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How financial accounting can influence social responsibility
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College of Administration and Finance Sciences
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Course Name: Financial Accounting
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Course Code: ACCT 201
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Semester: 2nd Sem 2023-2024/ 1445 H
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Instructor: Dr Fathimunisa Hanfy
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Introduction
Importance
Definitions
Methodology
Cost Accounting data
Interpretations
Interpretations
Discussion
Conclusion
References
Thank you Note
Slide
1-1
CHAPTER
1
FINANCIAL REPORTING AND
ACCOUNTING STANDARDS
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
Slide
1-2
Learning Objectives
Slide
1-3
1.
Identify the major financial statements and other means of financial
reporting.
2.
Explain how accounting assists in the efficient use of scarce
resources.
3.
Explain the need for high-quality standards.
4.
Identify the objective of financial reporting.
5.
Identify the major policy-setting bodies and their role in the
standard-setting process.
6.
Explain the meaning of IFRS.
7.
Describe the challenges facing financial reporting.
Financial Reporting and Accounting Standards
Global Markets
Objective of
Financial
Reporting
• Financial
statements and
financial reporting
• General-purpose
financial
statements
• Accounting and
capital allocation
• High-quality
standards
Slide
1-4
• Capital providers
• Entity perspective
• Decision-usefulnes
s
Standard-Setting
Organizations
• IOSCO
• IASB
• Hierarchy of IFRS
Financial
Reporting
Challenges
• Political
environment
• Expectations gap
• Significant financial
reporting issues
• Ethics
• International
convergence
Global Markets
World markets are becoming increasingly intertwined.
Top 20 Global Companies In Terms Of Sales
Slide
1-5
Global Markets
Significant number of foreign companies are found on
national exchanges.
Illustration 1-2
International Exchange
Statistics
Slide
1-6
Global Markets
Financial Statements and Financial Reporting
Characteristics of accounting are:
Slide
1-7
(1)
the identification, measurement, and communication
of financial information about
(2)
economic entities to
(3)
interested parties.
LO 1 Identify the major financial statements and other means of financial reporting.
Global Markets
Economic Entity
Financial Statements
Additional Information
Financial
Information
Statement of
Financial Position
President’s letter
Accounting?
Income Statement
or Statement of
Comprehensive
Income
Reports filed with
governmental
agencies
Identify
and
Measure
and
Communicate
Slide
1-8
Statement of Cash
Flows
Prospectuses
News releases
Forecasts
Statement of
Changes in Equity
Environmental
impact statements
Note Disclosures
Etc.
LO 1 Identify the major financial statements and other means of financial reporting.
Global Markets
Accounting and Capital Allocation
Resources are limited. Efficient use of resources often
determines whether a business thrives.
Illustration 1-3
Capital Allocation Process
Slide
1-9
LO 2 Explain how accounting assists in the efficient use of scare resources.
Global Markets
High Quality Standards
Globalization demands a single set of high-quality international
accounting standards. Some elements:
1.
Single set of high-quality accounting standards established by
a single standard-setting body.
2.
Consistency in application and interpretation.
3.
Common disclosures.
4.
Common high-quality auditing standards and practices.
5.
Common approach to regulatory review and enforcement.
6.
Education and training of market participants.
(Continued)
Slide
1-10
LO 3 Explain the need for high-quality standards.
Global Markets
High Quality Standards
Globalization demands a single set of high-quality international
accounting standards. Some elements:
Slide
1-11
7.
Common delivery systems (e.g., eXtensible Business
Reporting Language—XBRL).
8.
Common approach to corporate governance and legal
frameworks around the world
LO 3 Explain the need for high-quality standards.
Slide
1-12
LO 3 Explain the need for high-quality standards.
Objective of Financial Accounting
Objective: Provide financial information about the reporting
entity that is useful to
•
present and potential equity investors,
•
lenders, and
•
other creditors
in making decisions in their capacity as capital providers.
