Intermediate Accounting
Seventeenth Edition
Kieso; Weygandt; Warfield
Chapter 1
Financial Accounting and
Accounting Standards
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Accounting – What Is It?
Specifically, in the context of financial accounting:
• What’s the point?
• What’s it about?
• Who’s it for?
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Financial Reporting Environment
Essential characteristics of accounting are:
1) the identification, measurement, and communication
of financial information about
2) economic entities to
3) interested parties.
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Financial Reporting Environment
Accounting and Capital Allocation
Resources are limited. Efficient use of resources often
determines whether a business thrives.
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Financial Reporting Environment
Objective of Financial Reporting
Provide financial information about the reporting entity
that is useful to
• present and potential equity investors,
• lenders, and
• other creditors in making decisions about providing
resources to the entity.
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Objective of Financial Accounting (1 of 2)
General-Purpose Financial Statements
• Provide financial reporting information to a wide
variety of users
• Provide the most useful information possible at the
least cost
Equity Investors and Creditors
• Primary users for general-purpose financial statements
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Objective of Financial Accounting (2 of 2)
Entity Perspective
• Companies viewed as separate and distinct from their
owners
Decision-Usefulness
Investors are interested in assessing the company’s
1. ability to generate net cash inflows and
2. management’s ability to protect and enhance the
capital providers’ investments.
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The Need to Develop Standards
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Words of Wisdom: “….warned that a person should not go to sleep at night until
the debits equaled the credits.”
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Parties Involved in Standard Setting
Three organizations:
• Securities and Exchange Commission (SEC)
• American Institute of Certified Public Accountants
(AICPA)
• Financial Accounting Standards Board (FASB)
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Parties Involved in Standard Setting
Securities and Exchange Commission (SEC)
• Established by the federal government
• Securities Exchange Act of 1934
• Accounting and reporting for public companies
• Encouraged private standard-setting body
• SEC requires public companies to adhere to GAAP
• SEC Oversight
• Enforcement Authority
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Parties Involved in Standard Setting
American Institute of Certified Public
Accountants (AICPA)
• National professional organization
• Established the following:
• Committee on Accounting Procedure (CAP)
• What went wrong?
• Accounting Principles Board (APB)
• What went wrong?
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Parties Involved in Standard Setting
Financial Accounting Standards Board (FASB)
Wheat Committee’s recommendations resulted in FASB.
Differences between FASB and APB include:
• Smaller membership
• Full-time, remunerated membership
• Greater autonomy
• Increased independence
• Broader representation
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Parties Involved in Standard Setting
Financial Accounting Standards Board (FASB)
Groups associated with FASB:
• Financial Accounting Foundation (FAF)
• Financial Accounting Standards Advisory Council
(FASAC)
• Staff and Task Forces
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Financial Accounting Standards Board
Due Process
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Financial Accounting Standards Board
Types of Pronouncements
Accounting Standards Updates
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Financial Accounting
Concepts
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Generally Accepted Accounting
Principles
Principles that have substantial authoritative support.
Major sources of GAAP:
• FASB Standards, Interpretations, and Staff Positions
• APB Opinions
• AICPA Research Bulletins
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Generally Accepted Accounting
Principles
FASB Codification
• Goal in developing the Codification is to provide in one
place all the authoritative literature related to a
particular topic
• Creates one level of GAAP, which is considered
authoritative
• All other accounting literature is considered nonauthoritative
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Generally Accepted Accounting
Principles (1 of 2)
FASB Codification
FASB has developed the Financial Accounting Standards
Board Codification Research System (CRS).
CRS is an online, real-time database that provides easy
access to the Codification.
The Codification and the related CRS provide a topically
organized structure, subdivided into topic, subtopics,
sections, and paragraphs, using a numerical index system.
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Generally Accepted Accounting
Principles (2 of 2)
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GAAP in a Political Environment
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Major Challenges in Financial Reporting
The Expectations Gap
What the public thinks accountants should do versus
what accountants think they can do.
• Difficult to close in light of accounting scandals
• Sarbanes-Oxley Act
• Public Company Accounting Oversight Board (PCAOB)
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Major Challenges in Financial Reporting
Financial Reporting Issues
• Nonfinancial measurements
• Forward-looking information
• Soft assets
• What kind of assets aren’t reported?
• Timeliness
• When are 10-Ks issued?
• Understandability
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Major Challenges in Financial Reporting
International Accounting Standards
Current Environment
Two sets of standards accepted for international use:
• U.S. GAAP issued by the FASB
• International Financial Reporting Standards (IFRS)
issued by the International Accounting Standards Board
(IASB)
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Major Challenges in Financial Reporting
Ethics in the Environment of Financial Accounting
In accounting, we frequently encounter ethical dilemmas.
• GAAP does not always provide an answer
• Doing the right thing is not always easy or obvious
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