ACC340Ch1Notes

School: Arizona State University - Course: ACC 340 - Subject: Accounting

CHAPTER 1 The Environment and Conceptual Framework of Financial Reporting What is accounting? Accounting is the identification, measurement, and communication of financial information. Accounting provides financial information about economic entities to interested parties. oInternal and external users need accounting information. Internal users, like management and employees, need information to plan, evaluate, and control an organization's operations. External users, primarily investors, creditors, and government agencies, are interested in financial accounting To provide the information needed by the external users, we provide financial statements. Financial Statements 1.Balance Sheet- reports the entity's resources (Assets), claims to the resources (Liabilities), and changes in them (Equity)for apointin time 2.Income Statement- shows the results of operationsfor aperiodof time. Follows accrual accounting. 3.Statement of Comprehensive Income- includes Net Income (from Income Statement) AND four "other" items that report "unrealized" gains/losses from the following: Unrealized gains/losses on available for sale securities Translation adjustments on foreign currency Pension adjustments Unrealized gains/losses on hedging on derivatives and hedging 4.Statement of Stockholders' Equity- shows investments by owners, distributions to owners, and all other changes in equity(i.e. Comprehensive Income) 5.Statement of Cash Flows- shows inflows and outflows of CASH from 3 sources: (1) Operating(2) Investing(3) Financing Management also uses less formal financial disclosures to convey information: President's letter or supplementary schedules in the annual report, Prospectuses, Reports filed with the SEC and other government agencies News releases and management forecasts Other.... 1 Spring 2023© Erin Jordan, Ph.D., Arizona State UniversityACC 340 - Chapter 1 - Page

Accrual Basis of Accounting Financial reporting under U.S. GAAP uses the accrual basis of accounting- record revenueswhen earnedandexpenseswhen incurredwithout regard as to whencashis received or paid. oWhy? Accrual accounting is more useful in: (1) analyzing performance(2) assessing futurecash flows Why Standards are Needed - U.S. GAAP Mutual understanding - represents a consensus of what to report and how Comparability between companies - same rules/principles apply and have substantial authoritative support Significance - statements should present fairly, clearly, and completely, the company's financial operations Who has Authority to Set Standards? Originally there were no standardized rules to follow, but with the establishment of an income tax in 1913, the stock market crash of 1929, and criticisms of no standardized reporting practices, forced the accounting profession to begin formulating guidelines. 1.SEC - (1934) The Securities and Exchange Commission (SEC) has the authority to set accounting standards for companies, but always has delegated the task to the accounting profession. Since 1934, the SEC has required that most companies which issues stock to the public, must file audited financial statements with the SEC. Federal agency that implements the Securities and Exchange Act The SEC's mandate is to establish accounting principles but believes the private sector has the resources and talents to establish these principles. SEC determines which standards companies must follow (IFRS vs. GAAP) SEC ultimately has enforcement authority 2.FASB (1973 - Present) Financial Accounting Standards Board FASB was preceded by the Committee on Accounting Procedure (1939-1959) and the Accounting Principles Board (1959-1973). Currently, FASB establishes GAAP and consists of: 7-member board - full time independent body Requires a majority 4/7 vote to approve new/revised standard Issue ASUs (Accounting Standards Updates) - this makes up authoritative U.S. GAAP The Accounting Standards Codification became effective on July 1, 2009, and represents the single source of authoritative (nongovernmental) U.S. GAAP. The codification is an on-line searchable database organized into 9 key topics and approximately 90 subtopics.