1.

01 - NOTES
I. Generally Accepted Accounting Principles (GAAP) is defined as the set of
accepted industry rules, practices, and guidelines for financial accounting. GAAP
includes the standards, conventions, and rules accountants follow in recording and
summarizing transactions and in the preparation of financial statements.
A. Governing organizations behind Generally Accepted Accounting Principles
1. American Institute of Certified Public Accountants (AICPA)
2. The Financial Accounting Standards Board (FASB)
3. The Securities and Exchange Commission (SEC)
a. Two laws, the Securities Act of 1933 and the Securities Exchange
Act of 1934, give the SEC authority to establish reporting and
disclosure requirements.
b. Holds primary responsibility for:
(1) Enforcing federal securities laws
(2) Regulating the securities industry
(3) Regulating the stock market
(4) Preventing corporate abuse of investors
c. Given enforcement authority by Congress to:
(1) Bring civil enforcement actions against individuals and
companies who:
(a) Commit accounting fraud
(b) Provide false information
(c) Engage in insider trading
(d) Violate securities laws
(2) Bring criminal enforcement actions against individuals and
companies for criminal offenses.
4. The SEC usually operates in an oversight capacity, allowing the FASB
and the Governmental Accounting Standards Board (GASB) to establish
these requirements.
B. Primary qualities that make accounting information useful for decision
making
1. Relevance – The information is capable of making a difference in a
decision. Information should have predictive or feedback value, and it must
be presented on a timely basis.
2. Reliability - Information must be verifiable, a faithful representation, and
reasonably free of error and bias (neutral).
C. Secondary qualities that make accounting information useful for decision
making
1. Comparability - Information has been measured and reported in a similar
manner for different enterprises.
2. Consistency - Information is created and reported using the same
accounting treatment to similar events from period to period.

II. There are thirteen basic accounting constraints, concepts, assumptions, and
principles that GAAP is founded upon.
A. Constraints:
 1. Cost Effectiveness Constraint: The cost of providing accounting
information should not exceed the benefit of the information it is
reporting.
2. Materiality Constraint: The requirements of any accounting principle
may be ignored when there is no effect on the decisions of users of
financial information (immaterial).
3. Conservatism Constraint: Accountants must use their judgment to
record transactions that require estimation. This concept helps
accountants choose between 2 equally likely alternatives. Therefore,
the less optimistic estimate will be chosen when two estimates are
judged to be equally likely.
B. Concepts:
1. Recognition Concept: An item should be recognized (recorded) in the
financial statements when:
a. It can be defined by GAAP assumptions and principles.
b. It can be measured.
c. It is relevant to decision making by users.
d. It is reliable.
2. Measurement Concept
a. Every transaction is measured by the stated unit of measurement,
such as the dollar
b. The stated procedure of valuing assets, liabilities, equity, revenue
and expenses as defined by GAAP
C. Assumptions:
1. Economic Business Entity Assumption: All of the business
transactions are separate from the business owner’s personal
transactions.
2. Going Concern Assumption: Financial statements are prepared
under the assumption that the company will remain in business
indefinitely unless there is sufficient evidence otherwise.
3. Monetary Unit Assumption: The accountant assumes a stable currency
is going to be the unit of record. The FASB accepts the nominal value of
the U.S. dollar unadjusted for inflation as the monetary unit of record.
4. Time Period Assumption: The entity's activities are separated into
periods of time, i.e.: months, quarters or years.
D. Principles:
1. Cost Principle: Assets are recorded at historical cost, which equals
the value exchanged at the time of their acquisition, not at Fair Market
Value.
2. Full Disclosure Principle: All information pertaining to the operations
and financial position of the entity must be reported within the period of
time in question.
3. Revenue Recognition Principle: Revenue is earned and recognized
upon product delivery or service completion, without regard to the
timing of cash flow. This is also called accrual basis accounting.
4. Matching Principle: The costs of doing business are recorded in the
same period as the revenue they help to generate.

