Chapter 1 The Economic in addition to Institutional Setting as long as Financial Reporting Learnin

Chapter 1 The Economic in addition to Institutional Setting as long as Financial Reporting Learnin www.phwiki.com

Chapter 1 The Economic in addition to Institutional Setting as long as Financial Reporting Learnin

Harris, Blaine, Office & Traffic Manager has reference to this Academic Journal, PHwiki organized this Journal Chapter 1 The Economic in addition to Institutional Setting as long as Financial Reporting Learning Objectives: What is accounting Why financial statements are important Who are the users of financial statements How do these users use financial statements What is GAAP What is the st in addition to ard setting process What are some qualitative characteristics of accounting in as long as mation What are some major concepts in addition to assumptions underlying accounting principles What is Accounting An in as long as mation system to account as long as all business transactions in addition to translate these transactions into accounting/financial terms to be reported in financial statements. Why Financial Statements Are Important Assess the risks (i.e., credit risk, asset risk) Provide a comprehensive economic history of a business entity Thus, financial statement can be used as long as various purposes (p3 of the textbook): As an analytical tool. As a management report card. As an early warning signal. As a basis as long as prediction. As a measure of accountability.

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Financial In as long as mation Accounting Identifies in addition to Measures in addition to Communicates Balance Sheet Income Statement Statement of Cash Flows Statement of Owners’ or Stockholders’ Equity Note Disclosures President’s letter Prospectuses, SEC Reporting News releases Forecasts Environmental Reports Etc. GAAP Not GAAP Financial Statements Additional In as long as mation Economic Entity Financial Statements in addition to Financial Reporting Learning Objective : Describe the dem in addition to in addition to supply as long as financial statements Who are the users of Financial Statements Why do they dem in addition to financial Statements Shareholders in addition to investors Investment decisions/stewardship function Proxy contests Lenders in addition to suppliers Lending decisions Covenant compliance Customers Supplier’s health Repeat purchases Warranties & supports Managers in addition to employees Per as long as mance assessment Compensation contracts Company-sponsored pension plans Government in addition to regulatory agencies M in addition to atory reporting Taxing authorities Regulated industries

Supply of financial in as long as mation Relevant financial in as long as mation is provided primarily through financial statements in addition to related disclosure notes. Major Financial statements: Balance Sheet, Income Statement, Statement of Stockholders’ Equity in addition to Statement of Cash Flows. Disclosures Other as long as ms of in as long as mation: Press releases in addition to management discussions (MD&A). Type of Disclosures: M in addition to atory Disclosure (i.e., leases, pension plans, etc.): Required by the SEC in addition to accounting st in addition to ards. Voluntary disclosure: Guided by cost/benefit considerations. Disclosure Benefits The following are benefits arising from voluntary disclosures : Increase investors’ confidence on the quality of company’s equity offerings. Obtain capital cheaply from the capital markets. Get better deals from suppliers.

Disclosure Costs The costs which may arise from voluntary disclosures : In as long as mation collection, processing in addition to dissemination costs. Competitive disadvantage costs. Litigation costs. Political costs. Case Study 1: WorldCom (source: RCJM textbook) (WSJ 8/5/2002 – Improper Capitalization) It’s May 2002 in addition to your brother says you should buy WorldCom shares. The shares look “incredibly cheap” at $2.00 because the company has a book value of $20.50/share in addition to cash of $0.73/share. WorldCom has weathered the industry downturn better than other companies. But an article in this morning’s paper raises a new concern: Fixed “rental” payment Message volume Holding steady despite declining message volume Epilogue of WorldCom In June 2002, WorldCom says $3.8 billion in line cost expenses were wrongly transferred to the balance sheet as assets. Share price falls to $0.06. $11 billion of improper transfers are eventually uncovered. In July 2002, the company declares bankruptcy. $3.8 b FUTURE BENEFITS NO FUTURE BENEFITS ASSET EXPENSE

Case Study 2: AOL (Source: RCJM Textbook) AOL spent $363 million on subscription promotion (costs paid as long as subscriber starter kits, direct marketing mailers, etc.) in 1996 while only recognized $126 million of that amount as advertising expense in 1996, deferring the rest as assets. In May 2000, AOL agreed to pay a fine of $3.5 million to SEC due to its violation of GAAP in deferring subscriber acquisition costs in 1995 in addition to 1996. Lessons learned Financial statement fraud is rare—but users should NOT simply accept the numbers at face value. Flexibility in accounting st in addition to ards provides opportunities as long as companies to manipulate the in as long as mation reported in the financial statements. Self-interest can also drive managers to overstate the income number, especially when compensation is based on earnings. Learning Objectives Define generally accepted accounting principles (GAAP) The need as long as GAAP The historical development of accounting st in addition to ards The st in addition to ard setting process of the Financial Accounting St in addition to ards Board (FASB)

