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AC 310-chapter 1

by: sam

AC 310-chapter 1

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This 10 page Class Notes was uploaded by sam on Monday March 9, 2015. The Class Notes belongs to a course at University of Alabama - Tuscaloosa taught by a professor in Fall. Since its upload, it has received 28 views.


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Date Created: 03/09/15
AC 310 Chapter 1 Chapter 1 Environment and Theoretical Structure of Financial Accounting Financial Accounting Environment 0 Financial accounting provides relevant nancial information to various external users 0 Example of an external user group nancial intermediaries includes nancial analysts stockbrokers mutual fund managers and credit rating organizations 0 Provide advice to investors and creditors FREMEERE or FI WAIMEIIAL 39INF39DRM mm in Fro tsoriientedicompanies I Natfnsrp t entities lag imammmt entitiess charitable organizations Ethiopia Ir Households 0 Financial statements most frequently provided 0 Balance sheet also called the statement of nancial positions 0 Income statement also called the statement of operations 0 Statement of cash ows operating investing and nancing activities 0 Statement of shareholders equity 0 Starting in 2012 companies must either provide a statement of other comprehensive income immediately following the income statement or present a combined statement of comprehensive income that includes the information normally contained in both the income statement and the statement of comprehensive income 0 Financial reporting process of providing information to external users AC 310 Chapter 1 0 External users also receive important nancial information from news releases and management forecasts prospectuses and reports led with regulatory agencies The Economic Environment and Financial Reporting 0 Capital markets mechanisms that foster the allocation of resources ef ciently 0 Primary forms of business organizations sole proprietorship partnership and corporation 0 Dominant form of business organization in terms of the ownership of productive resources is corporation Investors provide resources usually cash to a corporation in exchange for an ownership interest shares of stock Creditors lend cash to the corporation either by making individual loans or by purchasing publicly traded debt such as bonds 0 Initial market transactions provide for new cash by the issuance of stocks and bonds by the corporation 0 Secondary market transactions provide for the transfer of stocks and bonds among individuals and institutions 0 Corporations receive no new cash from secondary market transactions 0 Help establish market prices for additional shares and for bonds The InvestmentCredit Decision A Cash Flow Perspective Investors and creditors are interesting in earning fair return on the resources they provide through dividends and ownership interest 0 The expected rate of return and the uncertainty or risk of that return are key variables in the investment decisions 0 A company will be able to provide a return to investors and creditors only if it can generate a pro t from selling its products or services Cash versus Accrual Accounting Accrual accounting measurement of the entity s accomplishments and resource sacri ces during the period regardless of when cash is received or paid 0 More accurate prediction of future operating cash ows and more reasonable portrayal of the periodic operating performance of the company AC 310 Chapter 1 o Focuses on cash ows as well as other resources provided and consumed by operations during a period revenues and expenses 0 Shows net income or net loss Net income is the difference between revenues and expenses 0 Net income is considered a better indicator of future operating cash ows than is current net operating cash ow 0 Cash basis accounting difference between cash receipts and cash disbursements during a reporting period from transactions related to providing goods and services to customers net operating cash ow 0 Provides a measure caed net operating cash ow 0 Over the life of a company net operating cash ow de nitely is the variable of concern However over short periods of time may not be indicative of the company s longrun cashgenerating ability The Development of Financial Accounting and Reporting Standards 0 Generally Accepted Accounting Principles GAAP set of both broad and speci c guidelines that companies should follow when measuring and reporting the information in their nancial statements and related notes Historical Perspective and Standards 0 1933 Securities Act and 1934 Securities Exchange Act 0 Designed to restore investor con dence and establish uniform accounting standards 0 1933 sets forth accounting and disclosure requirements for stocks and bonds 0 1944 applies to secondary market transactions created the Securities and Exchange Commission SEC 0 The SEC has the authority to set accounting standards for companies but has delegated the task to the private sector 0 Early US Standard Setting 0 First private sector body to assume the task of setting accounting standards Committee on Accounting Procedure CAP which was a committee of the American Institute of Accountants AlA o The AlA was renamed the American Institute of Certi ed Public Accountants AlCPA o In 1959 the Accounting Principles Board APB replaced the CAP AC 310 Chapter 1 Was never able to establish a conceptual framework for nancial accounting