INTERMEDIATE
ACCOUNTING
14th EDITION
K. Fred Skousen
Earl K. Stice
James D. Stice
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Task Force Clip Art included in
this electronic presentation is
used with the permission of
New Vision Technology of
Nepean Ontario, Canada
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FINANCIAL
REPORTING
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Learning Objectives
 Describe the purpose of financial reporting
and identify the primary financial
statements.
 Explain the function of accounting
standards and describe the role of the FASB
in setting these standards in the United
States.
 Recognize the importance to financial
reporting of the SEC, AICPA, AAA, and
IRS.
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Learning Objectives
 Realize the growing importance and
relevance of international accounting issues
to the practice of accounting in the United
States and understand the role of the IASC in
international accounting standard setting.
 Understand the significance of the FASB’s
conceptual framework in outlining the
qualities of good accounting information,
defining terms such as asset and revenue, and
providing guidance about appropriate
recognition, measurement, and reporting.
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Learning Objectives
 Identify career opportunities related to
accounting and financial reporting in the
fields of public accounting, corporate
accounting, financial analysis, banking, and
consulting.
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Definition for Accounting
“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.” (APB 4.40).
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Definition for Accounting
Key features of this definition:
• Accounting provides a vital service in
today’s business environment.
• Accounting is concerned primarily
with quantitative financial information
that is used in conjunction with
qualitative evaluations in making
judgments.
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Definition for Accounting
Key features of this definition:
• Accounting information is used in
making decisions about how to
allocate scarce resources.
• Although accountants place much
emphasis on reporting what has
already occurred, this past information
is intended to be useful in making
economic decisions about the future.
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Users of Accounting Information
All parties interested in the
financial health of a
company are called
stakeholders.
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Users of Accounting Information
Two major classifications of stakeholders
Internal users, who
make decisions
directly affecting the External users,
internal operations who make decisions
concerning their
of the enterprise.
relationship to the
enterprise.
Major Internal and External
Stakeholder Groups
Government
Analysts
Investors
Community
Board of Directors
Management
Employees
Suppliers
Employees
Customers
Creditors
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Financial Reporting
The balance sheet
reports, asThe
of aincome
certain statement
reports,
a certain
point in time,
the forThe
statement of cash
interval,
assets
resources
of a the net
flows
reports, for a
company (thegenerated
assets), through
certain interval, the
business operations
the company’s
amount of cash generated
(revenues),
the
obligations
(the
andnet
consumed by a
consumed
(the through
liabilities),assets
and the
company
expenses),
and the netfinancing, and
equity of the
owners.operating,
income.
investing activities.
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Financial Reporting
Accounting estimates
and judgments are
outlined in the notes to
financial statements.
Financial Statement
Relationships
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Statement of Cash Flows
Cash From Op
Cash From Inv
Cash From Fin
Net Increase
Beg. Cash
End. Cash
Balance Sheet 12/31/X0
Cash
Other
Total
$ 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
Unqualified With Explanatory Language
1,030
Qualified
6
No opinion
2
Adverse
0
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
Securities and Exchange
Commission (1934-present)
 1929 stock market crash blamed on
nonstandard accounting.
 1934 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.
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U.S. Accounting StandardSetting Bodies
Committee on
Accounting
Procedures
(CAP)
Born:
1939
Died:
1959
Pronouncements:
Accounting Research
Bulletins
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U.S. Accounting StandardSetting Bodies
Accounting
Principles
Board
(APB)
Born:
1959
Died:
1973
Pronouncements:
APB Opinions
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U.S. Accounting Standards
Setting Bodies
Financial
Accounting
Standards Board
(FASB)
Born:
1973
Died:
Pronouncements:
Statements of
Financial Accounting
Standards
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Accounting Standard-Setting
Organizations
FAF
GASAC
GASB
SEC
FASAC
AICPA
FASB
EITF
AcSEC
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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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FASB Authority Sources-Overview
Gov’t Regulators
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
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FASB Authority Sources--SEC
• Maintains power to regulate
registrant companies.
Congress
SEC
FASB
Registrant
Companies
FASB Authority Sources-AICPA
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 Provides authority to the FASB through its
Code of Professional Conduct Rule 203.
 AICPA members must show that client financial
statements comply with FASB pronouncements
(GAAP).
 AICPA grants continuing membership to its
members who comply with Rule 203.
FASB Authority Sources -AICPA
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Endorsement of FASB through Rule 203
AICPA
Continuing
Membership
Members of
the AICPA
GAAP
FASB
FASB “Due Process”
 Topic or project added to agenda.
 Task force assembled to study topic.
 Research and analysis performed by
FASB technical staff.
 Discussion Memorandum drafted and
released.
 Public hearing, usually 60 days later,
is held.
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FASB “Due Process”
 Board analyzes and evaluates public
response.
 Exposure Draft prepared and released.
 Sixty-day exposure period allows for
public 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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SEC Authoritative Literature
 Financial Reporting Releases
 Staff Accounting Bulletins
 Accounting and Auditing
Enforcement Releases
 Accounting Series Releases
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What is GAAP?
• Level A
– FASB Statements and
Interpretations
– APB Opinions
– CAP Accounting
Research Bulletins
• Level B
• Level C
– Consensus Positions
of EITF
– AICPA Practice
Bulletins
• Level D
– AICPA Accounting
Interpretations
– FASB Technical
Bulletins
– FASB “Question and
– AICPA Industry Audit
Answer” guides
and Accounting Guides
– Other widely
– AICPA Statements of
recognized industry
Position
practices
International Accounting
Standards Committee
The
accounting
standards
produced
The
International
Accounting
by the International
Standards
CommitteeAccounting
(ISAC) was
Standards
Committee
are referred
to
formed
in 1973
to develop
worldwide
as International
Accounting
accounting standards.
Standards (IASs).
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Conceptual Framework Overview
Objectives
of Financial
Reporting
Qualitative
Characteristics
of Information
Accounting
Elements
of Financial
Statements
Recognition and Measurement Concepts
Assumptions
Principles
Constraints
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Objectives of Financial Reporting

Usefulness.

Understandability.

Target audience: investors and creditors.

Assessing future cash flows.

Evaluating economic resources.

Primary focus on earnings.
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Objectives of Financial Reporting
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
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.
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Objectives of Financial Reporting
Target 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 Future Cash 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 Economic Resources
Financial reporting should also provide
information about an enterprise’s 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 Focus on 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.
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
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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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What About Conservatism?
The concept of conservatism can be
summarized as follows: When in
doubt, recognize all losses but don’t
recognize any gains.
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Elements of Financial Statements
• Assets
• Liabilities
• Equity
• Investment
• Distribution
• Comprehensive Income
• Revenues
• Expenses
• Gains
• Losses
Recognition and
Measurement Concepts
Assumptions
• Economic Entity
• Going Concern
• Arm’s-Length
Transactions
• Monetary Unit
• Periodicity
Principles
• Historical Cost
• Revenue
Recognition
• Matching
• Full Disclosure
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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Traditional Assumptions of the
Accounting Model
•
•
•
•
•
Economic entity.
Going concern.
Arm’s-length transactions.
Stable monetary unit.
Accounting period.
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Careers in Financial Accounting
• Public accounting.
• Company
accounting.
• User (analyst,
banker, consultant).
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The End