1 The Environment of Financial Reporting

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• 1 The Environment of Financial Reporting

Accounting School Zhongnan University of
Economics Law
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Intermediate Accounting 1 The Environment of
Financial Reporting
Forewords

• Course nature and objective
• Teaching methods
• Test requirements and form
• Scoring system
• Brief contents

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Intermediate Accounting 1 The Environment of
Financial Reporting
I. Accounting information users, uses, and
GAAP in U.S.A.

Companies may obtain capital by issuing capital
stock or by borrowing from lenders
Bank
Stock Exchange
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Intermediate Accounting 1 The Environment of
Financial Reporting

• Accounting is a service activity. Its function
  is to provide quantitative information, primarily
  financial in nature, about economic entities that
  is intended to be useful in making economic
  decisions--in making reasoned choices among
  alternative courses of action. (Statement of the
  Accounting Principles Board No. 4, p. 40)

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Accounting Information Economic Activities and
Decision Making
Intermediate Accounting 1 The Environment of
Financial Reporting
Intermediate Accounting 1 The Environment of
Financial Reporting
Companys Economic Activities
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Intermediate Accounting 1 The Environment of
Financial Reporting
Major Internal and External Stakeholder Groups
Investors
Government
Community
Board of Directors Management Employees
Suppliers
Analysts
Employees
Customers
Creditors
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Intermediate Accounting 1 The Environment of
Financial Reporting
Comparison of Financial and Managerial Accounting

Sources of Authority Statement Format Decision
Focus
Could you illustrate differences between
financial and managerial accounting?
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Intermediate Accounting 1 The Environment of
Financial Reporting
Financial Reporting

• Financial reporting is the process of
  communicating financial accounting information
  about a company to external users.

The balance sheet reports, as of a certain point
in time, the resources of a company (the assets),
the companys obligations (the liabilities), and
the equity of the owners.
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Intermediate Accounting 1 The Environment of
Financial Reporting
Financial Reporting

• Financial reporting is the process of
  communicating financial accounting information
  about a company to external users.

The income statement reports, for a certain
interval, the net assets generated through
business operations (revenues), the net assets
consumed (the expenses), and the net income.
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Intermediate Accounting 1 The Environment of
Financial Reporting
Financial Reporting

• Financial reporting is the process of
  communicating financial accounting information
  about a company to external users.

The statement of cash flows reports, for a
certain interval, the amount of cash generated
and consumed by a company through operating,
financing, and investing activities.
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Intermediate Accounting 1 The Environment of
Financial Reporting
Financial Reporting

• A statement of changes in stockholders equity
  also is included by many companies. This
  statement summarizes the changes in each item of
  stockholders equity for a period.
• Accounting estimates and judgments are outlined
  in the notes to financial statements.

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Intermediate Accounting 1 The Environment of
Financial Reporting
Generally Accepted AccountingPrinciples (GAAP)

GAAP are the guidelines, procedures, and
practices that a company is required to use in
recording and reporting the accounting
information in its audited financial statements.
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Intermediate Accounting 1 The Environment of
Financial Reporting
Hierarchy of Sources of GAAP

• Level A
• FASB Statements and Interpretations
• APB Opinions
• CAP Accounting Research Bulletins
• SEC Regulation S-X and Financial Reporting
  Releases
• Level B
• FASB Technical Bulletins
• AICPA Industry Audit and Accounting Guides
• AICPA Statements of Position

• Level C
• Consensus Positions of EITF
• AICPA Practice Bulletins
• Level D
• AICPA Accounting Interpretations
• FASB Question and Answer guides
• AICPA Accounting Trends and Techniques
• Level E
• Other accounting literature

A B C D E
Higher Authority
Lower Authority
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Intermediate Accounting 1 The Environment of
Financial Reporting
2. The development of accounting standards in
U.S. -CAP
Committee on Accounting Procedures (CAP)
Born 1939 Died 1959
Pronouncements Accounting Research Bulletins
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Intermediate Accounting 1 The Environment of
Financial Reporting
2. The development of accounting standards in
U.S. -APB
Accounting Principles Board (APB)
Born 1959 Died 1973
Pronouncements APB Opinions
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Intermediate Accounting 1 The Environment of
Financial Reporting
2. The development of accounting standards in
U.S. -FASB
Financial Accounting Standards Board (FASB)
Born 1973 Died
Pronouncements Statements of Financial
Accounting Standards
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Intermediate Accounting 1 The Environment of
Financial Reporting

Structure of the FASB
Financial Accounting Foundation (16-member board
of trustees)
Continued
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Intermediate Accounting 1 The Environment of
Financial Reporting

