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ACCOUNTING
14th EDITION
K. Fred Skousen
Earl K. Stice
James D. Stice
This electronic
presentation
prepared by
Douglas Cloud,
Pepperdine
University
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this electronic
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New
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Nepean Ontario,
Ontario, Canada
Canada
FINANCIAL
REPORTING
Learning Objectives
Describe the purpose of financial reporting
Learning Objectives
Realize the growing importance and relevance of
Learning Objectives
Identify career opportunities related to
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11
12
Government
Analysts
Investors
Community
Board of Directors
Management
Employees
Suppliers
Employees
Customers
Creditors
13
Financial Reporting
The
The balance
balance sheet
sheet
The
income
The
income
reports,
of
reports, as
asstatement
of aa certain
certainreports, for
statement
reports,
for
point
the
point in
in time,
time,
the interval,
The
of
The statement
statement
of cash
cash
aa certain
the
certain
interval,
the
resources
of
aa
resources
of
flows
flows reports,
reports, for
for aa
net
assets
generated
net
assets
generated
company
assets),
company (the
(thethrough
assets),business
certain
interval,
the
certain
interval,
the
through
business
the
the companys
companys
amount
of
amount
of cash
cash generated
generated
operations
(revenues),
operations
(revenues),
obligations
obligations (the
(thenet assets
and
consumed
by
a
and
consumed
by
a
the
the
net
assets
liabilities),
the
liabilities), and
and
the
company
through
company
through
consumed
(the
consumed
(the
equity
owners.
equity of
of the
the
owners.operating,
operating,
financing, and
and
expenses),
expenses), and
and the
the net
netfinancing,
investing
activities.
investing
activities.
income.
income.
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Financial Reporting
Accounting
Accounting estimates
estimates and
and
judgments
judgments are
are outlined
outlined in
in
the
the notes
notes to
to financial
financial
statements.
statements.
15
Financial Statement
Relationships
16
80,000
4,550,000
$4,630,000
Liabilities $2,970,000
Stock
900,000
R/E
760,000
Total
$4,630,000
$ 973,000
(1,188,000)
245,000
$ 30,000
80,000
$ 110,000
Balance Sheet 12/31/X1
Income Statement
Revenues
$12,443,000
Expenses
11,578,400
Net Income $ 864,600
Statement of
Retained Earnings
R/E 12/31/X0 $ 760,000
Net Income
864,600
Dividends
(400,000)
R/E 12/31/X1 $1,224,600
Cash
Other
Total
$ 110,000
4,975,000
$5,085,000
Liabilities $2,860,400
Stock
1,000,000
R/E
1,224,600
Total
$5,085,000
Relative Frequency of
Audit Opinions (1998)
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Companies
Unqualified
5,978
1,030
Qualified
No opinion
Adverse
Total
7,016
Accounting Standard-Setting
Organizations
FAF
GASAC
GASB
SEC
FASAC
AICPA
FASB
EITF
AcSEC
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Other
U.S. Gov't
IAPC
IASC
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20
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Accounting Standard-Setting
Organizations
FAF
GASAC
GASB
SEC
FASAC
AICPA
FASB
EITF
AcSEC
23
Other
U.S. Gov't
IAPC
IASC
Financial Accounting
Standards Board (1973-present)
Seven full-time members comprise this independent
body.
Issues Statements of Financial Accounting Standards.
Determines GAAP by due process.
Works within the conceptual framework.
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Instructors
SEC
State Boards
of Public Acct.
American Acct.
Association
FASB
Statement Preparers
Financial Executives
Institute
IMA
Individual Corps
Auditors
AICPA
State societies of
CPAs
Major audit firms
2
5
SEC
FASB
Registrant
Companies
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27
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AICPA
AICPA
Continuing
Membership
Members
Membersof
of
the
theAICPA
AICPA
GAAP
FASB
FASB
technical staff.
Discussion Memorandum drafted and released.
Public hearing, usually 60 days later, is held.
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30
comment.
Committee studies public response to exposure
draft and prepares final draft.
