1. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Spiceland and Sepe Intermediate Accounting

2. Environment and Theoretical Structure of Financial Accounting CHAPTER 1

3. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Financial Accounting Environment Profit-oriented companies Not-for-profit entities Households Providers of Financial Information External User Groups Investors Creditors Employees Labor unions Customers Suppliers Government agencies Financial intermediaries Relevant Financial Information

4. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Financial Accounting Environment Relevant financial information is provided primarily through financial statements and related disclosure notes.  Balance Sheet  Income Statement  Statement of Cash Flows  Statement of Shareholders’ Equity

5. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Investment-Credit Decisions A Cash Flow Perspective Corporate shareholders will receive cash from their investments through...  Periodic dividend distributions from the corporation.  The ultimate sale of the ownership shares of stock.

6. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Investment-Credit Decisions A Cash Flow Perspective Accounting information should help investors evaluate the amount, timing, and uncertainty of the enterprise’s future cash flows.

7. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Cash Versus Accrual Accounting Cash Basis Accounting  Revenue is recognized when cash is received.  Expenses are recognized when cash is paid.

8. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Cash Versus Accrual Accounting Cash Basis Accounting Carter Company has sales on account totaling $100,000 per year, and collected as shown on the following slide. The company prepaid $60,000 for three years’ rent in the first year. Utilities are $10,000 per year, but in the first year only $5,000 was paid. Payments to employees are $50,000 per year. Let’s look at the cash flows.

9. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Cash Versus Accrual Accounting Cash Basis Accounting

10. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Cash Versus Accrual Accounting Cash Basis Accounting Cash flows in any one year may not be a predictor of future cash flows.

11. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Cash Versus Accrual Accounting Accrual Accounting  Revenue is recognized when earned.  Expenses are recognized when incurred. Let’s reconsider the Carter Company information.

12. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Accrual Accounting  Revenue is recognized when earned.  Expenses are recognized when incurred. Lets reconsider the Carter Company information. Cash Versus Accrual Accounting

13. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Development of Financial Accounting Concepts, principles, and procedures were developed to meet the needs of external users (GAAP).

14. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Early Standard Setting Evolution of Standard-Setting Process 1938 - 1959:  Committee on Accounting Procedures (CAP) 1959 - 1973:  Accounting Principles Board (APB)

15. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Current Standard Setting - FASB www.fasb.org Supported by the Financial Accounting Foundation. Seven full-time, independent voting members serving for 10 years. Answerable only to the Financial Accounting Foundation. Members not required to be CPAs.

16. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Establishment of Accounting Standards A Political Process GAAP Internal Revenue Service www.irs.gov American Institute of CPAs www.aicpa.org Securities and Exchange Commission www.sec.gov American Accounting Association www.aaa-edu.org Governmental Accounting Standards Board www.gasb.org Financial Executives Institute www.fei.org

17. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill International Accounting Standards Committee (IASC) Established in 1973 to narrow the range of differences in accounting standards. Increase in international trade has motivated the IASC to attempt to eliminate alternative accounting treatments.

18. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Role of the Auditor Independent intermediary to help insure that management has in fact appropriately applied GAAP.

19. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill The Conceptual Framework Accounting standards consistency. Resolve new accounting problems. Provide user benefits.

20. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill The Conceptual Framework Recognition and Measurement Criteria (SFAC No. 5) Environment Implementation Implementation assumptions principles constraints Objectives of Financial Reporting (SFAC No. 1) Qualitative Characteristics of Accounting Information (SFAC No. 2) Elements of Financial Statements (SFAC No. 6)

21. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill To provide information:  Useful for decisions.  That helps predict cash flows.  About economic resources, claims to resources, and changes in resources and claims. Elements Recognition and Measurement Concepts Constraints Conceptual Framework Objectives Qualitative Characteristics Financial Statements Continued

22. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Elements Assets Liabilities Equity Investments by Owners Distributions to owners Revenues Expenses Gains Losses Comprehensive Income Recognition and Measurement Concepts Assumptions Economic entity Going concern Periodicity Monetary unit Principles Historical cost Realization Matching Full Disclosure Objectives Financial Statements Balance sheet Income statement Statement of cash flows Statement of shareholders’ equity Related disclosures Constraints Cost effectiveness Materiality Conservatism Qualitative Characteristics Understandability Primary Relevance Reliability Secondary Comparability Consistency

23. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Decision Usefulness ReliabilityRelevance Predictive Value Feedback Value TimelinessVerifiabilityNeutrality Representational Faithfulness ComparabilityConsistency Qualitative Characteristics Understandability

24. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill The Realization Principle Two conditions must be met if the realization principle is to be satisfied. Reasonable Assurance of Collection Substantial Completion of Transaction

25. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Recognition and Measurement Concepts

26. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill SFAC No. 6 Revenues “Inflows of assets or settlements of liabilities during a particular accounting period. Such inflows or settlements stem from delivery or production of goods or rendering of services.”

27. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill SFAC No. 6 Expenses “Outflows of assets or incurrences of liabilities during a particular accounting period. Such outflows are necessary to delivery or production of goods or rendering of services.”

28. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill SFAC No. 6 Gains and Losses Gains: “Increases in equity resulting from incidental transactions not associated with the company’s major business.” Losses: “Decreases in equity resulting from incidental transactions not associated with the company’s major business.”

29. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill SFAC No. 6 Assets and Liabilities Assets: “Business resources that have probable future economic benefits.” Liabilities: “Probable future sacrifices of economic benefits.”

30. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill SFAC No. 6 Equity Residual interest in the assets of a business entity is also known as net assets.

31. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill SFAC No. 6 Investments and Distributions Investments by owners: “Increases in equity resulting from asset contribution by other entities (owners/stockholders).” Distribution to owners: “Decreases in equity resulting from the distribution of assets to other entities.”

32. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill SFAC No. 6 Comprehensive Income “The change in equity resulting from the aggregate of all transactions reported in a particular accounting period, except for investments by and distributions to owners.”

33. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question The function of financial accounting is to identify, measure and communicate financial information about economic entities to interested parties. a. True b. False

34. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question The function of financial accounting is to identify, measure and communicate financial information about economic entities to interested parties. a. True b. False

35. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question Accrual accounting provides a better indication of ability to generate cash flows than does information limited to the financial effects of cash receipts and cash payments. a. True b. False

36. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question Accrual accounting provides a better indication of ability to generate cash flows than does information limited to the financial effects of cash receipts and cash payments. a. True b. False

37. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question The primary objective of accrual basis accounting is the measurement of income. a. True b. False

38. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question The primary objective of accrual basis accounting is the measurement of income. a. True b. False

39. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question Generally accepted accounting principles include both standards set by various rule making bodies and certain accounting practices that have evolved over time. a. True b. False

40. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question Generally accepted accounting principles include both standards set by various rule making bodies and certain accounting practices that have evolved over time. a. True b. False

41. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question The major financial accounting standard setting body is the a. Accounting Principles Board b. Securities and Exchange Commission c.Financial Accounting Standards Board d. American Institute of CPAs

42. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question The major financial accounting standard setting body is the a. Accounting Principles Board b. Securities and Exchange Commission c.Financial Accounting Standards Board d. American Institute of CPAs

43. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question The FASB issues which of the following types of pronouncements? a.Standards b.Interpretations c.Financial Accounting Concepts d.Technical Bulletins e.All of the above

44. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question The FASB issues which of the following types of pronouncements? a.Standards b.Interpretations c.Financial Accounting Concepts d.Technical Bulletins e.All of the above

45. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question The Financial Accounting Standards Board develops accounting and reporting standards independent of public, business and political pressures. a. True b. False

46. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Question The Financial Accounting Standards Board develops accounting and reporting standards independent of public, business and political pressures. a. True b. False

47. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Ethics in Accounting To be useful, accounting information must be objective and reliable. Management may be under pressure to report desired results and ignore or bend existing rules.

48. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Model for Ethical Decisions  Determine the facts of the situation.  Identify the ethical issue and the stakeholders.  Identify the values related to the situation.  Specify the alternative courses of action.  Evaluate the courses of action.  Identify the consequences of each course of action.  Make your decision and take any indicated action.

49. © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill End of Chapter 1