Structure of the FASB
Financial Accounting Standards Board (7 members)
Administrative Staff
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Intermediate Accounting 1 The Environment of
Financial Reporting
Types of Pronouncements Issued by the FASB

• Statements of Financial Accounting Standards
• Interpretations
• Technical Bulletins
• Statements of Financial Accounting Concepts
• Other Pronouncements

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Intermediate Accounting 1 The Environment of
Financial Reporting
FASB Operating Procedures

Identify Topic
Continued
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Intermediate Accounting 1 The Environment of
Financial Reporting
FASB Operating Procedures

From previous page
Hold Public Hearings
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Intermediate Accounting 1 The Environment of
Financial Reporting
FASB Authority Sources-- Overview

FASB
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Intermediate Accounting 1 The Environment of
Financial Reporting
3. Other organizations currently influencing
GAAP in U.S.

• Securities and Exchange Commission (SEC)
• American Institute of Certified Public
  Accountants (AICPA)
• FASB Emerging Issues Task Force (EITF)
• Cost Accounting Standards Board (CASB)
• Internal Revenue Service (IRS)
• American Accounting Association (AAA)

Continued
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Intermediate Accounting 1 The Environment of
Financial Reporting

• International Accounting Standards Committee
  (IASC)/International Accounting Standards Board
  (IASB)
• Governmental Accounting Standards Board (GASB)
• Financial Executives International (FEI)
• Institution of Management Accountants (IMA)
• Association for Investment Management and
  Research (AIMR)/ Chartered Financial Analyst
  Institute (CFAI)

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Intermediate Accounting 1 The Environment of
Financial Reporting
Securities Exchange Commission (1933-present)

• 1929 stock market crash blamed on nonstandard
  accounting.
• 1933 Securities Act established SEC to
  standardize accounting.
• Created to protect the interests of investors by
  ensuring full and fair disclosure.
• Granted legal authority to dictate GAAP.
• Has tended to defer setting GAAP to the
  accounting profession.

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Intermediate Accounting 1 The Environment of
Financial Reporting
American Institute of Certified Public Accountants

The American Institute of Certified Public
Accountants (AICPA) is the professional
organization of practicing CPAs in the United
States.
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Intermediate Accounting 1 The Environment of
Financial Reporting

American Accounting Association
The American Accounting Association (AAA) is
primarily an organization for accounting
professors.
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Intermediate Accounting 1 The Environment of
Financial Reporting
Internal Revenue Service

The Internal Revenue Service (IRS) has the
primary goal of equitable collecting revenue.
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Intermediate Accounting 1 The Environment of
Financial Reporting
4. Ethics in the accounting environment

Accountants are often faced with ethical dilemmas
(ethical conflicts) in their professional roles.
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Intermediate Accounting 1 The Environment of
Financial Reporting
Principles of the AICPA Code of Professional
Conduct

Responsibilities
In carrying out their responsibilities as
professionals, members should exercise sensitive
professional judgment in all their activities.
Continued
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Intermediate Accounting 1 The Environment of
Financial Reporting
Principles of the AICPA Code of Professional
Conduct

The Public Interest
Members should accept the obligation to act in a
way that will serve the public interest, honor
the public trust, and demonstrate commitment to
professionalism.
Continued
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Intermediate Accounting 1 The Environment of
Financial Reporting
Principles of the AICPA Code of Professional
Conduct

Integrity
To maintain and broaden public confidence,
members should perform all professional
responsibilities with the highest sense of
integrity.
Continued
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Intermediate Accounting 1 The Environment of
Financial Reporting
Principles of the AICPA Code of Professional
Conduct

Objectivity and Independence
A member should maintain objectivity and be free
from conflicts of interest in discharging
professional responsibilities. A member in
public practice should be independent in fact and
appearance.
Continued
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Intermediate Accounting 1 The Environment of
Financial Reporting
Principles of the AICPA Code of Professional
Conduct

Due Care
A member should observe the professions
technical and ethical standards, strive
continually to improve competence and the quality
of services, and discharge the professional
responsibility to the best of the members
ability.
Continued
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Intermediate Accounting 1 The Environment of
Financial Reporting
Principles of the AICPA Code of Professional
Conduct

Scope and Nature of Service
A member in public practice should observe the
Principles of the CPC in determining the scope
and nature of services to be provided.
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Intermediate Accounting 1 The Environment of
Financial Reporting
5. Comparison of the development of accounting
standards in China and in U.S.

Could you compare the development of accounting
standards in China and in U.S.?
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The End