III. Statements Required by GAAP

 A. Balance Sheet: shows information about the organization’s resources at one
given time.
1. Shows Assets, Liabilities, and Equity
2. Details about cash including cash in the bank, amount owed to creditors,
and the value of the company’s assets.
B. Income Statement: Shows the flow of revenues over a given period of time,
typically a month, quarter, or year.
1. Shows revenue and expenses
2. Shows profit or loss of a company
C. Statement of Cash Flow: shows the movement of cash in and out of the
business over a specified period.
1. Details cash flows from operating activities, investing activities, and
financing activities
2. Shows how changes in the balance sheet and income statement affect
cash and cash equivalents
D. Statement of Stockholders Equity: shows the changes in the company’s
equity throughout the reporting period.
1. Reports profit or loss from the company
2. Reports dividends paid
3. Reports other items that are debited/credited to retained earnings

IV. International Financial Reporting Standards (IFRS)

A. Principles-based standards, interpretations, and the framework adopted
by the International Accounting Standards Board (IASB)
B. Due to numerous companies operating globally, standards that are applicable
to all countries need to be developed.
C. Framework of IFRS
1. States the basic principles of IFRS
2. Currently being updated and converged with the IASB and FASB
3. The objective is to create a sound foundation for future accounting
standards.
D. US GAAP becoming IFRS
1. In February 2010, the SEC voted unanimously to publish a statement to
reaffirm its longstanding commitment to the goal of a single set of high-
quality global accounting standards. Additionally, the SEC expressed its
continued support for the convergence of US GAAP and IFRS.
2. Beginning in October 2010, the SEC will begin to work on a plan to
combine GAAP and IFRS.
3. U.S. companies may move to IFRS in approximately 2015 or 2016
1.01 Rules in My Life

Why is it
Rule Important Consequences

Why should people who handle money for others

follow the rules? What are some effects of not
following accounting rules?
 1.01 Key Terms – Page 1

1.01 Key Terms

– PAPB
Term Definition
Generally Accepted Accounting Principles, The standards,
conventions, and rules accountants follow in recording and
GAAP summarizing transactions, and in the preparation of financial
statements,

American Institute of Certified Public Accountants; the national

AICPA professional organization of CPAs.

Financial Accounting Standards Board; develops GAAP for

FASB public companies.

Securities and Exchange Commission; primarily responsible

for enforcing federal securities laws and regulating the
SEC
securities industry.

Securities A negotiable financial instrument representing financial value.

Examples are banknotes, bonds, common stocks, options, and
futures.

Also called Truth in Securities Act; established after the stock

market crash of 1929 during the Great Depression. It requires
Securities Act of 1933
that any offer of sale of securities be registered.

A law governing the secondary trading of securities in the US;

Securities Act of 1934
established the SEC (Securities and Exchange Commission).
Governmental Accounting Standards Board; develops GAAP
GASB
for state and local governments.
Capable of making a difference in decision-making of the user.
Relevance
Information must be verifiable, a faithful representation, and
Reliability reasonably free from error and bias.

Helps detect and explain similarities and differences between

Comparability companies.

Using the same method of accounting from one period to

Consistency another to help decision makers.
 1.01 Key Terms – Page 2

Term Definition
Given two equally likely alternatives to estimate, accountants
Conservatism constraint will choose the less optimistic alternative.

States that an item should be recognized (recorded) in the

financial statements when it can be defined, measured,
Recognition concept
relevant and reliable.

States that every transaction is measured by the stated unit of

Measurement concept measurement, such as the dollar.

Fairness; uninfluenced by emotion or personal opinion; does

Objectivity not allow bias or conflicts of interest.
All of the business transactions should be separate from those
Economic business
of the owners.
entity assumption
Financial statements are prepared under the assumption that
Going concern
the company will remain in business indefinitely unless
assumption
significant evidence otherwise.
Monetary unit
Assumes a stable currency is going to be the unit of record.
assumption
The entity’s activities are separated into periods of time such
Time period assumption
as months, quarters or years.
Cost principle
Assets are recorded at historical cost, not fair market value.
assumption
All information pertaining to operations and financial position
of the entity must be reported within the period of time in
Full disclosure principle
question.

