ASSIGNMENT CLASSIFICATION TABLE

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CHAPTER 1

Financial Accounting and Accounting Standards

ASSIGNMENT CLASSIFICATION TABLE

Topics

Questions

• Subject matter of accounting. 1
• Environment of accounting. 2, 3, 4
• Role of principles, objectives, standards,

and accounting theory.

5, 6, 7

• Historical development of accounting standards. 8, 9, 10, 11
• Authoritative pronouncements

and standards-setting bodies.

12, 13, 14, 15, 16, 17, 18, 19,

20, 21, 22, 23

• Role of pressure groups. 23, 24, 25, 26, 27, 28
• International accounting. 29, 30
• Ethical issues. 31

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ANSWERS TO QUESTIONS

• Financial accounting measures, classifies, and summarizes in report form those activities and that

information which relate to the enterprise as a whole for use by parties both internal and external to a business enterprise. Managerial accounting also measures, classifies, and summarizes in report form enterprise activities, but the communication is for the use of internal, managerial parties, and relates more to subsystems of the entity. Managerial accounting is management decision oriented and directed more toward product line, division, and profit center reporting.

• Financial statements generally refer to the four basic financial statements: balance sheet, income

statement, statement of cash flows, and statement of changes in owners’ or stockholders’ equity.Financial reporting is a broader concept; it includes the basic financial statements and any other means of communicating financial and economic data to interested external parties. Examples of financial reporting other than financial reports are annual reports, prospectuses, reports filed with the government, news releases, management forecasts or plans, and descriptions of an enterprise’s social or environmental impact.

• If a company’s financial performance is measured accurately, fairly, and on a timely basis, the right

managers and companies are able to attract investment capital. To provide unreliable and irrelevant information leads to poor capital allocation which adversely affects the securities market.

• Some major challenges facing the accounting profession relate to the following items:

Non-financial measurement—how to report significant key performance measurements such as customer satisfaction indexes, backlog information and reject rates on goods purchased.Forward-looking information—how to report more future oriented information.Soft assets—how to report on intangible assets, such as market know-how, market dominance, and well-trained employees.Timeliness—how to report more real-time information.

• In general, the objectives of financial reporting are to provide (1) information that is useful in

investment and credit decisions, (2) information that is useful in assessing cash flow prospects, and (3) information about enterprise resources, claims to those resources, and changes in them.More specifically these objectives state that financial reporting should provide information:

• that is useful to present and potential investors and creditors and other users in making

rational investment, credit, and similar decisions. The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence.

• to help present and potential investors and creditors and other users in assessing the amounts,

timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans. Since investors and creditors’ cash flows are related to enterprise cash flows, financial reporting should provide information to help investors, creditors, and other users assess the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise.

• about the economic resources of an enterprise, the claims to those resources (obligations of the

enterprise to transfer resources to other entities), owners’ equity, and the effects of transactions, events, and circumstances that change its resources and claims to those resources.

• A common set of standards applied by all businesses and entities provides financial statements

which are reasonably comparable. Without a common set of standards, each enterprise could, and would, develop its own theory structure and set of practices, resulting in noncomparability among enterprises.

© 2008 For Instructor Use Only 1-3 Questions Chapter 1 (Continued)

• General-purpose financial statements are not likely to satisfy the specific needs of all interested

parties. Since the needs of interested parties such as creditors, managers, owners, governmental agencies, and financial analysts vary considerably, it is unlikely that one set of financial statements is equally appropriate for these varied uses.

• The SEC has the power to prescribe, in whatever detail it desires, the accounting practices and

principles to be employed by the companies that fall within its jurisdiction. Because the SEC receives audited financial statements from nearly all companies that issue securities to the public or are listed on the stock exchanges, it is greatly interested in the content, accuracy, and credibility of the statements. For many years the SEC relied on the AICPA to regulate the profession and develop and enforce accounting principles. Lately, the SEC has assumed a more active role in the develop- ment of accounting standards, especially in the area of disclosure requirements. In December 1973, in ASR No. 150 (affirmed following passage of the Sarbanes-Oxley Act in 2002) the SEC said the FASB’s statements would be presumed to carry substantial authoritative support and anything contrary to them to lack such support. It thereby supports the development of accounting principles in the private sector.

