CHAPTER 1
Accounting—Present and Past
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What is Accounting?
Accounting is the process of:
Identifying
Measuring
Communicating
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Economic
information
about an entity
>
For decisions
and informed
judgments
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Users and Uses of Accounting
Information
User
Management
Investors
Decision/Inform ed Judgment Made
Planning, directing and controlling
Assessing amounts, timing, and
uncertainty of future cash returns on their
investment
Creditors
Assessing probability of collection and the
risk of late (or non-) payment
Employees
Planning for retirement and future job
prospects
Securities and
Reviewing for compliance of all required
Exchange Commission information
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Financial Accounting
Financial accounting
generally refers to the
process that results in the
preparation and reporting
of financial statements for
an entity.
Financial accounting is
primarily externally
oriented and concerned
with the historical results
of an entity’s performance.
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Managerial Accounting/Cost
Accounting
Managerial accounting is
concerned with the use of
economic and financial
information to plan and
control many of the
activities of the entity and
to support the
management decisionmaking process.
Cost accounting relates to
the determination and
accumulation of product,
process, or service costs.
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Auditing—Public Accounting
Public accounting firms
and individual Certified
Public Accountants (CPAs)
provide auditing services
and issue an independent
auditor’s report.
An independent auditor’s report usually contains three brief
paragraphs and states whether the financial statements are
prepared in conformity with generally accepted accounting
principles. An auditor’s report can be unqualified (a “clean”
opinion) or qualified.
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Internal Auditing
Internal auditors are
professional accountants
who perform functions
much like those of an
external auditor. However,
internal auditors are
employed in industry
rather than public
accounting.
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Governmental and Not-for-Profit
Accounting
Governmental units (e.g.,
municipal, state, and
federal agencies) and notfor-profit entities (e.g.,
universities, hospitals, and
religious organizations)
require the same
accounting functions to be
performed as do other
accounting entities.
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Income Tax Accounting
Tax practitioners often
develop specialties in the
taxation of individuals,
partnerships, corporations,
trusts and estates, or
international tax law
issues.
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How Has Accounting Developed?
Mesopotamians
record tax receipts
on clay tablets.
3000 B.C.
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How Has Accounting Developed?
Luca Pacioli published first textbook
describing a comprehensive doubleentry bookkeeping system.
3000 B.C. 1494
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How Has Accounting Developed?
The industrial revolution of the 19th century
generated the need for large amounts of
capital to finance the enterprises that
supplanted individual craftsmen.
3000 B.C. 1494 1800’s
This need resulted in the corporate form of
organization and the need to provide
investors with reports showing the financial
position and the results of operations.
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How Has Accounting Developed?
Accounting professionals in this country organized
themselves in the early 1900’s and worked hard to
establish certification laws, standardized audit
procedures, and other attributes of a profession.
3000 B.C. 1494 1800’s 1900’s
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How Has Accounting Developed?
Between 1932 to 1934 the American Institute Accountants and
the New York Stock Exchange agreed on five broad principles
of accounting.
3000 B.C. 1494 1800’s 1900’s 1932 1933
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1934 1934
The Securities Act of 1933 and the Securities Exchange Act of
1934 gave the Securities and Exchange Commission (SEC)
the authority to establish accounting principles for companies
whose securities had to be registered with the SEC.
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How Has Accounting Developed?
Although the SEC has the authority to establish accounting
principles, the standard-setting process has been delegated to
other organizations over the years.
3000 B.C. 1494 1800’s 1900’s 1932 1933 1939
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1934 1934 1959
The Committee on Accounting Procedure of the American
Institute of Accountants issued 51 Accounting Research
Bulletins that dealt with accounting principles.
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How Has Accounting Developed?
In 1959, the Accounting Principles Board (APB) replaced the
Committee on Accounting Procedure as the standard-setting
body.
3000 B.C. 1494 1800’s 1900’s 1932 1933 1939 1959
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1934 1934 1959
The APB ultimately issued 39 Opinions on serious accounting
issues, but it failed to develop a conceptual underpinning for
accounting.
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How Has Accounting Developed?
The Financial Accounting Foundation (FAF) was created and
established the Financial Accounting Standards Board (FASB)
as the authoritative standard-setting body within the
accounting profession.
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1934 1934 1959
The FASB has issued 145 Statements of Financial Accounting
Standards that have established standards of accounting and
reporting for particular issues.
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How Has Accounting Developed?
The Sarbanes-Oxley Act of 2002 creates a five-member
Public Company Accounting Oversight Board (PCAOB) which
has the authority to set and enforce auditing, attestation,
quality control, and ethics standards for public companies.
3000 B.C. 1494 1800’s 1900’s 1932 1933 1939 1959 1973 2002
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to
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1934 1934 1959
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Standards for Other Types of
Accounting
Managerial/Cost
Accounting
Cost Accounting
Standards Board (CASB)
Auditing/Public
Accounting
Auditing Standards
Board (part of AICPA)
Government and
Not-for-Profit
Governmental
Accounting Standards
Board (GASB)
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International Accounting
Standards
The International
Accounting Standards
Committee (IASC)
seeks methods of
providing
comparability between
financial statements
prepared according to
the differing
accounting standards
of its member nations.
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Ethics and the Accounting
Profession
Integrity
Objectivity
Independence
Competence
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The Conceptual Framework
Statements of Financial Accounting
Concepts (SFACs) describe concepts and
relationships that underlie financial
accounting standards.
•
Objectives of Financial Reporting of Business Enterprises
•
Qualitative Characteristics of Accounting Information
•
Elements of Financial Statements of Business Enterprises
•
Objectives of Financial Reporting of Nonbusiness
Organizations
•
Recognition and Measurement in Financial Statements
•
Elements of Financial Statements
•
Using Cash Flow Information and Present Value in Accounting
Measurement
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End of Chapter 1
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