Revenue is earned and recognized upon product delivery or

Revenue recognition
service completion, no matter when cash is received.
principle
Costs of doing business are recorded in the same period as
the revenue they help generate, regardless of when money is
Matching principle
actually paid.

IFRS International Financial Reporting Standards

IASB International Accounting Standards Board
APB Accounting Principles Board
1.01 GAAP – Definition and Governing Bodies – Page 1
PowerPoint #1 Notes

GAAP Stands for

Defined as

Rules accountants

Governing
Bodies

American
Institute of
Certified
Public
Accountants

FASB
1.01 GAAP – Definition and Governing Bodies – Page 2
PowerPoint #1 Notes

Stands for
SEC
Created by:
Responsibility for:

Authority:
Granted by:
Civil Enforcement against:
Criminal Enforcement against:
Objectives:

Securities
1.01 GAAP – Definition and Governing Bodies – Page 3
PowerPoint #1 Notes

Securites
Act of 1933

2 Basic Objectives

Securities
Act of 1934
:

GASB
1.01 GAAP – Definition and Governing Bodies – Page 1
PowerPoint #1 Notes
--
GAAP Stands for Generally Accepted Accounting Principles

Defined as the set of accepted industry rules, practices, and

guidelines for financial accounting
Rules accountants follow in recording and summarizing
transactions and in the preparation of financial statements

Governing AICPA
FASB
Bodies
SEC
Securities
Securities Act of 1933
Securities Act of 1934
GASB
American Founded in 1887
Institute of
Sets ethical standards for CPA profession
Certified
Public Sets U.S. auditing and GAAP standards
Accountants
Develops and grades the CPA exam

FASB Financial Accounting Standards Board

Established in 1973

Establishes and improves standards of financial accounting

1.01 GAAP – Definition and Governing Bodies – Page 2
PowerPoint #1 Notes

Stands for Securities and Exchange Commission

S
E Created by: the Securities Act of 1933 and 1934
C Responsibility for:
Enforcing Federal Securities Laws
Regulating the Securities Industry
Regulating the Stock Market
Preventing Corporate abuse of investors

Authority Granted by: Congress

Civil Enforcement against: individuals and companies who commit fraud

Criminal Enforcement against: companies and individuals for criminal offenses
Objectives:
Maintain fair, orderly and efficient markets
Ensure that securities professionals deal fairly with customers
Faciliate Capital formation for corporations

Securities notes

stock

treasury stock

security futures

bonds

certificates of interest

participation in profit sharing agreements

1.01 GAAP – Definition and Governing Bodies – Page 3
PowerPoint #1 Notes

Securites aka Truth in Securities Law

Act of
1933
2 Basic Objectives

Requires that investors receive financial/significant

information concerning securities for public sale
Prohibits deceit, misrepresentations,
and fraud
Securities Empowers the SEC with broad authority of securities
Act of 1934 industry
brokerage firms

Power to register, transfer agents

regulate, and oversee
clearing agencies

self regulatory organization

GASB Governmental Accountings Standards Board

Established in 1984

Establish and improve standards of state and local

governmental accounting and reporting
1.01 GAAP – Qualities of Accounting Information – Page 1
PowerPoint #2 Notes

Chart What do these words mean to you? List your thoughts below:

Objectives of To provide
Financial
Information For

To inform about -

Decision Usefulness -

Understandability -

Primary Qualities Relevance -

Reliability -

Relevance

Reliability
1.01 GAAP – Qualities of Accounting Information – Page 2
PowerPoint #2 Notes

Secondary Comparability -
Qualities

Consistency -

Comparability

Consistency

Questions:
1.01 GAAP – Qualities of Accounting Information – Page 1 – KEY
PowerPoint #2 Notes

Chart What do these words mean to you? List your thoughts below:

Objectives of To provide useful, understandable information to users of financial statements for