Board votes on final draft (5-2 margin required for
passage).
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What is GAAP?
Level A
FASB Statements and
Interpretations
APB Opinions
CAP Accounting
Research Bulletins
Level B
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Level C
Consensus Positions of
EITF
AICPA Practice Bulletins
Level D
AICPA Accounting
Interpretations
FASB Question and
FASB Technical Bulletins
Answer guides
AICPA Industry Audit
and Accounting Guides
Other widely recognized
AICPA Statements of
industry practices
Position
International Accounting
Standards Committee
The
accounting
standards
produced
The
International
Accounting
The
accounting
standards
produced
The
International
Accounting
by
Accounting
Standards
Committee
(ISAC)
by the
the International
International
Accounting
Standards
Committee
(ISAC) was
was
Standards
Committee
referred
formed
in
develop
Standards
Committee
are
referred to
to
formed
in 1973
1973 to
toare
develop
as
Accounting
worldwide
accounting
standards.
as International
International
Accounting
worldwide
accounting
standards.
Standards
Standards (IASs).
(IASs).
33
Objectives
of Financial
Reporting
Qualitative
Characteristics
of Information
Accounting
Elements
of Financial
Statements
Principles
Constraints
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Objectives of Financial
Reporting
Usefulness.
Understandability.
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Objectives of Financial
Reporting
Usefulness
Usefulness
Financial reporting should provide
information that is useful to present and
potential investors and creditors and
other users in making rational
investment, credit, and similar decisions.
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Objectives of Financial
Reporting
Understandability
Understandability
Financial reporting should provide
information that is understandable to one
who has a reasonable knowledge of
accounting and business and who is
willing to study and analyze the
information presented.
37
Objectives of Financial
Reporting
Target
Target Audience
Audience
While there are many potential users of
financial reports, the objectives are directed
primarily toward investors and creditors.
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Objectives of Financial
Reporting
Assessing
Assessing Future
Future Cash
Cash Flows
Flows
Financial reporting should provide
information that is useful in assessing
amounts, timing, and uncertainty (risk) of
prospective cash flows.
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Objectives of Financial
Reporting
Evaluating
Evaluating Economic
Economic Resources
Resources
Financial reporting should also provide
information about an enterprises assets,
liabilities, and owners equity to help
investors, creditors, and others evaluate the
financial strengths and weaknesses of the
enterprise and its liquidity and solvency.
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Objectives of Financial
Reporting
Primary
Primary Focus
Focus on
on Earnings
Earnings
Information about enterprise earnings,
measured by accrual accounting, generally
provides a better basis for forecasting
future performance than does information
about current cash receipts and
disbursements.
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Qualitative Characteristics of
Accounting Information
Primary Qualities
A. Relevance
1. Predictive Value
2. Feedback Value
3. Timeliness
B. Reliability
1. Verifiability
2. Representational
Faithfulness
3. Neutrality
Secondary Qualities
A. Comparability
B. Consistency
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Qualitative Characteristics of
Accounting Information
43
Decision
Makers
Benefits > Cost
Understandability
Decision
Usefulness
Relevance
Predictive
Value
Feedback
Value
Reliability
Timeliness
Verifiability
Neutrality
Consistency
Comparability
Materiality
Representational
Faithfulness
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Recognition and
Measurement Concepts
Principles
Assumptions
Historical Cost
Revenue Recognition
Matching
Full Disclosure
Economic Entity
Going Concern
Arms-Length
Transactions
Monetary Unit
Periodicity
Constraints
Cost-Benefit
Materiality
Industry Practice
Conservatism
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Financial Statements v.
Financial Reporting
A full set of financial statements is necessary to
meet the objectives of financial reporting. Included
in the recommended set of general-purpose financial
statements are reports that show:
Financial position at the end of the period.
Earnings (net income) for the period.
Cash flows during the period.
Investments by and distributions to owners
during the period.
Comprehensive income for the period.
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Economic entity.
Going concern.
Arms-length transactions.
Stable monetary unit.
Accounting period.
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The End