified public accountants. The major functions of the AICPA are: Issuing Accounting and Auditing Guides Issuing Statements of Position which provide guidance on financial accounting questions. Issuing Practice Bulletins which express the AICPA’s position on narrow accounting issues.

Federal and State Agencies Require detailed systems of accounting for public utilities. Issue income tax rules for companies (IRS). Some companies adopt tax accounting rules for financial records, provided the rules don’t conflict with GAAP. Strong influencing agencies include regulatory agencies for public utility companies and the IRS.

Other Organizations Federal and State Agencies other than the SEC AAA (American Accounting Association) NYSE (New York Stock Exchange) IASC (International Accounting Standards Committee) Other organizations that play a role in developing accounting principles are: Federal and State Agencies other than the SEC AAA (American Accounting Association) NYSE (New York Stock Exchange) IASC (International Accounting Standards Committee)

American Accounting Association (AAA) Has members who: teach accounting; write textbooks and articles. Stimulates the acceptance of accounting principles. About half of the of members of the American Accounting Association (AAA) teach accounting.

New York Stock Exchange (NYSE) Required corporations to publish annual reports as early as 1900. Required independent audits for corporations since 1933. The New York Stock Exchange (NYSE) has been instrumental in the development of accounting principles and rules.

International Accounting Standards Board (IASB) Wants to develop standards that can be adopted throughout the world. Has issued about 50 international accounting standards. The International Accounting Standards Board, IASB, was formed to develop accounting standards that can be adopted throughout the world. In an important move, in 2002 the European Union voted to require companies whose securities are traded on exchanges in member countries to prepare financial reports on the basis of IASB Standards.

Objective 3. Users and Uses of Financial Reports There are all kinds of groups, organizations and individuals who use financial reports.

The FASB has concluded that financial reporting rules should focus on providing information to investors and creditors. The focus is not on management tax authorities regulatory agencies Financial reporting rules are primarily concerned with providing information that is helpful to current and potential investors and creditors so that they can make better investment and credit decisions.

Why does FASB focus on helping investors and creditors instead of other interested parties? QUESTION The other interested parties — management, tax authorities, regulatory agencies — have access to specific information from the firm’s records not available to the public. ANSWER FASB focuses on helping investors and creditors instead of other interested parties because the other interested parties — management, tax authorities, regulatory agencies — have access to specific information from the firm’s records which is not available to the public.

Investors and creditors expect to receive a cash flow directly or indirectly from the business entity: directly from the distribution of the company’s earnings. indirectly through the disposal of their interests for cash. Investors and creditors expect to receive a cash flow directly or indirectly from the business entity.

Financial report users need information about: Profits Economic resources (assets) Claims against assets (liabilities and owner’s equity) Changes in assets and in claims against assets Financial report users need information about: Profits, Assets, Claims against the assets (liabilities and owner’s equity) and Information about changes in assets and the claims against the assets.

Complete the following sentences: SECTION R E V I W Complete the following sentences: The ______ sector (government) is represented by the _____________ ____________________. public Securities and Exchange Commission The ______ sector (business) is represented by the __________________ _______________. private Financial Accounting Standards Board Let’ review. . . The ______ requires its members to confirm that audited companies follow the Statements developed by the _____. AICPA FASB

Complete the following sentences: SECTION R E V I W Complete the following sentences: The FASB has concluded that financial reporting rules should focus on providing information to ________ and ________. investors creditors Cash flows are received _______ from a company through the distribution of the company’s earnings. directly Cash flows are received ________ from a company through the sale of interest in the company for cash. indirectly

College Accounting, 11th Edition Thank You for using College Accounting, 11th Edition Price • Haddock • Brock