Financial decision making
Information For present and potential investors

to inform about -economic resources of a company; claims to those resources;

effects of transactions and events; circumstances that cause may cause change
Decision Usefulness -quality of being useful to decision making

Understandability - users must understand information within the context of

decision being made
Primary Qualities Relevance - relating to the matter at hand

Reliability - the quality or state of being reliable; tests yield the same
results

Relevance capable of making a difference in the decision making of the user

must have predictive or feedback value

must be presented in a timely manner

Reliability Must be verifiable

Must be a faithful representation

Must be reasonably free from error

Must be reasonably free from bias; should be neutral

1.01 GAAP – Qualities of Accounting Information – Page 2
PowerPoint #2 Notes

Secondary Comparability - quality of information that enables users to

Qualities identify similarities and differences

Consistency - Conformity from period to period with

unchanging policies and procedures

Comparability to detect and explain similarities and differences

should be comparable across diferent companies and time

periods

Consistency enhances the utility of financial statements to users

a qualitiy of the relationship between two accounting numbers

Questions:
1.01 GAAP – Constraints, Concepts, Assumptions, and
Principles – Page 1
PowerPoint #3 Notes

Constraints

Cost
Effectiveness
Constraint

Materiality
Constraint

Conservatism
Constraint

Concepts

Recognition
Concept

1.01 GAAP – Constraints, Concepts, Assumptions, and

Principles – Page 2
 PowerPoint #3 Notes

Measurement
Concept

Assumptions

Economic
Business
Entity
Assumption

Going
Concern
Assumption

Monetary
Unit
Assumption

Time Period
Assumption

1.01 GAAP – Constraints, Concepts, Assumptions, and

Principles – Page 3
PowerPoint #3 Notes
Principles of
Accounting

Cost
Principle

Full
Disclosure
Principle

Revenue
Recognition
Principle

Matching
Principle

Questions

1.01 GAAP – Constraints, Concepts, Assumptions, and

Principles – Page 1
PowerPoint #3 Notes
Constraints A limit, regulation or being confined within bounds

Refers to accounting guidelines that border the Hierarchy of

Qualitative Information
Consist of Cost Effectiveness, Materiality, and Conservatism

Cost Called Cost Benefit

Effectiveness
Constraint
Cost of providing accounting information should not exceed
benefit of information being reported.

Materiality Big enough to make a difference in the decision making

Constraint process

States that requirements of any accounting principle may be

ignored when no effect on decisions by users.

Conservatism Accountants use judgment to record estimated transactions

Constraint

Helps the accountant choose between 2 equal alternatives

Concepts Ground rules of accounting

Recognition

Measurement

Recognition An item should be recognized in financial statements when

Concept defined by GAAP
Can be measured
Relevant to decision making
Reliable

1.01 GAAP – Constraints, Concepts, Assumptions, and

Principles – Page 2
PowerPoint #3 Notes
Measurement Every transaction measure by stated unit of measurement
Concept

Stated procedure of valuing assets, liabilities, equity,

revenue, and expenses as defined by GAAP

Assumptions Agreed upon rules of accounting; basic, understood

beliefs

Four basic assumptions: Economic Business Entity;

Going Concern; Monetary Unit; and Time Period

Economic All business transactions should be separate from the

Business business owner's personal transactions
Entity
Assumption
No co-mingling of personal funds with business funds.

Going Assumes the company will remain in business

Concern indefinitely unless there is sufficient evidence otherwise.
Assumption
If there is evidence, must be disclosed in the financial
statements.

Monetary Unit Assumes a stable currency is going to be the unit of

Assumption record

FASB accepts the US Dollar

Time Period Entities activities are separated into periods of time such
Assumption as months, quarters, or years.

Transactions must be accounted for in the time period

they occur.

1.01 GAAP – Constraints, Concepts, Assumptions, and

Principles – Page 3
PowerPoint #3 Notes
Principles Rules used to prepare present, and report
of financial statements.
Accounting
Dictate how events shoud be recorded and
reported.

