1 The Environment of Financial Reporting Accounting School · Zhongnan University of Economics & Law...

1 The Environment of Financial Reporting

Accounting School · Zhongnan University of Economics & Law

ntermediate Accounntermediate Accountingting

中级会计学

Intermediate Accounting 1 The Environment of Financial Reporting

Forewords Forewords

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

I. Accounting information: users, uses,

and GAAP in U.S.A. I. Accounting information: users, uses,

and GAAP in U.S.A.

Companies may obtain capital by issuing capital stock or by borrowing

from lenders

Stock Exchange

“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)

Accounting Information Economic Activities Accounting Information Economic Activities and Decision Makingand Decision Making

Accumu-late

AccountingInformation

Communi-cate

External User

Internal User

External Decisio

n Making

Internal Decisio

n Making

Company’s Economic Activities

Impact

Intermediate Accounting 1 The Environment of Financial ReportingIntermediate Accounting 1 The Environment of Financial Reporting

InvestorsCommunity

Board of DirectorsManagementEmployees

Suppliers

Employees

CreditorsCustomers

Analysts

Government

Major Internal and External Stakeholder Groups

Comparison of Financial and Managerial Comparison of Financial and Managerial AccountingAccounting

Sources of Authority;

Statement Format;Decision Focus…

Sources of Authority;

Statement Format;Decision Focus…

Could you illustrate differences between

financial and managerial accounting?

Could you illustrate differences between

financial and managerial accounting?

Financial ReportingFinancial ReportingFinancial ReportingFinancial 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 company’s obligations (the liabilities), and the equity of the owners.

The balance sheet reports, as of a certain

point in time, the resources of a company

(the assets), the company’s obligations (the liabilities), and the equity of the owners.

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.

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.

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.

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.

Financial ReportingFinancial Reporting Financial ReportingFinancial 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.

Generally Accepted AccountingGenerally Accepted AccountingPrinciples (GAAP)Principles (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.

Hierarchy of Sources of GAAPHierarchy of Sources of GAAPHierarchy of Sources of GAAPHierarchy 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

Higher Authority Lower Authority A B C D E

Committee on Accounting Procedures

(CAP)Born: 1939Died: 1959

Pronouncements: Accounting Research Bulletins

2. The development of accounting

standards in U.S. -CAP

Accounting Principles

Board(APB)

Born: 1959Died: 1973

Pronouncements: APB Opinions

standards in U.S. -APB

Financial Accounting

Standards Board(FASB)

Born: 1973Died:

Pronouncements: Statements of Financial Accounting Standards

standards in U.S. -FASB

Structure of the FASBStructure of the FASBStructure of the FASBStructure of the FASB

Financial Accounting Standards Advisory Council

(approximately 30 members)

Financial Accounting Standards Board

(7 members)

Appoint, fund, and oversee

Financial Accounting Foundation (16-member board of trustees)

Advise

ContinuedContinuedContinuedContinued

Structure of the FASBStructure of the FASBStructure of the FASBStructure of the FASB

Financial Accounting Standards Board

(7 members)

Task Forces of the Standards Board

(including Emerging Issues Task Force)

Appoint

Consult

Support

Administrative Administrative StaffStaff

Research and Research and Technical StaffTechnical Staff Consult

Types of Pronouncements Issued by the Types of Pronouncements Issued by the FASBFASB

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

FASB Operating ProceduresFASB Operating ProceduresFASB Operating ProceduresFASB Operating Procedures

Identify Topic

Appoint Task Force

Conduct Research

Issue Discussion

Memorandum or Invitation to

Comment

Deliberate on Findings

Hold Public Hearings

Issue Exposure

FASB Operating ProceduresFASB Operating ProceduresFASB Operating ProceduresFASB Operating Procedures

From previous

Issue Exposure

Hold Public Hearings

Modify Exposure

Drafts

Vote (super-

majority)

Issue Statement

FASB Authority Sources-- Overview FASB Authority Sources-- Overview

• American Acct.InstructorsInstructors

Association

Gov’t RegulatorsGov’t Regulators• SEC• State Boards

of Public Acct.

Statement PreparersStatement Preparers• Financial Executives

Institute• IMA• Individual Corps

AuditorsAuditors• AICPA• State societies of

CPAs• Major audit firms

3. Other organizations currently

influencing GAAP in U.S. 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)

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)

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)

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)

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.

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.

American Accounting AssociationAmerican Accounting Association

The American Accounting

Association (AAA) is primarily an

organization for accounting professors.

Internal Revenue ServiceInternal Revenue Service

The Internal Revenue Service (IRS) has the

primary goal of equitable collecting

revenue.

4. Ethics in the accounting

environment 4. Ethics in the accounting

environment

Accountants are often faced with ethical dilemmas (ethical conflicts) in their professional roles.

Principles of the AICPA Code Principles of the AICPA Code of Professional Conductof Professional Conduct

ResponsibilitiesResponsibilities

In carrying out their responsibilities as

professionals, members should exercise sensitive

professional judgment in all their activities.

In carrying out their responsibilities as

professionals, members should exercise sensitive

professional judgment in all their activities.

The Public InterestThe 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.

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.

IntegrityIntegrity

To maintain and broaden public confidence,

members should perform all professional

responsibilities with the highest sense of integrity.

To maintain and broaden public confidence,

members should perform all professional

responsibilities with the highest sense of integrity.

Objectivity and IndependenceObjectivity 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.

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.

Due CareDue Care

A member should observe the profession’s technical and ethical

standards, strive continually to improve competence and the quality of services,

and discharge the professional responsibility to the best of the

member’s ability.

A member should observe the profession’s technical and ethical

standards, strive continually to improve competence and the quality of services,

and discharge the professional responsibility to the best of the

member’s ability.

Scope and Nature of ServiceScope 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.

A member in public practice should observe the Principles of the CPC in determining the scope and nature of services

to be provided.

5. Comparison of the development of accounting standards in China and in

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

The EndThe End

1 The Environment of Financial Reporting Accounting School · Zhongnan University of Economics & Law...

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