Environment and Theoretical
Structure of Financial Accounting
Sid Glandon, DBA, CPA
Associate Professor of Accounting
1
Financial Accounting

Financial reporting is the process of
providing relevant financial information to
third-party users
Investors
 Creditors
 Financial intermediaries
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2
Capital Markets

Primary markets

Debt and equity instruments are sold based
on anticipated cash flows
Interest
 Dividends
 Capital gains
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Secondary market
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Investors trade
3
Accrual vs. Cash Accounting
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Accrual accounting provides a more
realistic representation of periodic
financial results
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Financial Statements
Balance Sheet
 Statement of Income
 Statement of Cash Flows
 Statement of Shareholders’ Equity
 Notes to the Financial Statements
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5
Standards
Establishment of accounting standards is
a political process
 Standards setting bodies

Committee on Accounting Procedures
 Accounting Principles Board
 Financial Accounting Standards Board
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Financial Accounting and
Reporting Standards
Securities and Exchange Commission
 American Institute of Certified Public
Accountants (AICPA)

Committee on Accounting Procedures
(CAP)
 Accounting Principles Board (APB)
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Financial Accounting Standards Board
(FASB)
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Financial Reporting Reform

Public Company Accounting Reform and
Investor Protection Act of 2002
Sarbanes-Oxley (SOX)
Public Company Accounting Oversight
Board (PCAOB)
 Standards setting body for publicly traded
companies and their auditors
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Conceptual Framework

Statements of Financial Accounting
Concepts
#1 Objectives of Financial Reporting
 #2 Qualitative Characteristics of Accounting
Information
 #6 Elements of Financial Statements
 #5 Recognition and Measurement in
Financial Statements

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Objectives of Financial Reporting

Provide information:
Useful for decision making
 Helps in predicting cash flows
 About economic resources, claims to
resources and changes in resources and
claims
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10
Qualitative Characteristics

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Understandability (user-specific quality)
Decision Usefulness (overriding objective)

Primary qualities
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Relevance
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Reliability
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Predictive value
Feedback value
Timeliness
Verifiability
Neutrality
Representational faithfulness
Secondary
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Comparability
Consistency
Materiality
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Constraints
Cost effectiveness
 Materiality
 Conservatism
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12
Elements of Financial Statements
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Assets
Liabilities
Equity
Investments by owners
Revenues
Gains
Expenses
Losses
Comprehensive income
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Recognition and Measurement

Recognition

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Item is an element that is measurable,
relevant and reliable
Measurement
Unit of measurement
 Attribute to be measured

Historical cost
 Net realizable value
 Present value of future cash flows
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Recognition and Measurement Concepts
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Assumptions
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Economic entity
Going concern
Perodicity
Monetary unit
Principles
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Historical cost
Realization
Matching
Full disclosure
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AICPA Code of Ethics

Preamble, self-discipline
 Responsibilities, sensitive professional and moral
judgments

Public Trust, serve the public interest
 Integrity, highest sense of integrity
 Objectivity and Independence, objective and
independent in fact and appearance

Due Care, professional’s technical and ethical standards
 Scope and Nature of Services, qualified to provide
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Model for Ethical Decisions
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Step 1, Determine the facts of the situation
Step 2, Identify the ethical issue and the stakeholders
Step 3, Identify the values related to the situation
Step 4, Specify the alternative courses of action
Step 5, Evaluate the courses of action in terms of their
consistency with the values identified
Step 6, Identify the consequences of each possible
course of action
Step 7, Make your decision and take any indicated
action
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