Cost Assets are recorded at historical cost, not fair

Principle market value

Full All information pertaining to operations and

Disclosure financial position must be reported
Principle
Circumstances and events that make a difference
to financial statement users should be disclosed.

Revenue Revenue is earned and recognized upon

Recognition transaction, not when cash is recieved.
Principle
Also called accrual based accounting.

Matching Costs of doing business iare recorded in the

Principle same perioed as the revenue they help generate.

Also called accrual based accounting.

Questions

1.01 GAAP – Financial Statements

PowerPoint #4 Notes
What are
Financial
Statements?

Balance
Sheet

Income
Statement

Statement of
Cash Flows

Statement of
Equity

Questions:
1.01 GAAP – Financial Statements
PowerPoint #4 Notes

What are A formal record of the financial activities of a business

Financial
Statements? Includes four basic financial statements

Balance Sheet; Income Statement; Statement of Cash Flows;

and Statement of Changes in Equity
Balance Reports a company's financial position/condition at a given
Sheet point in time.
Reports on Assets, Liabilities, and Equity.

Details about cash in bank, amounts owed to creditors, and

value of a company's assets.
Income Reports on company's income and expenses over a given
Statement period of time.
Reports on Revenue and Expenses.
Shows a company's profit or loss over a given period of time.

Reports on a company's cash flow activities in and out of a

Statement of business form:
Cash Flows
Operating Activities; Investing Activities; and Financing
Activities.
Shows how changes in the balance sheet and income
statement affect cash and cash equivalents.

Statement of Reports the changes of the company's equity throughout the

Equity reporting period.
Reports profit or loss from the company
Reports dividends paid
Reports other items debited/credited to retained earnings.

Questions:
1.01 GAAP and IFRS
PowerPoint #5 Notes

What is
the IFRS

Framework
of IFRS

US GAAP
becoming
IFRS
1.01 GAAP and IFRS
PowerPoint #5 Notes

What is International Financial Reporting Standards

the IFRS Adopted in 1989 by the International Accounting Standards

Board
Composed of Principles-based Standards, Interpretations, and
Framework. Establishes broad rules and treatments of events.
Because of numerous companies operating globally,
standards that are applicable to all countries need to be
developed.

Framework States the basic principles of IFRS

of IFRS
Currently being updated and converged with the IASB and
FASB

Objective is to create a sound foundation for future accounting

standards.

US GAAP In February 2010, the SEC voted to reaffirm its committment to

a set of High Quality Global Accounting Standards.
becoming
IFRS In October 2010, the SEC began working on a plan to combine
GAAP and IFRS.

US companies may move to IFRS in approximately 2015 or

2016.

Questions
1.01 GAAP – Additional Study Helps

1. Direct students to this website for quizzes, puzzles, etc. about financial
statements and accounting principles:
a. :http://www.accountingcoach.com/online-accounting-course/financial-
accounting.html

2. For more information on the accounting hierarchy:

a. http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156317989
i. Click on agreement, select yes
ii. Page 18 will contain the diagram
b. http://highered.mcgraw-
hill.com/sites/0072994029/student_view0/ebook/chapter1/chapter_opener.
html

3. For information on concepts; principles; and financial statements:

a. www.wikipedia.com – Search for your topic.
b. http://www.accountingcoach.com/online-accounting-course/financial-
accounting.html
c. http://media.wiley.com/product_data/excerpt/87/04710720/0471072087-
1.pdf

4. Compare/contrast IFRC with GAAP

a. http://wiki.ifrs.com/Financial-Statement-Presentation
b. http://en.wikipedia.org/wiki/International_Financial_Reporting_Standards
c. http://www.ey.com/Publication/vwLUAssets/IFRS_vs_US_GAAP_Basics_
March_2010/$FILE/IFRS_vs_US_GAAP_Basics_March_2010.pdf -
specifically beginning on Page 7
d. http://www.accountingcoach.com/online-accounting-course/09Xpg01.html