Chapter

1-1
Financial Accounting and
Accounting Standards
Chapter
1
Intermediate Accounting,
12th Edition
Kieso, Weygandt, and Warfield
Prepared by Coby Harmon, University of California, Santa Barbara
Chapter
1-2
1. Identify the major financial statements and other means of
financial reporting.
2. Explain how accounting assists in the efficient use of scarce
resources.
3. Describe some of the challenges facing accounting.
4. List the objectives of financial reporting.
5. Explain the need for accounting standards.
6. Identify the major policy-setting bodies and their role in the
standard-setting process.
7. Explain the meaning of generally accepted accounting principles.
8. Describe the impact of user groups on the standard-setting
process.
9. Understand issues related to ethics and financial accounting.

Chapter 1 Learning Objectives
Chapter
1-3
Financial Accounting and Accounting Standards
Financial Statements
and Financial
Reporting
Accounting and
Capital Allocation
Challenges
Objectives
The Need to
Develop Standards
Parties Involved in
Standard Setting
Generally Accepted
Accounting
Principles
Issues in Financial
Reporting
Securities and
Exchange
Commission (SEC)
American Institute of
Certified Public
Accountants (AICPA)
Financial Accounting
Standards Board
(FASB)
Governmental
Accounting
Standards Board
(GASB)
Changing Role of the
AICPA
Political Environment
The Expectations
Gap
International
Accounting
Standards
Ethics
Chapter
1-4
LO 1 Identify the major financial statements and other means of financial reporting..
Characteristics of Accounting
Essential characteristics of accounting are:
(1) the identification, measurement, and
communication of financial information about
(2) economic entities to
(3) interested parties.
Chapter
1-5
Financial
Information
Accounting?
Identifies
and
Measures
and
Communicates
Balance Sheet
Income Statement
Statement of Cash
Flows
Statement of
Owners or
Stockholders Equity
Note Disclosures
Presidents letter
Prospectuses,
SEC Reporting
News releases
Forecasts
Environmental
Reports
Etc.
GAAP Not GAAP
Financial Statements Additional Information Economic Entity
Characteristics of Accounting
LO 1 Identify the major financial statements and other means of financial reporting..
Chapter
1-6
LO 1 Identify the major financial statements and other means of financial reporting..
What is the purpose of information presented in
notes to the financial statements?
a. To provide disclosure required by generally
accepted accounting principles.
b. To correct improper presentation in the financial
statements.
c. To provide recognition of amounts not included in
the totals of the financial statements.
d. To present managements responses to auditor
comments.
Review
Characteristics of Accounting
Chapter
1-7
Accounting and Capital Allocation
Resources are limited. Efficient use of resources often
determines whether a business thrives.
Financial
Reporting
Information to help
users with capital
allocation decisions.
Users
Investors, creditors,
and other users
Capital Allocation
The process of
determining how and
at what cost money
is allocated among
competing interests.
LO 2 Explain how accounting assists in the efficient use of scare resources.
Illustration 1-1 Capital
Allocation Process
Chapter
1-8
An effective process of capital allocation is critical to a
healthy economy, which
a. promotes productivity.
b. encourages innovation.
c. provides an efficient and liquid market for buying
and selling securities.
d. All of the above.
Accounting and Capital Allocation
LO 2 Explain how accounting assists in the efficient use of scare resources.
Review
Chapter
1-9
Challenges Facing Financial Accounting
Non-financial Measurements
Forward-looking Information
Soft Assets
Timeliness
LO 3 Describe some of the challenges facing accounting.
Chapter
1-10
Financial reporting should provide information:
(a) that is useful to present and potential investors and
creditors and other users in making rational investment,
credit, and similar decisions.
(b) to help present and potential investors and creditors and
other users in assessing the amounts, timing, and
uncertainty of prospective cash receipts.
(c) about the economic resources of an enterprise, the claims
to those resources, and the effects of transactions,
events, and circumstances that change its resources and
claims to those resources.
Objectives of Financial Accounting
LO 4 List the objectives of financial reporting.
Chapter
1-11
All of the following are objectives of financial
reporting except to provide information
a. About enterprise resources, claims to those
resources, and changes in them.
b. That is useful in investment and credit decisions.
c. About the management and major shareholders of
an enterprise.
d. That is useful in assessing cash flow prospects.
Objectives of Financial Accounting
LO 4 List the objectives of financial reporting.
Review
Chapter
1-12
Need to Develop Standards
Various users
need financial
information
The accounting profession
has attempted to develop a
set of standards that are
generally accepted and
universally practiced.
Financial Statements
Balance Sheet
Income Statement
Statement of Stockholders Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting Principles
(GAAP)
LO 5 Explain the need for accounting standards.
Chapter
1-13
Parties Involved in Standard Setting
Four organizations:
Securities and Exchange Commission (SEC)
American Institute of Certified Public
Accountants (AICPA)
Financial Accounting Standards Board (FASB)
Government Accounting Standards Board (GASB)
LO 6 Identify the major policy-setting bodies and
their role in the standard-setting process.
Chapter
1-14
Securities
Act of 1933
Securities
Act of 1934
Securities and Exchange Commission
Established by federal government
Accounting and reporting for public companies
Encouraged private standard-setting body
SEC requires public companies to adhere to GAAP
SEC Oversight
Enforcement Authority
LO 6 Identify the major policy-setting bodies and
their role in the standard-setting process.
Chapter
1-15
American Institute of CPAs
National professional organization
Established the following:
LO 6
Committee on
Accounting
Procedures

Accounting
Principles Board

1939 to 1959
Issued 51 Accounting
Research Bulletins
(ARBs)
Problem-by-problem
approach failed


