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Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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
Environment and Theoretical
Structure of Financial Accounting
Chapter 1
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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
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Financial Accounting Environment
Relevant financial information is provided primarily through
financial statements and related disclosure notes. The
following financial statements are the most frequently
provided.
1. Balance Sheet
2. Income Statement
3. Statement of Cash Flows
4. Statement of Shareholders Equity
Starting in 2012, companies must either provide a
Statement of Other Comprehensive Income immediately
following the Income Statement, or present a Combined
Statement of Comprehensive Income that includes the
information normally contained in both the Income
Statement and the Statement of Other Comprehensive
Income.



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Cash versus Accrual Accounting
Cash Basis Accounting
Revenue is recognized when cash is received.
Expenses are recognized when cash is paid.
O
R
O
R
O
R
OR
Accrual Accounting
Revenue is recognized when earned.
Expenses are recognized when incurred.
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The Development of Financial
Accounting and Reporting Standards
Concepts,
principles, and
procedures
developed to meet the
needs of external
users (GAAP).
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Historical Perspective and Standards


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Current U. S. Standard Setting
Supported by the Financial Accounting
Foundation
Seven full-time, independent voting members
Members not required to be CPAs
Financial Accounting
Standards Board
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International Standard Setting
The main objective of the International
Accounting Standards Board (IASB) is to
develop a single set of high quality,
understandable, and enforceable global
accounting standards to help participants in
the worlds capital markets and other users
make economic decisions.
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Efforts to Converge U.S. and
International Standards
Issues and Concerns:
Desire for a single set of global standards
Need for standards that are customized to fit stringent legal
and regulatory requirements of U.S.
Possible differences in implementation and enforcement





Progress:
September 2002: FASB and IASB sign Norwalk Agreement.
November 2008: SEC issues a Roadmap with milestones.
May 2011: SEC issues discussion paper describing a
condorsement approach.
November 2011: SEC issues two studies comparing U.S.
GAAP to IFRS and analyzing how IFRS are applied globally.
December 2011: SEC postpones final determination until
2012.






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A Move Away from
Rules-Based Standards?
Rules-based accounting standards
vs.
Objectives-oriented approach

Objectives-oriented
(principles-based)
approach stresses
professional judgment

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The Conceptual Framework
The Conceptual Framework has been described as
an Accounting Constitution. It provides the
underlying foundation for accounting standards.
FASB Conceptual Framework
(Statements of Financial Accounting Concepts)
Objectives of Financial Reporting (SFAC 1, replaced by
SFAC 8)
Qualitative Characteristics (SFAC 2, replaced by SFAC 8)
Elements of Financial Statements (SFAC 3, replaced by
SFAC 6)
Recognition and Measurement (SFAC 5 and SFAC 7)
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Objective
To provide financial information
that is useful to capital providers.
Elements
Recognition and
Measurement
Concepts
Constraints
Financial
Statements
The Conceptual Framework
Qualitative
Characteristics
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Neutrality Completeness
Free from
error
Predictive
value
Materiality
Relevance Faithful representation
Qualitative Characteristics of
Accounting Information
Comparability
(Consistency)
Understandability Verifiability Timeliness
Decision usefulness
Confirmatory
value
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Elements of Financial Statements
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Elements of Financial Statements
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Recognition, Measurement and
Disclosure Concepts
Recognition
Process of admitting information
into the basic financial statements
Criteria:
1. Definition
2. Measurability
3. Relevance
4. Reliability
Measurement
Process of associating numerical
amounts with the elements.
Measurement Attributes:
1. Historical cost
2. Net realizable value
3. Current cost
4. Present value of
future cash flows
5. Fair value
Disclosure
Process of including additional
supplemental information.
Examples:
1. Parenthetical
amounts
2. Notes to FS
3. Supplemental FS
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Revenue Recognition: Realization
Two Criteria:
1. Earnings process is complete or virtually
complete.
2. Reasonable certainty as to the collectability of
the asset to be received (usually cash).
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Expense Recognition: Matching
The matching principle requires that all
expenses incurred in generating revenue for a
period also be recognized in the same period.
Four Approaches
1. Based on exact cause-and-effect relationships.
2. By associating an expense with the revenues
recognized in a specific time period.
3. By a systematic and rational allocation to specific
time periods.
4. In the period incurred, without regard to related
revenues.
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End of Chapter 1