1. © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Accounting: What The Numbers Mean
Tenth Edition
Marshall, McManus, and Viele

2. Accounting—Present and Past
Chapter 1
Accounting—Present and Past
Chapter 1: Accounting—Present and Past
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

3. Accounting is the process of:
What is Accounting?
LO 1
Accounting is the process of:
Learning Objective 1: Explain the definition of accounting.
Accounting is the process of identifying, measuring, and communicating economic information about an organization to external and internal users for the purpose of making decisions and informed judgments.
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4. Users and Uses of Accounting Information
LO 2
Learning Objective 2: Identify who the users of accounting information are and explain why they find accounting information useful.
The internal users of accounting information include the management and owners of an organization. Accounting information is used to identify and measure costs and benefits, to plan and control the activities of an entity, and to support management’s decision-making process.
The external users of accounting information include investors and shareholders, creditors and suppliers, employees, and governmental agencies such as the Securities and Exchange Commission. Investors and shareholders use accounting information to make investment decisions about the company’s stock. Creditors and suppliers use accounting information to assess the ability of the company to pay its debts. Employees use accounting information for retirement planning and to determine the ability of the company to meet its retirement obligations. The Securities and Exchange Commission uses accounting information to evaluate a company’s compliance with SEC rules and regulations and to ensure that the company has fully disclosed all required information to investors.
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5. Financial Accounting
LO 3
Financial accounting generally refers to the process that results in the preparation and reporting of financial statements for an entity.
Financial accounting is primarily externally oriented and concerned with the historical results of an entity’s performance.
Learning Objective 3: Identify the variety of professional services that accountants provide.
Financial accounting focuses on financial statement preparation for external users. Financial accounting provides historical data about an entity’s business transactions and the effects of those transactions on the financial position, results of its operations, and its cash flows for a specified time period.
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6. Managerial Accounting/ Cost Accounting
LO 3
Managerial accounting is concerned with the use of economic and financial information to plan and control many of the activities of the entity and to support the management decision-making process.
Managerial accounting focuses on the management process of planning, organizing, and controlling the entity’s activities to accomplish the entity’s goals. Cost accounting relates to the processes used by management to determine and allocate costs based upon current, relevant information.
Cost accounting relates to the determination and accumulation of product, process, or service costs.
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7. Auditing—Public Accounting
LO 3
Public accounting firms and individual Certified Public Accountants (CPAs) provide auditing services and issue an independent auditor’s report.
Work done by public accounting firms varies depending on the size and classification of the firm. Small local firms primarily provide bookkeeping, accounting, tax preparation, and financial planning services to individuals and small businesses. Larger regional firms concentrate on auditing services, corporate tax returns, and management advisory services. Larger domestic and international firms also provide auditing, corporate tax returns, and management advisory services, but their clients are large domestic and international corporations.
An independent auditor’s report usually contains four brief paragraphs and states whether the financial statements are prepared in conformity with generally accepted accounting principles. An auditor’s report can be unqualified (a “clean opinion) or qualified.
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8. Internal Auditing
LO 3
Internal auditors are professional accountants who perform functions much like those of an external auditor. However, internal auditors are employed in industry rather than public accounting.
The internal auditor is generally responsible for reviewing the financial statements of an individual company or analyzing the operating efficiency of an entity’s activities. A Certified Internal Auditor (CIA) has similar qualifications of other accountants, but has also passed an examination to become a CIA.
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9. Governmental and Not-for-Profit Accounting
LO 3
Governmental units (e.g., municipal, state, and federal agencies) and not-for-profit entities (e.g., universities, hospitals, and religious organizations) require the same accounting functions to be performed as do other accounting entities.
The Governmental Accounting Standards Board (GASB) provides the guidelines for financial accounting and reporting by state and local governmental entities and public colleges and universities. These entities employ accountants with similar educational qualifications as those employed in business and public accounting.
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10. Income Tax Accounting
LO 3
Tax practitioners often develop specialties in the taxation of individuals, partnerships, corporations, trusts and estates, or international tax law issues.
The United States Internal Revenue Code and related regulations coupled with state and local tax laws specify rules and procedures to be followed to determine an entity’s tax liability. Accountants use their judgment and expertise to design transactions so that an entity’s overall income tax liability is minimized. Accountants also prepare tax returns and represent clients whose tax returns are being reviewed or challenged by tax authorities.
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11. How Has Accounting Developed?
Effective July, 2009, all FASB standards were superseded by the FASB Accounting Standards Codification (FASB Codification). Essentially, the FASB Codification reorganized divergent sources of U.S. GAAP in a more accessible and researchable format. The FASB Codification now represents a single source of U.S. GAAP.
Effective July, 2009, all FASB standards were superseded by the FASB Accounting Standards Codification (FASB Codification). Essentially, the FASB Codification reorganized divergent sources of U.S. GAAP in a more accessible and researchable format. The FASB Codification now represents a single source of U.S. GAAP. Changes to the Codification are communicated through Accounting Standards Update (Update or ASU), regardless of the form in which such guidance may have been issued prior to the release of the FASB Codification. Although such Updates do in fact amend FASB Codification, the FASB does not consider ASUs as authoritative in their own right. A total of 58 ASUs have been issued through the end of 2011.
