1. 1 An electronic presentation by Douglas Cloud Pepperdine University

2. 2 Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

3. 3 The Environment of Financial Reporting C hapter 1

4. 4  Understand capital markets and decision making.  Know what is included in financial reporting.  Explain generally accepted accounting principles (GAAP) and the sources of GAAP.  Identify the types of pronouncements issued by the FASB. and Exchange Commission (SEC) and the FASB. Objectives

5. 5  Understand how the Financial Accounting Standards Board (FASB) operates.  Describe the relationship between the Securities and Exchange Commission (SEC) and the FASB.  Use ethical models for decision making about ethical dilemmas.  Understand creative thinking. Objectives

6. 6 Companies need large amounts of capital for operations.

7. 7 Companies may obtain capital by issuing capital stock... Stock Exchange

8. 8... or by borrowing from lenders. Bank

9. 9 Capital Markets Corporations Financial InstitutionsInvestors Borrow money Sell stocks and bonds Primary Market (e.g., individuals, banks) Secondary Market (e.g., New York Stock Exchange) Buy and sell stocks and bonds Investors Buy and sell stocks and bonds

10. 10 Accounting Information Economic Activities and Decision Making External Decisio n Making Internal Decisio n Making Accumu- late Accounting Information Commu- nicate Impact Company’s Economic Activities External User Internal User

11. 11 Comparison of Financial and Managerial Accounting Sources of Authority Financial Accounting Managerial Accounting GAAP Internal needs

12. 12 Time Frame of Reported Information Financial Accounting Managerial Accounting Primarily historical Present and future Comparison of Financial and Managerial Accounting

13. 13Scope Financial Accounting Managerial Accounting Mainly total company Individual departments, divisions, and total company Comparison of Financial and Managerial Accounting

14. 14 Type of Information Financial Accounting Managerial Accounting Primarily quantitative Sales$275,240 Cost180,120 Gross95,120 Expenses 80,120 Net inc.$15,000 Comparison of Financial and Managerial Accounting Qualitative as well as quantitative Materials usage is unfavorable by $8,400.

15. 15 Statement Format Financial Accounting Managerial Accounting Determined by company; focused upon specific decisions being made format Prescribed by GAAP; oriented toward investment and credit decisions Comparison of Financial and Managerial Accounting

16. 16 Decision Focus Financial Accounting Managerial Accounting External Internal Comparison of Financial and Managerial Accounting

17. 17 Financial Reporting Financial reporting is the process of communicating financial accounting information about a company to external users.

18. 18 Balance sheet (or statement of financial position) which summarizes a company’s financial position at a given date. Income statement which summarizes the results of a company’s income producing activities for a period of time. Statement of cash flows which summarizes a company’s cash inflows and outflows for a period of time. Companies present at least three major financial statements: Financial Reporting

19. 19 A statement of changes in stockholders’ equity also is included by many companies. This statement summarizes the changes in each item of stockholders’ equity for a period. Financial Reporting

20. 20 Generally Accepted Accounting Principles (GAAP) GAAP are the guidelines, procedures, and practices that a company is required to use in recording and reporting the accounting information in its audited financial statements.

21. 21 Hierarchy of Sources of GAAP A Pronouncements of authoritative bodies (FASB, APB, CAP, SEC). B Pronouncements of bodies of expert accountants that have been exposed for public comment. C Pronouncements of bodies of expert accountants that have not been exposed for public comment.

22. 22 D Widely accepted practices and pronouncements representing prevalent practice in a particular industry or applications to specific circumstances. F Other accounting literature. Hierarchy of Sources of GAAP

23. 23 History of GAAP in the Private Sector 1938 CAP formed CAP issued 51 ARBs APB issued 31 Opinions 1959 APB formed 1973 FASB formed Present FASB issued 135 Statements of Standards as of 4/99

24. 24 Reasons for Forming APB  To alleviate criticism about the process of formulating accounting principles, which included wider representation.  To create a policy-making body whose rules would be binding on companies rather than optional.

25. 25 Criticisms of the APB  Independence. The members of the APB were part-time volunteers whose major responsibilities were to their employers.  Representation. The public accounting firms and the AICPA were too closely associated with the development of accounting standards.  Response time. Emerging problems were not solved quickly enough.

26. 26 Structure of the FASB Financial Accounting Standards Advisory Council (approximately 30 members) Financial Accounting Standards Board (7 members) Appoint, fund, and oversee Advise Financial Accounting Foundation (16-member board of trustees) Continued on next slide

27. 27 Structure of the FASB Financial Accounting Standards Board (7 members) Task Forces of the Standards Board (including Emerging Issues Task Force) Appoint Consult Support Administrative Staff Research and Technical Staff Consult

28. 28 Types of Pronouncements Issued by the FASB Statements of Financial Accounting Standards Interpretations Technical Bulletins Statements of Financial Accounting Concepts Other Pronouncements

29. 29 FASB Operating Procedures Identify Topic Appoint Task Force Conduct Research Issue Discussion Memorandum or Invitation to Comment Deliberate on Findings Issue Exposure Draft Continue next slide Hold Public Hearings

30. 30 FASB Operating Procedures Modify Exposure Drafts Vote (super- majority) Issue Statement Deliberate on Findings Issue Exposure Draft Hold Public Hearings

31. 31 Other Organizations Impacting GAAP Securities and Exchange Commission (SEC) American Institute of Certified Public Accountants (AICPA) FASB Emerging Issues Task Force (EITF) Cost Accounting Standards Board (CASB) Internal Revenue Service (IRS) American Accounting Association (AAA) Securities and Exchange Commission (SEC) American Institute of Certified Public Accountants (AICPA) FASB Emerging Issues Task Force (EITF) Cost Accounting Standards Board (CASB) Internal Revenue Service (IRS) American Accounting Association (AAA)

32. 32 Other Organizations Impacting GAAP International Accounting Standards Committee (IASC) Governmental Accounting Standards Board (GASB) Financial Executives Institution (FEI) Institution of Management Accountants (IMA) Association for Investment Management and Research (AIMR) International Accounting Standards Committee (IASC) Governmental Accounting Standards Board (GASB) Financial Executives Institution (FEI) Institution of Management Accountants (IMA) Association for Investment Management and Research (AIMR)

33. 33 Participants in the Development of GAAP FASB SECAICPA EITF CASB GASB IMA IRS IASC AAA AIMR FEI

34. 34 Principles of the AICPA Code of Professional Conduct ResponsibilitiesResponsibilities In carrying out their responsibilities as professionals, members should exercise sensitive professional judgment in all their activities.

35. 35 Principles of the AICPA Code of Professional Conduct The Public Interest Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism.

36. 36 Principles of the AICPA Code of Professional Conduct IntegrityIntegrity To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.

37. 37 Principles of the AICPA Code of Professional Conduct Objectivity and Independence A member should maintain objectivity and be free from conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance.

38. 38 Principles of the AICPA Code of Professional Conduct Due Care A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge the professional responsibility to the best of the member’s ability.

39. 39 Principles of the AICPA Code of Professional Conduct Scope and Nature of Service A member in public practice should observe the Principles of the CPC in determining the scope and nature of the services to be provided.

40. 40 An Ethicist’s Basic Approaches to Moral Reasoning  The utilitarian model, which evaluations actions based on the greatest good for the greatest number.  The rights model, which embraces actions that protect individual moral rights.  The justice model, which emphasizes a fair distribution of benefits and burdens.

41. 41 Creative and Critical Thinking Recognize Problem Identify Alternatives Evaluate Alternatives Select Solution Implement Solution Creative Thinking Critical Thinking

42. 42 C hapter 1