1959 to 1973
Issued 31 Accounting
Principle Board
Opinions (APBOs)
Wheat Committee
recommendations
adopted in 1973
http://www.aicpa.org/
Chapter
1-16
Financial Accounting Standards Board
Wheat Committees recommendations resulted in the creation of a
the Financial Accounting Standards Board in 1973.
Financial
Accounting
Foundation
Selects members of the FASB
Funds their activities
Exercises general oversight.
Financial
Accounting
Standards Board
Financial Accounting
Standards Advisory
Council
Mission to establish and improve
standards of financial accounting
and reporting.
Consult on major policy issues.
LO 6 Identify the major policy-setting bodies and
their role in the standard-setting process.
Chapter
1-17
Missions is to establish and improve standards of
financial accounting and reporting. Differences
between FASB and APB include:
Financial Accounting Standards Board
Smaller Membership
Full-time, Remunerated Membership
Greater Autonomy
Increased Independence
Broader Representation
http://www.fasb.org/
LO 6 Identify the major policy-setting bodies and
their role in the standard-setting process.
Chapter
1-18
The first step taken in the establishment of a typical
FASB statement is
a. The board conducts research and analysis and a
discussion memorandum is issued.
b. A public hearing on the proposed standard is held.
c. The board evaluates the research and public
response and issues an exposure draft.
d. Topics are identified and placed on the boards
agenda.
Financial Accounting Standards Board
Review
LO 6 Identify the major policy-setting bodies and
their role in the standard-setting process.
Chapter
1-19
FASB relies on two basic premises:
(1) Responsive to entire economic community
(2) Operate in full view of the public
Due Process
Step 1 = Topic placed on agenda
Step 2 = Research conducted and Discussion Memorandum
issued.
Step 3 = Public hearing
Step 4 = Board evaluates research, public response and
issues Exposure Draft
Step 5 = Board evaluates responses and issues final
Statement of Financial Accounting Standard
LO 6 Identify the major policy-setting bodies and
their role in the standard-setting process.
Chapter
1-20
Issued by the FASB:
Types of Pronouncements
Standards, Interpretations, and Staff Positions.
Financial Accounting Concepts
Emerging Issues Task Force Statements
LO 6 Identify the major policy-setting bodies and
their role in the standard-setting process.
Chapter
1-21
Governmental Accounting Standards Board
Created in 1984 to address state and local governmental reporting
issues.
LO 6
Financial
Accounting
Foundation
Financial
Accounting
Standards Board
Financial Accounting
Standards Advisory
Council
Governmental
Accounting
Standards Board
Governmental
Accounting Standards
Advisory Council
http://www.gasb.org/
Chapter
1-22
Generally Accepted Accounting Principles
Those principles that have substantial authoritative
support.
Major sources of GAAP are:
FASB Standards, Interpretations, and Staff Positions
APB Opinions
AICPA Accounting Research Bulletins
LO 7 Explain the meaning of generally accepted accounting principles.
Chapter
1-23
FASB Statements,
Interpretations, and
Staff Positions
APB Opinions
CAP Accounting
Research Bulletins
Category A (Most Authoritative)
FASB Technical
Bulletins
AICPA Industry Audit
and Accounting Guides
AICPA Statements of
Position
Category B
FASB Emerging Issues Task Force AICPA AcSEC Practice Bulletins
Category C
AICPA Accounting
Interpretations
Category D (Least Authoritative)
FASB Implementation
Guides
Recognized Industry
Practices
House of GAAP
LO 7
Chapter
1-24
Which of the following accounting pronouncements is the
most authoritative?
a. FASB Statement of Financial Accounting Concepts.
b. FASB Technical Bulletins.
c. AICPA Accounting Principles Board Opinion.
d. AICPA Statement of Position.
Generally Accepted Accounting Principles
LO 7 Explain the meaning of generally accepted accounting principles.
Review
Chapter
1-25
Issues in Financial Reporting
Standard Setting in a Political Environment
Accounting standards are as much a product of
political action as they are of careful logic or
empirical findings.
LO 8 Describe the impact of user groups on the standard-setting process.
Chapter
1-26
FASB
Preparers
(e.g., FEI)
Financial
Community
Government
(SEC, IRS, other
agencies)
Industry
Associations
Business Entities
CPAs and
Accounting Firms
AICPA (AcSEC)
Academicians
Investing Public
Accounting standards,
interpretations, and bulletins
Standard Setting
LO 8 Describe the impact of user groups on the standard-setting process.
Illustration 1-5 User
Groups that Influence
Accounting Standards
Chapter
1-27
All those who serve on the FASB must be
Certified Public Accountants.
Review:
Issues in Financial Reporting
LO 8 Describe the impact of user groups on the standard-setting process.
False
Chapter
1-28
Issues in Financial Reporting
Expectation Gap
What the public thinks accountants should do vs.
what accountants think they can do.
Difficult to close
Sarbanes-Oxley Act (2002)
Public Company Accounting Oversight Board
(PCAOB)
LO 8 Describe the impact of user groups on the standard-setting process.
Chapter
1-29
Issues in Financial Reporting
International Accounting Standards
Two sets of standards accepted for international use:
U.S. GAAP, issued by the FASB
International Financial Reporting Standards
(IFRS), issued by the IASB
FASB and IASB recognize that global markets will best be
served if only one set of GAAP is used.
LO 8 Describe the impact of user groups on the standard-setting process.
Chapter
1-30
Issues in Financial Reporting
Ethics in the Environment of Financial Accounting
In accounting, we frequently encounter ethical
dilemmas.
GAAP does not always provide an answer
Doing the right thing is not always easy or obvious
LO 9 Understand issues related to ethics and financial accounting.
Chapter
1-31
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