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Accounting Principles and Reporting Standards

Chapter. 14. Accounting Principles and Reporting Standards. Section 1: Generally Accepted Accounting Principles. Section Objectives. Understand the process used to develop generally accepted accounting principles.

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Accounting Principles and Reporting Standards

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  1. Chapter 14 Accounting Principles and Reporting Standards Section 1: Generally Accepted Accounting Principles Section Objectives • 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. McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

  2. 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.

  3. The Development of Generally Accepted Accounting Principles Public sector government represented by SEC Private sector business represented by FASB Objective 1 In the United States, accounting principles are developed through a cooperative effort between the public sectorand private sector.

  4. Objective 2 Identify the major accounting standards-setting bodies and their roles in the standards-setting process.

  5. 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.

  6. 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.

  7. 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.

  8. 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.

  9. Other Organizations • AAA (American Accounting Association) • NYSE (New York Stock Exchange) • IASC (International Accounting Standards Committee)

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

  11. New York Stock Exchange (NYSE) • Required corporations to publish annual reports as early as 1900. • Required independent audits for corporations since 1933.

  12. International Accounting Standards Board (IASB) • Wants to develop standards that can be adopted throughout the world. • Has issued about 50 international accounting standards. 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.

  13. Describe the Users and Uses of Financial Reports Objective 3 The FASB has concluded that financial reporting rules should focus on providing information to investors and creditors. The focus is not on management regulatory agencies tax authorities

  14. Chapter 14 Accounting Principlesand Reporting Standards Section 2: The FASB’s Conceptual Framework of Accounting Section Objectives • Identify and explain the qualitative characteristics of accounting information. • Describe and explain the basic assumptions about accounting reports. • Explain and apply the basic principles of accounting. • Describe and apply the modifying constraints on accounting principles. McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

  15. FASB’s framework of accounting can be divided into four categories: • Qualitative Characteristics • Basic Assumptions • Basic Accounting Principles • Modifying Constraints

  16. Usefulness Understandability Relevance Reliability Neutrality Comparability Completeness Objective 4 Identify and explain the qualitative characteristics of accounting information Qualitative Characteristics

  17. Qualitative Characteristics Usefulness Information should be useful to decision makers.

  18. Qualitative Characteristics Understandability The information should be presented in a clear and understandable manner assuming users have some basic knowledge of business and economics.

  19. Qualitative Characteristics Relevance The information should be appropriate for and have a bearing on decisions to be made by the users. • Timeliness—The information should be reported promptly so that it can be used in making current business decisions. • The information provided should have both predictive and feedback value.

  20. Qualitative Characteristics Reliability The information should be dependable, that is, free from error and also free from any bias on the part of the preparer. • Verifiability— Implies that supporting documents such as checks, invoices, and contracts support the information supplied in the financial statements and that they are available for examination. • Representational Faithfulness – Implies that the data shown in the financial reports reflect what really happened.

  21. Qualitative Characteristics Neutrality The information should not favor one group of users over another group. The information should be prepared in such a way that it is helpful to all groups.

  22. Qualitative Characteristics Comparability The information should be presented so that it can be compared with the financial statements of other businesses as well as previous financial statements of the business itself.

  23. Qualitative Characteristics Consistency Means that an entity uses the same accounting treatment for similar events and data from period to period.

  24. Describe and explain the basic assumptions about accounting reports Objective 5 Underlying Assumptions • Separate Economic Entity • Going Concern • Monetary Unit • Periodicity of Income

  25. QUESTION: What is the separate economic entity assumption? ANSWER: The separate economic entity assumption assumes that the business is separate from its owners.

  26. QUESTION: What is the going concern assumption? ANSWER: The going concern assumption is the concept that a firm will continue to operate indefinitely.

  27. QUESTION: What is the monetary unit assumption? ANSWER: The monetary unit assumption is the concept that records are kept in terms of money and the value of money is stable.

  28. QUESTION: What is the periodicity of income assumption? ANSWER: The periodicity of income assumption is the concept that income should be reported in certain time periods.

  29. Explain and apply the basic principles of accounting Historical Cost Basis Revenue Recognition Matching Full Disclosure Objective 6 General Principles

  30. QUESTION: What is the historical cost basis principle? ANSWER: The historical cost basis principle is the principle that requires assets to be recorded at their cost at the time they are acquired.

  31. QUESTION: What is recognition of revenue? ANSWER: Recognition is determining the period in which to record revenue and report it on the income statement.

  32. QUESTION: What is the matching principle? ANSWER: The matching principle is the concept that revenue and costs incurred in earning that revenue should be matched in the appropriate accounting period.

  33. QUESTION: What is the full disclosure principle? ANSWER: The full disclosure principle is the requirement that all information that might affect the user’s interpretation of financial statements be disclosed in the statements or in the footnotes.

  34. Describe and apply the modifying constraints on accounting principles Objective 7 Modifying Constraints • Materiality • Cost-Benefit Test • Conservatism • Industry Practice

  35. QUESTION: What is materiality? ANSWER: Materiality is the significance of an item in relation to a particular situation or set of facts.

  36. QUESTION: What is the Cost Benefit Test? ANSWER: Cost Benefit Test says that the cost of gathering information to fully comply with an accounting principle or rule may be much higher than the benefit revealed. (Example, creating a depreciation schedule to depreciate the cost of a trash can or stapler)

  37. QUESTION: What is conservatism? ANSWER: Conservatism is the concept that revenue and assets should be understated rather than overstated if GAAP allows alternatives.

  38. QUESTION: What is Industry Practice? ANSWER: Some industries have unusual tax laws or regulatory requirements and so have developed special accounting principles and procedures for their industry.

  39. Thank You for using College Accounting, 12th Edition Price • Haddock • Farina

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