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12. Standards for Other Types of Accounting
LO 6
Managerial/Cost Accounting
Cost Accounting Standards Board (CASB) for government contracts
Auditing/Public Accounting
Auditing Standards Board (part of AICPA)
The Cost Accounting Standards Board (CASB) has the authority to establish cost accounting standards for certain government contracts and colleges and universities that are recipients of major federal research funds.
The Auditing Standards Board, part of the American Institute of Certified Public Accountants, issues auditing standards and procedures used to audit privately-held companies.
The Governmental Accounting Standards Board (GASB) establishes guidelines for state and local governmental entities and public colleges and universities. The GASB operates with the authority of the Financial Accounting Foundation, which is also the parent organization of the Financial Accounting Standards Board (FASB).
State and Local Governments
Governmental Accounting Standards Board (GASB)
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13. International Accounting Standards
LO 6
The goal of the International Accounting Standards Board (IASB) is to develop a single set of high-quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles.
With the advancement of the global marketplace, a need for comparability between financial statements prepared in different countries according to differing standards has developed. The goal of the International Accounting Standards Board (IASB) is to develop a single set of high-quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles.
The IASB and its predecessor organization had issued 41 International Accounting Standards (IAS) and 13 International Financial Reporting Standards (IFRS) as of September 2012, with much of this progress coming in recent years. As a result, all major nations have now established time lines to converge with or adopt IFRS standards in the near future.
The IASB has issued 41 IASs and
13 IFRSs.
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14. Ethics and the Accounting Profession
LO 7
Integrity
Objectivity
Independence
Competence
Learning Objective 7: Identify the key elements of ethical behavior for a professional accountant.
Professional accounting organizations require members to conform to a Code of Professional Conduct or be subject to disciplinary action. The AICPA’s Code of Professional Conduct identifies four key elements of ethical behavior. Integrity, being honest and forthright in dealings and communications with others; objectivity, being impartial and free from conflict of interest; independence, related to objectivity, especially important for auditors to be independent both in appearance and in fact; and competence, having the knowledge and professional skills to adequately perform the work assigned. These four elements are essential characteristics of accounting professionals, which enable them to serve the best interests of employers, clients, and the public.
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15. The Conceptual Framework
LO 8
In the mid-1970’s, the Financial Accounting Standards Board (FASB) began creating the Statements of Financial Accounting Concepts (SFAC) in an effort to define the underlying concepts of accounting principles and financial reporting practices.
Learning Objective 8: Summarize the reasons for the FASB’s Conceptual Framework project.
In the mid-1970’s, the Financial Accounting Standards Board (FASB) began creating the Statements of Financial Accounting Concepts (SFAC) in an effort to define the underlying concepts of accounting principles and financial reporting practices. The FASB issued eight SFACs through September 2012, the first six of which were issued between 1978 and These statements represent a great deal of effort by the FASB, and progress made on this project has not come easily.
In concert with their efforts to converge U.S. and international accounting standards, the FASB and IASB have undertaken a project to improve and converge their respective Conceptual Frameworks as well.
Statements of Financial Accounting Concepts (SFACs) describe concepts and relationships that underlie financial accounting standards.
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16. Chapter 1: The Objective of General Purpose Financial Statements
Concepts Statement No. 8
LO 9
Chapter 1: The Objective of General Purpose Financial Statements
Individual firms or entities
External Users
Historical cost
Benefits exceed costs
Timely information
Notes and disclosures
Learning Objective 9: Summarize the objectives of financial reporting for business enterprises.
To set the stage more completely for your study of financial accounting, it is appropriate to have an overview of the foundational building blocks of financial reporting as expressed in Concepts Statement No. 8, Chapter 1: “The Objective of General Purpose Financial Reporting.” To gain a comprehensive understanding of the author summary provided here, you may want to download the full text of Concepts Statement No. 8 from the FASB’s website.
Financial reporting is done for individual firms, or entities, rather than for industries or the economy as a whole. It is aimed primarily at meeting the needs of external users of accounting information who would not otherwise have access to the firm’s records. Financial accounting is historical scorekeeping; it is not future-oriented. Financial accounting information is developed and used at a cost, and the benefits to the user of accounting information should exceed the cost of providing it. A primary objective of financial reporting is to provide timely information about a firm’s earnings and cash flow. Financial reporting includes detailed notes and other disclosures. Accrual accounting involves accounting for the effect of an economic activity, or transaction, on an entity when the activity has occurred, rather than when the cash receipt or payment takes place. Financial accounting does not attempt to directly measure the value of a firm, although it can be used to facilitate the efforts of those attempting to achieve such an objective. Financial accounting standards are still evolving; with each new update to the FASB Codification, accounting procedures are modified to mirror new developments in the business world as well as current views and theories of financial reporting.
Accrual accounting
Does not measure value of the firm
Evolving
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17. End of Chapter 1
End of Chapter 1.
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