Jesica Islas

Intermediate Accounting 1
January 30, 2007
Professor A. Wu
Chapter 1

Midterm Review

Characteristics of Accounting
Essential characteristics of accounting are:
1. the identification, measurement, and communication of financial information
about
2. economic entities to
3. interested parties (internal vs. external)

Challenges Facing Financial Accounting

• Non-financial Measurements
• Forward-looking Information
• Soft Assets
• Timeliness

Objectives of Financial Accounting

Financial reporting should provide information:
(a) That is useful to present and potential investors and creditors and other users in
making rational investment, credit, and similar decisions.
(b) To help present and potential investors and creditors and other users in
assessing the amounts, timing, and uncertainty of prospective cash receipts.
(c) About the economic resources of an enterprise, the claims to those resources,
and the effects of transactions, events, and circumstances that change its
resources and claims to those resources

Securities and Exchange Commission

• Established by federal government
• Accounting and reporting for public companies

Securities Securities
Act of 1933 Act of 1934
• Encouraged private standard-setting body
• SEC requires public companies to adhere to GAAP
• SEC Oversight
• Enforcement Authority

American Institute of CPAs

• National professional organization
• Established the following:
Jesica Islas
Intermediate Accounting 1
January 30, 2007
Professor A. Wu
Chapter 1

Committee on Accounting
Committee on Accounting
Procedures
Procedures
1959 to 1973
1939 to 1959
Issued 31 Accounting
Issued 51 Accounting
Principle Board Opinions
Research Bulletins
(APBOs)
(ARBs)
Wheat Committee
Problem-by-problem
recommendations adopted
approach failed
in 1973

Financial Accounting Standards Board

Wheat Committee’s recommendations resulted in the creation of the Financial
Accounting Standards Board in 1973.

Financial Select members of the

Accounting FASB
Funds their activities
Foundation Exercises general
oversight.

Financial
Accounting Mission to establish and
Standards Board improve standards of
financial accounting and
reporting.

Financial Accounting
Standards Advisory Consult on major policy
Council issues.

Financial Accounting Standards Board (http://www.fasb.org/)

Mission is to establish and improve standards of financial accounting and reporting.
Differences between FASB and APB include:
• Smaller Membership
• Full-time, Remunerated Membership
• Greater Autonomy
Jesica Islas
Intermediate Accounting 1
January 30, 2007
Professor A. Wu
Chapter 1

• Increased Independence
• Broader Representation

Due Process
FASB relies and two basic premises:
(1) Responsive to entire economic community
(2) Operate in full view of the public

Step 1 = Topic placed on agenda

Step 2 = Research conducted and Discussion Memorandum issued.
Step 3 = Public hearing
Step 4 = Board evaluates research, public response and issues Exposure Draft
Step 5 = Board evaluates responses and issues final Statement of Financial
Accounting Standard.

Types of Pronouncements:
Issued by the FASB:
• Standards, Interpretations, and Staff Positions.
• Financial Accounting Concepts
• Emerging Issues Task Force Statements

Governmental Accounting Standards Board (http://www.gasb.org/)

It was created in 1984 to address state and local government reporting issues.
Financial Accounting
Foundation

Governmental
Financial Accounting
Accounting
Standards Board
Standards Board

Financial Accounting Governmental

Standards Advisory Accounting Standards
Council Advisory Council

Generally Accepted Accounting Principles

There are those principles that have substantial authoritative support.
Major sources of GAAP are:
• FASB Standards, Interpretations, and Staff Positions
Jesica Islas
Intermediate Accounting 1
January 30, 2007
Professor A. Wu
Chapter 1

• APB Opinions
• AICPA Accounting Research Bulletins

House of GAAP

AICPA Accounting FASB Implementation Recognized Industry

Interpretations Guides Practices

Category D (Less Authoritative)

FASB Emerging Issues Task Force AICPA AcSec Practice Bulletins

Category C

AICPA Industry Audit and AICPA Statements of

FASB Technical Bulletins
Accounting Guides Position

Category B

FASB Statements, Inpret & AICPA Accounting

APB Opinions
Staff Positions Research Bulletin

Category A (Most Authoritative)

Issues in Financial Reporting

International Accounting Standards
Two sets of standards accepted for international use:
• U.S. GAAP, issued by the FASB
• International Financial Reporting Standards (IFRS), issued by the IASB

FASB and IASB recognize that global markets will best be served if only one of GAAP
is used.