and reporting that was broadly accepted The FASB 1973creation of the Financial Accounting Standards Board FASB o Included representatives from the auditing profession pro toriented companies accounting educators nancial analysts and government 0 1984 the FASB s Emerging Issues Task Force EITF was formed to improve nancial reporting by resolving narrowly de ned nancial accounting issues within the framework existing GAAP Attempts to resolve nancial reporting issues without involving the FASB HIERAREH T GE EDEN l EEFTIMG AUTH EZIFEITIIquot Congress SEE WEE l WE WEE fl WE 1W ill Present Codi cation The codi cation does not change GAAP instead it reorganizes the thousands of US GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure FASB Accounting Standards Codi cation ASC o Represents the single source of authoritative nongovernmental US GAAP and also incudes portions of SEC accounting guidance that are relevant to nancial reports led with the SEC 0 It is now the only source of authoritative US GAAP other than rules and interpretive releases of the SEC International Standard Setting 0 International Accounting Standards Board IASB AC 310 Chapter 1 o Formed to develop a single set of global accounting standards 0 International Financial Reporting Standards lFRSs o Gaining support around the globe The Establishment of Accounting Standards Due Process 0 The FASB undertakes a series of informationgathering steps before issuing an Accounting Standards Update Politics in Standard Setting 0 A change in accounting standards can result in a substantial redistribu8tion of wealth within our economy Encouraging HighQuality Financial Reporting The Role of the Auditor o It is the responsibility of management to apply GAAP appropriately Auditors independent intermediaries who help ensure that management has appropriately applied GAAP in preparing the company s nancial statements 0 Auditors express an opinion on the compliance of nancial statements with GAAP 0 Offer credibility to nancial statements Financial Reporting Reform SarbanesOxley Act 0 Provides for the regulation of auditors and the types of services they furnish to clients increases accountability of corporate executives addresses con icts of interest for securities analysts and provides for stiff criminal penalties for violators A Move Away from RulesBased Standards 0 A principlesbased or objectivesoriented approach to stand setting stresses professional judgment as opposed to following a list of rules Conceptual Framework 0 Conceptual framework has been described as an quotaccounting constitutionquot 0 Does not prescribe GAAP It provides an underlying foundation for accounting standards Qualitative Characteristics of Financial Reporting Information AC 310 Chapter 1 o Predictive value con rmatory value con rmation of investor expectations about future cashgenerating ability 0 Financial information is material if omitting it could affect users decisions 0 Information is material if it has an effect on decisions 0 Professional judgment determines what amount is material in each situation Faithful representation means agreement between a measure and a realworld phenomenon that the measure is supposed to represent Neutrality implies freedom from bias 0 Representational faithfulness is enhanced if information is free from error Conservatism practice followed in an attempt to ensure that uncertainties and risks inherent in business situations are adequately considered 0 Inconsistent with neutrality Enhancing Qualitative Characteristics 0 Comparability the ability to help users see similarities and differences among events and conditions 0 Accounting information should be comparable across different companies and over different time periods 0 Consistency permits valid comparisons between different pedods 0 Accounting information is consistent if it is measured and reported the same way in each time period Veri ability implies a consensus among different measures 0 Information is veri able if different measurers would each consensus about whether it is representationally faithful Timeliness information that is available to users early enough to allow its use in the decision process Understandability users must be able to comprehend the information within the context f the decision being made Key Constraint Cost Effectiveness Cost effectiveness information is cost effective only if the bene t of increased decision usefulness exceeds the costs of providing that information o The costs of providing nancial information include any possible adverse economic consequences of accounting standards AC 310 Chapter 1 Hierarchy of Qualitative Bharaoteris tics of Financai information redinive value QUALI39I39ATNE CHAR MET E El ETIICE rescission usefulness rm il39imEl objective Fl Fun da mental Faithful representation 7 characteristics Relevance P Free from I Fl El l39 Eun firmatu rig Cumpunems value M atarlallty Cam I late Hess bl El utrality 5 t s spec 39Ei Enhancing gmp arability 1 chars cteristii ts mam Em n LT UEiFl Eibllilly Tunneling iniderstandabllity East e Heuz tive Hess thenefits exceed 351st GEETIE rain Elements of Financial Statements Assets probable future economic bene ts obtains or controlled by a particular entity as a result of past transactions or events Liabilities probable future sacri ces of economic bene ts arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events Equity or net assets called stockholder s equity it is the residual interest