Intermediate I, Week 1 Notes
Intermediate I, Week 1 Notes 3310
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This 6 page Class Notes was uploaded by Emily Sears on Saturday January 9, 2016. The Class Notes belongs to 3310 at Auburn University taught by Dr. Duane Brandon in Spring 2016. Since its upload, it has received 32 views. For similar materials see Intermediate Accounting I in Accounting at Auburn University.
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Better than the professor's notes. I could actually understand what the heck was going on. Will be back for help in this class.
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Date Created: 01/09/16
1 CHAPTER 1: The Demand for the Supply of Financial Accounting Information Role of Financial Accounting The role of financial accounting is to identify, measure, and report relevant and reliable financial information about companies to present and potential future stakeholders. The purpose of accounting is to help people make decisions about economic activities. Business Activities Companies typically engage in three sets of activities 1. Financing Activities- Involve raising the capital needed to run the company 2. Investing Activities- Once a company has financial capital, it typically invests that capital in productive resources that are needed to operate the business 3. Operating Activities- With necessary resources in place the company can commence day-to-day operating activities, producing goods and/or services and selling them to customers Who Are Stakeholders? Stakeholders are parties with some type of interest in the company. Stakeholder Demand for Accounting Information, Standards, and Audits 2 Separation of ownership and control gives rise to information asymmetry problems and a natural demand for accounting information, accounting standards (GAAP), and independent audits The Supply of Financial Accounting Information The supply of accounting information that companies report is determined primarily y the interactions between two forces: 1. Authoritative professional accounting standards (GAAP and IFRS) that govern in company’s country of inception. 2. Choices, methods, estimates, ad judgements that the company must make in order to apply these accounting standards to measure and report their financial statements Securities and Exchange Commission (SEC) Created by Congress to administer Sec. Acts of 1933 and 1934 Delegates its legal authority (granted by congress) to set GAAP for US companies to the FASB and to set IFRS for international companies to the IASB. SEC reporting requirements: Form 5-1 (registration statements) Form 10-K (annual reports) Form 10-Q (quarterly reports) Form 20-F (annual report for non-US companies) Form 8-K (disclosures of significant events) Proxy Statements (ex: Form DEF 14A) Insider holdings and trading activities (ex: Forms 3,4, & 5) SEC’s stated mission: “Protect investors maintain fair, orderly, and efficient markets, and facilitate capital formation” Accounting History in the US Pre-1930 accounting was mostly unregulated Accounting methods were proprietary and kept confidential Largely driven by creditors, with a cash emphasis Corporate investment boomed in the 1920’s The Crash of 1929 led to questioning of reporting practices This led to… 3 FASB and the Historical Establishment of Accounting Standards AICPA’s Committee on Accounting Procedure (1938-1959) CAP issued a series of 51 Accounting Research Bulletins (ARBs) AICPA’s Accounting Principles Board (1959-1973) APB issued a series of 31 APB Opinions Financial Accounting Statndards Board (1973-Present) The FASB issued Statements of Financial Accounting Standards (SFAS’s) through mid-2009. There are 168 of these standards. FASB now issues Accounting Standards Updates (ASUs) Note, many of the early standards are still in effect today. “GAAP Hierarchy” was replaced by Codification Project in 2009. The new codification recognizes GAAP into about 90 topical areas. Structure of the FASB FASB Operating Procedures 4 Note: Accounting standard evolve over time. They are not created in a vacuum and may not be “ideal”. A number of constituents (with different self-interests) participate in and influence standard setting. The IASB and IFRS The International Accounting Standards Board (IASB) is the international accounting standard setter, establishing the International Financial Reporting Standards (IFRS) which are required or permitted in roughly 130 countries. The structure and process for issuing new standards of the IASB is similar to that of the FASB The IASB includes 16 members from various countries FASB and IASB Convergence The 2002 “Norwalk Agreement” formalized the commitment to converge standards. Key FASB initiatives include: 1. Conducting long-term joint projects with IASB 2. Participating