• The Committee on Accounting Procedure was a special committee of the American Institute of CPAs

that, between the years of 1939 and 1959, issued 51 Accounting Research Bulletins dealing with a wide variety of timely accounting problems. These bulletins provided solutions to immediate problems and narrowed the range of alternative practices. But, the Committee’s problem-by-problem approach failed to provide a well-defined and well-structured body of accounting theory that was so badly needed. The Committee on Accounting Procedure was replaced in 1959 by the Accounting Principles Board.

• The creation of the Accounting Principles Board was intended to advance the written expression

of accounting principles, to determine appropriate practices, and to narrow the differences and inconsistencies in practice. To achieve its basic objectives, its mission was to develop an overall conceptual framework to assist in the resolution of problems as they became evident and to do substantive research on individual issues before pronouncements were issued.

• Accounting Research Bulletins were pronouncements on accounting practice issued by the

Committee on Accounting Procedure between 1939 and 1959; since 1964 they have been recognized as accepted accounting practice unless superseded in part or in whole by an opinion of the APB or an FASB standard. APB Opinions were issued by the Accounting Principles Board during the years 1959 through 1973 and, unless superseded by FASB Statements, are recognized as accepted practice and constitute the requirements to be followed by all business enterprises.FASB Statements are pronouncements of the Financial Accounting Standards Board and currently represent the accounting profession’s authoritative pronouncements on financial accounting and reporting practices.

• The explanation should note that generally accepted accounting principles or standards have

“substantial authoritative support.” They consist of accounting practices, procedures, theories, concepts, and methods which are recognized by a large majority of practicing accountants as well as other members of the business and financial community. Bulletins issued by the Committee on Accounting Procedure, opinions rendered by the Accounting Principles Board, and statements issued by the Financial Accounting Standards Board constitute “substantial authoritative support.”

• It was believed that FASB Statements would carry greater weight than APB Opinions because of

significant differences between the FASB and the APB, namely: (1) The FASB has a smaller membership of full-time compensated members; (2) the FASB has greater autonomy and increased independence; and (3) the FASB has broader representation than the APB.

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• The technical staff of the FASB conducts research on an identified accounting topic and prepares

a “discussion memorandum” that is released by the Board for public reaction. The Board analyzes and evaluates the public response to the discussion memorandum, deliberates on the issues, and issues an “exposure draft” for public comment. The discussion memorandum merely presents all facts and alternatives related to a specific topic or problem, whereas the exposure draft is a tentative “statement.” After studying the public’s reaction to the exposure draft, the Board may reevaluate its position, revise the draft, and vote on the issuance of a final statement.

• Statements of financial accounting standards constitute generally accepted accounting principles

and dictate acceptable financial accounting and reporting practices as promulgated by the FASB.The first standards statement was issued by the FASB in 1973.

Statements of financial accounting concepts do not establish generally accepted accounting principles. Rather, the concepts statements set forth fundamental objectives and concepts that the FASB intends to use as a basis for developing future standards. The concepts serve as guidelines in solving existing and emerging accounting problems in a consistent, sound manner. Both the standards statements and the concepts statements may develop through the same process from discussion memorandum, to exposure draft, to a final approved statement.

• Rule 203 of the Code of Professional Conduct prohibits a member of the AICPA from expressing

an opinion that financial statements conform with GAAP if those statements contain a material departure from an accounting principle promulgated by the FASB, or its predecessors, the APB and the CAP, unless the member can demonstrate that because of unusual circumstances the financial statements would otherwise have been misleading. Failure to follow Rule 203 can lead to a loss of a CPA’s license to practice. This rule is extremely important because it requires auditors to follow FASB standards.

• FASB Standards, FASB Technical Bulletins, AICPA Practice Bulletins.

• The chairman of the FASB was indicating that too much attention is put on the bottom line and not

enough on the development of quality products. Managers should be less concerned with short- term results and be more concerned with the long-term results. In addition, short-term tax benefits often lead to long-term problems.

The second part of his comment relates to accountants being overly concerned with following a set of rules, so that if litigation ensues, they will be able to argue that they followed the rules exactly.The problem with this approach is that accountants want more and more rules with less reliance on professional judgment. Less professional judgment leads to inappropriate use of accounting procedures in difficult situations.

In the accountants’ defense, recent legal decisions have imposed vast new liability on accountants.The concept of accountant’s liability that has emerged in these cases is broad and expansive; the number of classes of people to whom the accountant is held responsible are almost limitless.

• FASB Staff Positions (FSP) are used to provide interpretive guidance and to make minor amend-

ments to existing standards. The due process used to issue a FSP is the same used to issue a new standard.