in the assets of an entity that remains after deducting its liabilities Investments by owners increases in equity of a particular business enterprise resulting from transfers to it from other entities of something of vale to obtain or increase ownership interests in it Distributions to owners decreases in equity of a particular enterprise resulting from transfers to owners Comprehensive income the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources Includes all changes in equity except those resulting from investments by owners and distributions to owners Revenues in ows settlements of its liabilities from delivering or producing goods rendering services etc Expenses out ows Gains increases in equity Lossesdecreases in equity All of these 10 elements of nancial statements describe nancial position and periodic performance Underlying Assumptions AC 310 Chapter 1 o 4 basic assumptions underlie GAAP o The economic entity assumption presumes that economic events can be identi ed speci cally with an economic entity ex google 0 The going concern assumption it is anticipated that a business entity will continue to operate inde nitely o The periodicity assumption allows the life of a company to be divided into arti cial time periods to provide timely information Fiscal year vs calendar year 0 The monetary unit assumption states that nancial statement elements should be measured in a particular monetary unit in the United States the US dollar Recognition Measurement and Disclosure Concepts 0 Recognition the process of admitting information into the nancial statements 0 Measurement process of associating numerical amounts with the elements 0 Disclosure refers to the process of including additional pertinent information in the nancial statements and accompanying notes Revenue Recognition Realization Realization principle requires that two criteria be satis ed before revenue can be recognized o The earnings process judged to be complete or virtually complete 0 There is reasonable certainty as to the collectability of the asset to be received usually cash 0 Revenue should be recognized in the period it is earned not necessarily in the period in which cash is received Pointof sale the goods or services sold to the buyer are delivered 0 Both revenue recognition criteria are usually met at the pointofsale Expense Recognition Matching AC 310 Chapter 1 0 According to the matching principle expenses should be recognized in the period in which they produce revenues lg Eased err an exaet EEUIEEElHdEffEETt rellatlielnslhiip This appreaeh is apprapriate fer pester u a as ene example There is a definite l d t relatienship between Eelll line s revenue treat the sale at persenalll eentpuiters and the pests te preduee these eemputers Gentntissiens paid te salespersens fer ehtaining revenues else is an example at an expense reeegnised leased en this appreaeh Ev asseeiatingi an expense with the revenues I EEQIITlIiIEd in a speeiiille tirne peried lulllanv expenses ean lhe related enlv te perieds at time during whieh revenue is earned Fer example the menthlv paid te an etliee vrerlser is net direetlv related te speeitie revenue event instead the entpllevee prevides benefits te the impanv ter that ene menth that indireethr relate te the revenue Qinised in that same peried By a svstelmatiie andl ratlienall allleeatlierr te speeitlie tirne perils dis Seme seats are ineurred te aeeuire assets that previde benefits tie the eempanv ter mere than ene reperan peried se we reeegnise expenses these time pe eds Fer example straight line depreeiatien is a svstemati39eal and ratilenalii wav te alllleeate the east at eeuiipment tn the perieds in whieh that equipment is used te preclude revenue a iiquot the peried illneuirredll wiitheuit regard te related revenues Semetimes pests are ineurred limit it is impessihle te determine in whieh peried er periieds if related revenues will eeeur Fer example lets say Geegle spends at milllien fer a series ef televisien eemmereials llt s dirtieth te determine when new mush er even whether add itilenal revenues lur as a result at that partieurlar series at ads as a resutt we reeegnise advertising expenditures as expenses in the peried ineurred AC 310 Chapter 1 Measurement 0 5 measurement attributes employed in GAAP 0 Historical cost original transaction value bases measurements on the amount given or received in the exchange transaction 0 Net realizable value bases measurements on the amount of cash into which the asset or liability will be converted in the ordinary course of business Ex customers purchased goods on account for 10000 and if 2000 in bad debts was anticipated net receivables should be valued at 8000 0 Current cost the cost that would be incurred to purchase or reproduce the goods 0 Present or discounted value of future cash ows bases measurement on future cash ows discounted for the time value of money 0 Fair value current market value bases measurement on the price that would be received to sell assets or transfer liabilities in an orderly market transaction GAAP gives a company the option to value nancial assets and liabilities at fair value Disclosure Fulldisclosure principle the nancial reports should include any information that could affect the decisions made by external users subject to the cost effectiveness constraint 0 Parenthetical comments or modifying comments 0 Disclosure notes 0 Supplemental schedules and tables


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