in short-term joint convergence projects 3. Monitoring IASB projects 4. Conducting convergence research project 5. Explicitly considering convergence potential in all decisions 6. Having a liaison IASB member on site at the FASB officers SEC and International Convergence SEC is committed to high-quality international accounting standards. Recent Developments As of 2007, foreign registrants are allowed to use IFRS rather than US GAAP to prepare financial statements reported in SEC Form 20-F. SEC is considering IFRS as an acceptable standard for domestic registrants. Status and timeline are unclear. OtherOrganizations American Institute of Certified Public Accountants (AICPA) FASB Emerging Issues Task Force (EITF) Internal Revenue Service (IRS) American Accounting Association (AAA) 5 International Accounting Standards Board (IASB) Governmental Accounting Standards Board (GASB) Public Company Accounting Oversight Board (PCAOB) Various Professional Organizations (FEI, IMA, CFAI) Financial Reporting Financial Reporting is the process of communicating financial accounting information about a company to external users 1. The Balance Sheet (or statement of financial position) summarizes a company’s financial position at a given date 2. The Income statement summarizes the results of a company’s income producing activities for a period of time 3. The Statement of Cash Flows summarizes a company’s cash inflows and outflows for a period of time. 4. The Statement of Changes in Stockholders’ Equity summarizes the changes in each item of stockholders’ equity for a period of time For example, the annual report includes: 1. Balance Sheet 2. Income Statement 3. Statement of Cash Flows 4. Statement of Changes in Stockholders’ Equity 5. Notes of the Financial Statements 6. Management Discussion & Analysis (MD&A) Balance Sheet Is the cornerstone of financial reporting Presents a snapshot of the resources of a firm (assets) and the claims on the firm (liabilities and shareholders’ equity) as of a specific date Assets= Liabilities + Shareholders’ Equity The balance sheet views resources from two perspectives: 1. Specific resources the firm holds (cash, inventory, and equipment) 2. The claims on the firm by the persons or entities that provided the resources (investors, creditors, lenders, suppliers, employees, and other stakeholders) Income Statement Measures and reports the financial results of a firm’s performance for a period of time (usually a quarter or year) Provides information about the profits and losses the company has generated during the period by conducting operating, investing, and financing activities Also called the P&L Statement (“Profit and Loss Statement”) Statement of Cash Flows Reports for a period of time the net cash flows (inflow minus outflows) from operating, investing, and financing activities. Provides useful information about how a firm is generating and using cash Provides information that complements the income statement, demonstrating how cash flows differ from accrual-based income 6 Consists of three sections: 1. Operating Activities 2. Investing Activities 3. Financing Activities Statement of Shareholders’ Equity Also called the “Statement of Changes in Shareholders’ Equity” Provides information about the common shareholders’ equity claims on the company and how those claims changed during the period The year-end amounts reported in this statement equal the amounts reported in the shareholders’ equity section of the balance sheet Important Informationwiththe Financial Statements Notes to the Financial Statements Companies must provide notes as additional information with the financial statements Explain how the accounts and amounts have been determined Provide important details about the accounting principles, methods, and estimates the company has used to measure assets, liabilities, equity, revenues, expenses, gains, and losses Management Discussion and Analysis (MD&A) The MD&A is an extensive narrative discussion and quantitative analysis. It is provided by company managers and provides insight into: Strategies Management’s evaluation of the company’s performance Business risk factors Expectations about the future Managers’ and Independent Auditors’ Attestations Management is responsible for financial statements and the underlying accounting and control system that generates the financial statements Independent auditors are responsible for assessing a company’s internal control system, designing audit tests, and forming an opinion about the fairness of the amounts reported in the financial statements The Sarbanes-Oxley Act of 2002 explicitly defined an expanded set of management/auditor responsibilities Why is an auditor’s opinion an essential element of financial reporting?
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