Questions:

1. - Differentiate broadly between financial accounting and managerial

accounting.
Financial accounting is the process of preparing financial reports for the
enterprise for use by both internal and external groups. These include stockholders,
managers, creditor and government agencies.
Jesica Islas
Intermediate Accounting 1
January 30, 2007
Professor A. Wu
Chapter 1

Managerial accounting is the process of identifying, measuring, analyzing and

communicating financial information needed by management to plan, control and
evaluate a company’s operations. These fall under an internal level.

5. - What are the major objectives of financial reporting?

The objectives of financial reporting are to provide information that is
1. Useful investment and credit decisions
2. Useful, in assessing cash flow prospects and
3. About company resources, claims to those resources and changes in them.

8. - In what way is the Securities and Exchange Commission concerned about

and supportive of accounting principles and standards?
The way the SEC are concerned about the accounting principles and standards are
by establishing the FASB which ensure that companies are abiding to their rules and
that companies are falling under GAAP. The way that are supportive is by relying in
the FASB to develop accounting standards and over seeing that companies are
meeting or following the rules established by the FASB.

9. - What was the Committee on Accounting Procedure, and what were its
accomplishments and failings?
The Committee on Accounting Procedure are composed of practicing GPAs who
issued 51 Accounting Research Bulletins during 1939 to 1959. They followed a
problem by problem method which forced to provide the structured body of
accounting principles.

10. - For what purposes did the AICPA in 1959 create the Accounting Principles
Board?
The major purposes of the Accounting Principles Board were
1. Advance the written expression of accounting principles
2. Determine appropriate practices and
3. Narrow the areas of differences and inconsistency in practice. They also
issued 31 opinions which were based mainly on research studies and be
supported by research and analysis.
12. - If you had to explain or define “generally accepted accounting principles or
standards,” what essential characteristics would you include in your
explanation?
The explanation should note that generally accepted accounting principles or
standards have “substantial authoritative support.” They consist of accounting
practices, procedures, theories, concepts, and methods which are recognized by a
large majority of practicing accountants as well as other members of the business and
financial community. Bulletins issued by the Committee on Accounting Procedure,
opinions rendered by the Accounting Principles Board, and statements issued by the
Financial Accounting Standards Board constitute “substantial authoritative support.”
Jesica Islas
Intermediate Accounting 1
January 30, 2007
Professor A. Wu
Chapter 1

13. - In what ways was it felt that the statements issued by the Financial
Accounting Standards Board would carry greater weight than the opinions
issued by the Accounting Principles Board?
It was believed that FASB Statements would carry greater weight than APB
Opinions because of significant differences between the FASB and the APB,
namely:
1. The FASB has a smaller membership of full-time compensated members;
2. the FASB has greater autonomy and increased independence; and
3. the FASB has broader representation than the APB.

Concepts for Analysis

CA 1-6 (FASB Role in Standard Setting)

Instructions:

a) Identify the sponsoring organization of the FASB and the process by which the
FASB arrives at a decision and issues an accounting standard.

The Financial Accounting Foundation is the sponsoring organization of the

FASB. The FAF selects the members of the FASB and the Advisory Council,
funds their activities, and generally oversees the FASB activities.
In establishing financial accounting standards, the FASB relies on a due process:
1. A topic is identified and placed on Board’s agenda,
2. A research and analysis conducted and discussion memorandum of pros
and cons issued,
3. A public hearing on proposed standard
4. A board evaluates research and public response and issues exposure draft,
5. A board evaluates responses and changes exposure draft, if necessary.
Final standard issued

CA 1-12 (Accounting Pronouncements)

Instructions
Match the description to the pronouncement

1. D Staff Positions.
2. F Interpretations (of the Financial Accounting Standards Board).
3. C Statement of Financial Accounting Standards.
4. E EITF Statements
5. A Opinions
6. B Statement of Financial Accounting Concepts.
Jesica Islas
Intermediate Accounting 1
January 30, 2007
Professor A. Wu
Chapter 1

a) Official pronouncements of the APB.

b) Sets forth fundamental objectives and concepts that will be used in developing
future standards.
c) Primary document of the FASB that establishes GAAP.
d) Provides additional guidance on implementing or applying FASB Standards or
Interpretations.
e) Provides guidance on how to account for new and unusual financial transactions
that have the potential for creating diversity in financial reporting practices.
f) Represent extensions or modifications of existing standards.