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nullnullAn electronic presentation by Douglas Cloud Pepperdine UniversitynullThe Environment of Financial ReportingChapter1ObjectivesObjectives1. Understand capital markets and decision making. 2. Know what is included in financial reporting. 3. Explain generally accepted accounting principles (GAAP) and the sources of GAAP. 4. Identify the types of pronouncements issued by the FASB. ContinuedObjectivesObjectives5. Understand how the Financial Accounting Standards Board (FASB) operates. 6. Describe the relationship between the Securities and Exchange Commission (SEC) and the FASB. 7. Use ethical models for decision making about ethical dilemmas. 8. Understand creative and critical thinking.Companies need large amounts of capital for operations.Companies need large amounts of capital for operations.Companies may obtain capital by issuing capital stock... Companies may obtain capital by issuing capital stock... Stock Exchangenull... or by borrowing from lenders. BankCapital MarketsCapital MarketsPrimary Market (e.g., individuals, banks)Secondary Market (e.g., New York Stock Exchange)Accounting Information Economic Activities and Decision MakingAccounting Information Economic Activities and Decision MakingCompany’s Economic ActivitiesnullExternal and Internal Users1. Buy. A potential investor decides to purchase a particular security on the basis of communicated accounting information. 2. Hold. An actual investor decides to retain a particular security on the basis of communicated accounting information. 3. Sell. An actual investor decides to dispose of a particular security on the basis of communicated accounting information. Comparison of Financial and Managerial AccountingComparison of Financial and Managerial AccountingSources of AuthorityComparison of Financial and Managerial AccountingTime Frame of Reported InformationComparison of Financial and Managerial AccountingComparison of Financial and Managerial AccountingScopeComparison of Financial and Managerial AccountingComparison of Financial and Managerial AccountingType of InformationComparison of Financial and Managerial AccountingComparison of Financial and Managerial AccountingStatement FormatComparison of Financial and Managerial AccountingComparison of Financial and Managerial AccountingDecision FocusComparison of Financial and Managerial AccountingnullThe company’s accountants prepare both the financial and the managerial accounting reports……and the information comes from the same information system.Financial ReportingFinancial ReportingFinancial reporting is the process of communicating financial accounting information about a company to external users.Financial ReportingFinancial ReportingThe balance sheet (or statement of financial position) which summarizes a company’s financial position at a given date. The income statement which summarizes the results of a company’s income producing activities for a period of time. The statement of cash flows which summarizes a company’s cash inflows and outflows for a period of time.Companies present at least three major financial statements:Financial ReportingA 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.Financial ReportingGenerally Accepted Accounting Principles (GAAP)Generally Accepted Accounting 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.They are like laws and are the rules that must be followed in financial reporting.Hierarchy of Sources of GAAPHierarchy of Sources of GAAPA. Pronouncements of authoritative bodies (FASB, APB, CAP, SEC). B. Pronouncements of bodies of expert accountants that have been exposed for public comment. C. Pronouncements of bodies of expert accountants that have not been exposed for public comment.ContinuednullD. Widely accepted practices and pronouncements representing prevalent practice in a particular industry or applications to specific circumstances. E. Other accounting literature.Hierarchy of Sources of GAAPHistory of GAAP in the Private SectorHistory of GAAP in the Private SectorCAP issued 51 ARBsAPB issued 31 OpinionsFASB issued 145 Statements of Standards as of 5/02Reasons for Forming APBReasons for Forming APB1. To alleviate criticism about the process of formulating accounting principles, which included wider representation. 2. To create a policy-making body whose rules would be binding on companies rather than optional. The APB was comprised 17 to 21 members, selected primarily from the accounting profession.Criticisms of the APBCriticisms of the APB1. Independence. The members of the APB were part-time volunteers whose major responsibilities were to the business, governmental, or academic organization employing them. 2. Representation. The public accounting firms and the AICPA were too closely associated with the development of accounting standards. 3. Response time. Emerging problems were not solved quickly enough by the part-time members of the APB. Structure of the FASBStructure of the FASBFinancial Accounting Foundation (16-member board of trustees)ContinuednullFinancial Accounting Standards Board (7 members)Administrative StaffStructure of the FASBTypes of Pronouncements Issued by the FASBTypes of Pronouncements Issued by the FASBStatements of Financial Accounting Standards Interpretations Technical Bulletins Statements of Financial Accounting Concepts Other PronouncementsFASB Operating ProceduresFASB Operating ProceduresIdentify TopicContinuednullHold Public HearingsFASB Operating ProceduresFrom previous pageOther Organizations Impacting GAAPSecurities 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)Other Organizations Impacting GAAPContinuedOther Organizations Impacting GAAPInternational Accounting Standards Committee (IASC) Governmental Accounting Standards Board (GASB) Financial Executives International (FEI) Institution of Management Accountants (IMA) Association for Investment Management and Research (AIMR)Other Organizations Impacting GAAPParticipants in the Development of GAAPParticipants in the Development of GAAPFASBSECAICPAPrinciples of the AICPA Code of Professional ConductPrinciples of the AICPA Code of Professional ConductResponsibilitiesIn carrying out their responsibilities as professionals, members should exercise sensitive professional judgment in all their activities.nullThe Public InterestMembers should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism.Principles of the AICPA Code of Professional ConductnullIntegrityTo maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.Principles of the AICPA Code of Professional ConductnullObjectivity and IndependenceA 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.Principles of the AICPA Code of Professional ConductnullDue CareA 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.Principles of the AICPA Code of Professional ConductnullScope and Nature of ServiceA member in public practice should observe the Principles of the CPC in determining the scope and nature of services to be provided.Principles of the AICPA Code of Professional ConductAn Ethicist’s Basic Approaches to Moral ReasoningAn Ethicist’s Basic Approaches to Moral Reasoning(1) The utilitarian model, which evaluations actions based on the greatest good for the greatest number. (2) The rights model, which embraces actions that protect individual moral rights. (3) The justice model, which emphasizes a fair distribution of benefits and burdens.Creative and Critical Thinking Impact on Problem SolvingCreative and Critical Thinking Impact on Problem SolvingnullChapter1The Endnull