Generally Accepted Accounting Principles (GAAP) GAAP: Accounting methods with substantial authoritative support to be used by business entities in preparing external reports as long as users. Most of what constitutes U.S. GAAP is in the as long as m of written pronouncements issued by the FASB in addition to its predecessors.(i.e., APB). The need as long as the GAAP. GAAP (Contd.) Public held companies in addition to certain regulated companies are required to use GAAP in preparing financial statements. Reasons Who Prescribes the St in addition to ards Securities in addition to Exchange Commission AICPA Public Sector Private Sector Financial Accounting St in addition to ard Board International Accounting St in addition to ard Board American Institute of Certified Public Accountants IASB U.S. Congress SEC FASB

Year Authority Official Release 1934 Congress SEC Regulation S-X ASR in addition to FRR Staff Accounting Bulletins 1938 Accounting Profession AICPA 1938-1959 CAP ARBs (51) 1959-1973 APB APB Opinions (31) 1973 FASB . 1. Statement of Financial Accounting St in addition to ards 2. Interpretations 3. Concepts of Financial Accounting 4. Technique Bulletins 5. Statements issued by EITF The U. S. GAAP Includes: 1. FASB statements (1973 – Present) 2. FASB Interpretations ( 1973 – Present) 3. APB Opinions (1959 – 1973) 4. APB Interpretations (1959 – 1973) 5. CAP, ARBs (1938 – 1959) 6. Other Authoritative Pronouncements (i.e., ASR & FRR of the SEC, Technique Bulletins/Staff Positions of FASB, in addition to Staff Acct. Bulletins of the SEC, Abstracts of EITF, SOP of the AICPA, etc.) FASB Accounting St in addition to ards Codification (ASC) (Source: SFAS 168) Effective July 1, 2009, FASB Accounting St in addition to ards Codification became the single source of authoritative, nongovernmental U.S. GAAP. The pronouncements of the SEC are also sources of authoritative GAAP as long as SEC registrants.

The Codification Research System (CRS) (Source: SFAS 168) Codification Research System (CRS): An online database developed by the FASB to allow easy access to the Codification ( in addition to there as long as e, the GAAP) online. CRS uses a numerical index system in which numerical numbers are used to correspond with topics, subtopics, sections in addition to paragraphs. Accounting St in addition to ards Codification (contd.) The Codification does not change GAAP but only the way the existing accounting st in addition to ards are organized. The Accounting St in addition to ard Setting Process of the FASB (A Due Process) (source: FASB Website) The Board identifies an accounting issue based on requests received from various sources. The Chairman decides whether to add a project to the technical agenda after consulting with other members in addition to subject to oversight by the Foundation’s Board of Trustees.

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The Accounting St in addition to ard Setting Process (contd.) The Board deliberates the various issues identified in addition to analyzed by the staff at one or more public meetings. The Board issues an Exposure Draft (In some case, the Board may issue a Discussion Paper to obtain comments prior to issuing the Exposure Draft.) The Accounting St in addition to ard Setting Process (contd.) The Board holds a public roundtable meeting on the Exposure Draft, if necessary. The staff analyzes comment letters, public roundtable discussion, in addition to any other in as long as mation . The Accounting St in addition to ard Setting Process (contd.) The Board re-deliberates the proposed provisions at one or more public meetings. The Board issues an Accounting St in addition to ards Update (ASU) to amend ASC by a simple majority vote. The passage of an ASU requires 3 votes. (note: effective 7/2008, FASB members reduced from 7 to 5).

Learning Objective Introduce the importance in addition to the need of IFRS Environment in addition to Theoretical Structure of Financial Accounting The Need as long as International Accounting St in addition to ards Companies doing business in more than one nations found that it is hard to comply with more than one set of accounting st in addition to ards established by authorities in different nations. In response to this problem, International Accounting St in addition to ards Committee (IASC) was as long as med in 1973 to develop a single set of global accounting st in addition to ards. Environment in addition to Theoretical Structure of Financial Accounting The History of International Accounting St in addition to ard Setting (cont.) 41 International Accounting St in addition to ards (IAS) was issued by IASC. IASC created International Accounting St in addition to ards Board (IASB) in April, 2001 to be in charge of prescribing the st in addition to ards. IASB endorsed 41 IAS in addition to named its pronouncement as International Financial Reporting St in addition to ard (IFRS).

Summary (contd.) Financial accounting st in addition to ards (GAAP) are often imprecise in addition to subject to interpretations. This imprecision gives managers an opportunity to shape financial statements: Most use the accounting flexibility to paint a truthful economic picture of the company. Other managers shape the financial statements to mask weaknesses in addition to to hide problems. So analysts must maintain a healthy skepticism about the numbers.

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