Environment and Theoretical Structure of Financial Accounting

1. Environment and Theoretical Structure of Financial Accounting Sid Glandon, DBA, CPA Associate Professor of Accounting

2. Financial Accounting • Financial reporting is the process of providing relevant financial information to third-party users • Investors • Creditors • Financial intermediaries

3. Capital Markets • Primary markets • Debt and equity instruments are sold based on anticipated cash flows • Interest • Dividends • Capital gains • Secondary market • Investors trade

4. Accrual vs. Cash Accounting • Accrual accounting provides a more realistic representation of periodic financial results

5. Financial Statements • Balance Sheet • Statement of Income • Statement of Cash Flows • Statement of Shareholders’ Equity • Notes to the Financial Statements

6. Standards • Establishment of accounting standards is a political process • Standards setting bodies • Committee on Accounting Procedures • Accounting Principles Board • Financial Accounting Standards Board

7. Financial Accounting and Reporting Standards • Securities and Exchange Commission • American Institute of Certified Public Accountants (AICPA) • Committee on Accounting Procedures (CAP) • Accounting Principles Board (APB) • Financial Accounting Standards Board (FASB)

8. Financial Reporting Reform • Public Company Accounting Reform and Investor Protection Act of 2002 Sarbanes-Oxley (SOX) • Public Company Accounting Oversight Board (PCAOB) • Standards setting body for publicly traded companies and their auditors

9. Conceptual Framework • Statements of Financial Accounting Concepts • #1 Objectives of Financial Reporting • #2 Qualitative Characteristics of Accounting Information • #6 Elements of Financial Statements • #5 Recognition and Measurement in Financial Statements

10. Objectives of Financial Reporting • Provide information: • Useful for decision making • Helps in predicting cash flows • About economic resources, claims to resources and changes in resources and claims

11. Qualitative Characteristics • Understandability (user-specific quality) • Decision Usefulness (overriding objective) • Primary qualities • Relevance • Predictive value • Feedback value • Timeliness • Reliability • Verifiability • Neutrality • Representational faithfulness • Secondary • Comparability • Consistency • Materiality

12. Constraints • Cost effectiveness • Materiality • Conservatism

13. Elements of Financial Statements • Assets • Liabilities • Equity • Investments by owners • Revenues • Gains • Expenses • Losses • Comprehensive income

14. Recognition and Measurement • Recognition • Item is an element that is measurable, relevant and reliable • Measurement • Unit of measurement • Attribute to be measured • Historical cost • Net realizable value • Present value of future cash flows

15. Recognition and Measurement Concepts • Assumptions • Economic entity • Going concern • Perodicity • Monetary unit • Principles • Historical cost • Realization • Matching • Full disclosure

16. AICPA Code of Ethics • Preamble, self-discipline • Responsibilities, sensitive professional and moral judgments • Public Trust, serve the public interest • Integrity, highest sense of integrity • Objectivity and Independence, objective and independent in fact and appearance • Due Care, professional’s technical and ethical standards • Scope and Nature of Services, qualified to provide

17. Model for Ethical Decisions • Step 1, Determine the facts of the situation • Step 2, Identify the ethical issue and the stakeholders • Step 3, Identify the values related to the situation • Step 4, Specify the alternative courses of action • Step 5, Evaluate the courses of action in terms of their consistency with the values identified • Step 6, Identify the consequences of each possible course of action • Step 7, Make your decision and take any indicated action