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Chapter 1: Financial Accounting and Accounting Standards
Terms in this set (41)
eXtensible Business Reporting Language (XBRL)
This is the method the SEC now requires for the delivery of financial reporting.
Essential Characteristics of Accounting
These are the identification, measurement, and communication about economic entities to interested parties.
This is the process that cumlinates the preparation of financial reports on the company for use by both internal and external parties.
This is the process of identifying, measuring, analyzing and communicating financial information needed by management to plan, control and evaluate a company's operations.
This group includes:
1) Balance Sheet
2) Income Statement
3) Statement of Cash Flows
4) Statement of Owner's or Stockholders' Equity
The process of determining how and at what cost money is allocated among competing interests.
Objective of General Purpose Financial Reporting
To provide financial information (financial position and related performance) about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in decisions about providing resources to the entity.
These provide the most useful information at the least cost.
The view that the financial reporting should be focused only on the needs of the shareholders.
This is not an appropriate viewpoint.
An entities responsibility for looking after something.
Under this responsibility, the company must prepare a single set of General-Purpose Financial Statements.
This is the idea that financial reporting provides information that is useful for making decisions.
For these decisions investors are interested in:
1) The company's ability to generate net cash flow
2) Management's ability to enhance the capital providers' investments
This ensures that a company records events that change its financial statements in the period in which events occur, rather than when it receives/pays cash.
The company general recognizes revenues when it makes sales.
Generally Accepted Accounting Principles (GAAP)
This is the common set of standards and procedures established for financial reporting.
These were developed by:
1) Securities and Exchange Commission (SEC)
2) American Institute of Certified Public Accountants (AICPA)
3) Financial Accounting Standards Board (FASB)
For purposes of determining GAAP:
Both the FASB issued "interpretations" and "FASB Staff Positions" that modify or extend existing standards are considered authoritative.
This is as much a product of political action as it is of careful logic or empirical findings.
This should be based on sound research and a conceptual framework that has it's foundation in economic reality.
Securities and Exchange Commission (SEC)
This is a federal agency developed in response to the stock market crash in 1929 which started the Great Depression.
These were called on in order to increase governement regulation of business, especially financial institutions and the stock market.
This entity has helped develop and standardize financial information presented to stockholders. This entity requires adherence to GAAP.
Companies who are publicly listed are required to be registered and file audited financial statements with the SEC.
This entity currently exercises oversight of the companies that are listed on the major exchanges (e.g NYSE and Nasdaq)
Private Partners of the SEC
1) American Institute of Certified Public Accountants (AICPA)
2) Financial Accounting Standards Board (FASB)
Financial Accounting Standards Board (FASB)
This is the entity the SEC relies on to develop the accounting standards.
Established due to the recommendations of the Wheat Board in 1973, this is the major operating organization in its three-part structure.
The Board's mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public.
American Institute of Certified Public Accountants (AICPA)
This is the national professional organization of practicing Certified Public Accountants (CPPAs) and is a major contributor of establishing GAAP.
Committee on Accounting Procedures (CAP)
This committee was appointed by the AICPA at the urging of the SEC in 1939.
This group consisting of practicing CPAs issued 51 Accounting Research Bulletins from 1939 to 1959.
Accounting Principles Board (APB)
This board was established in 1959 by the AICPA in response to the inefficient problem-by-problem approach the CAP was using.
1) Advance the written expression of accounting principles
2) Determine appropriate practices
3) Narrow the areas of difference and inconsistencies in practice
This board was dissolved in 1973.
These are the APB's official pronouncements intended to be based mainly on research studies and be supported by reason an analysis.
Thirty-one pronouncements were made by this board before dissolution.
Established in 1971, the accounting profession was anxious to avoid governmental rule-making and appointed this Study Group on Establishment of Accounting Principles.
Headed by the chair Francis Wheat, the group examined the organization and operation of the APB and determined necessary changes in order to have better results.
In 1972, the group submitted its findings to the AICPA and Council. This spurred the replacement of the APB with the Financial Accounting Standards Board in 1973.
Financial Accounting Foundations (FAF)
This is the board suggested by the Wheat Committee that selects the members of the FASB and the Advisory Counsil, funds their activities, and generally oversees the FASB's activities.
Financial Accounting Standards Advisory Counsil (FASAC)
This cousil consults with the FASB on major policy and technical issues and also helps select task force members for the various task force groups for various projects.
Premises for Standard Setting
The FASB relies on two basic premises:
1) The FASB should be responsive to the needs and viewpoints of the entire economic community and not just the public accounting profession
2) It should operate in full view of the public through a "due process" system that gives interested persons ample opportunity to make their views known.
The passage of new FASB guidance in the form of an Accounting Standards Update requires the support of ofur of the seven Board members.
FASB issues two major types:
1) Accounting Standards Updates
2) Financial Accounting Concepts
Accounting Standards Updates
These Updates amend the Accounting Standards Codification, which represents the source of authoritative accounting standards, other than standards issued by the SEC.
Emerging Issues Task Force (EITF)
This type of Accounting Standards Update, created in 1984 by the FASB provides implementation guidance within the framewor of the Codification to reduce diversity in practice on a timely basis. This deals mostly with short-term emerging issues.
Financial Accounting Concepts
First being issued by the FASB in November 1978, these are a movement away from problem-by-problem approach and sets forth fundamental objectives and concepts that the board uses in developing future standards of financial accounting and reporting.
Note! Unlike the Updates, these do not establish GAAP, but do pass through the same due process system.
Financial Reporting Executive Committee (FinREC)
An agency of the AICPA authorized to make public statements on behalf of the AICPA on financial reporting matters.
This committee's mission is to determine the AICPA's technical policies regarding financial reporting standards, with the ultimate purpose of serving the public interest by improving financial reporting.
The also issue audit and accounting guides.
Auditing Standards Board (ASB)
This is the board that the AICPA develops auditing standards through.
AICPA continues to develop and grade the CPA exam, administered in all 50 states.
Public Company Accounting Oversight Board (PCAOB)
This is the board the Sarbanes-Oxley Act requires to OVERSEE the development of the auditing standards.
Financial Accounting Standards Board Accounting Standards Codification
Also known as "the Codification."
The goal in creating this was to provide in one place all the authoritative literature related to a particular topic.
This creates one level of GAAP, which is considered authoritative.
All other accounting literature is considered non-authoritative.
Financial Accounting Standards Board Codification Research System (CSR)
This is an online, real-time database that provides easy access to the Codification.
It is subdivided into:
Using a numerical index system.
This is the impact of accounting reports on the wealth positions on issuers and users of financial information, and the decision-making behavior resulting from that impact.
This act has established some key legislation:
1) The Public Company Accounting Oversight Board (PCAOB) for overseeing accounting practices
2) Implements stronger independence rules for auditors
3) Requires CEOs and CFOs to personally certiy that the financial statements and disclosures are accurate and complete
4) Requires the audit committee to be comprised of independent members
5) Requires a code of ethics for senior financial officers
This is a system of checks and balances designed to prevent and detect any fraud and errors.
This is the difference between what the public thinks accountants should do and what accountants think they can do.
Financial Reporting Issues
These can include issues with or lack of:
1) Nonfinancial measurements
2) Forward-looking information
3) Soft-Assets (Intangibles)
There are two sets of rules accepted for this type of environment, they are:
1) GAAP - issued by the Financial Accounting Standards Board (FASB)
2) International Financial Reporting Standards (IFRS) - issued by the London-based International Accounting Standards Board (IASB)
This is a memorandum of understanding issued by the FASB and IASB to show a formalized commitment to the convergence of GAAP and IFRS.
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