Slide
1-13
LO 4 Identify the objectives of financial reporting.
Objective of Financial Accounting
General-Purpose Financial Statements
•
Provide financial reporting information to a wide variety
of users.
•
Provide the most useful information possible at the
least cost.
Capital Providers (Investors)
Investors are the primary user group.
Slide
1-14
LO 4 Identify the objectives of financial reporting.
Objective of Financial Accounting
Entity Perspective
Companies viewed as separate and distinct from their owners.
Decision-Usefulness
Investors are interested in assessing the company’s
Slide
1-15
1.
ability to generate net cash inflows and
2.
management’s ability to protect and enhance the
capital providers’ investments.
LO 4 Identify the objectives of financial reporting.
Objective of Financial Accounting
Review Question
The objective of financial reporting places most
emphasis on:
a. reporting to capital providers.
b. reporting on stewardship.
c. providing specific guidance related to specific
needs.
d. providing information to individuals who are
experts in the field.
Slide
1-16
LO 4 Identify the objectives of financial reporting.
Objective of Financial Accounting
Review Question
General-purpose financial statements are prepared
primarily for:
a. internal users.
b. external users.
c. auditors.
d. government regulators.
Slide
1-17
LO 4 Identify the objectives of financial reporting.
Standard-Setting Organizations
Two Major Organizations:
•
International Accounting Standards Board (IASB)
Issues International Financial Reporting Standards
(IFRS).
Standards used on most foreign exchanges.
Standards used by foreign companies listing on U.S.
securities exchanges.
IFRS used in over 115 countries.
Slide
1-18
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Standard-Setting Organizations
Two Major Organizations:
•
Financial Accounting Standards Board (FASB)
Issues Statements of Financial Accounting
Standards (SFAS).
Required for all U.S.-based companies.
Slide
1-19
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Standard-Setting Organizations
International Organization of Securities
Commissions (IOSCO)
Does not set accounting standards.
Dedicated to ensuring that global
markets can operate in an efficient
and effective basis.
http://www.iosco.org/
Slide
1-20
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Standard-Setting Organizations
International Accounting Standards Board (IASB)
Composed of four organizations—
International Accounting Standards
Committee Foundation (IASCF)
International Accounting Standards
Board (IASB)
http://www.iasb.org
Standards Advisory Council
International Financial Reporting
Interpretations Committee (IFRIC)
Slide
1-21
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Standard-Setting Organizations
Illustration 1-4
International Standard-Setting Structure
Slide
1-22
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Standard-Setting Organizations
Review Question
IFRS stands for:
Slide
1-23
a.
International Federation of Reporting Services.
b.
Independent Financial Reporting Standards.
c.
International Financial Reporting Standards.
d.
Integrated Financial Reporting Services.
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Standard-Setting Organizations
Review Question
The major key players on the international side are the:
Slide
1-24
a.
IASB and FASB.
b.
SEC and FASB.
c.
IOSCO and the SEC.
d.
IASB and IOSCO.
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Standard-Setting Organizations
Review Question
Which body from the U.S. side is similar to the IASB?
Slide
1-25
a.
SEC.
b.
FASB.
c.
FASC.
d.
FAF.
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Due Process
The IASB due process has the following elements:
Slide
1-26
1.
Independent standard-setting board;
2.
Thorough and systematic process for developing
standards;
3.
Engagement with investors, regulators, business leaders,
and the global accountancy profession at every stage of
the process; and
4.
Collaborative efforts with the worldwide standard-setting
community.
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Due Process
Illustration 1-4
International
Standard-Setting
Structure
Slide
1-27
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Due Process
Review Question
Accounting standard-setters use the following process in
establishing international standards:
Slide
1-28
a.
Research, exposure draft, discussion paper, standard.
b.
Discussion paper, research, exposure draft, standard.
c.
Research, preliminary views, discussion paper,
standard.
d.
Research, discussion paper, exposure draft, standard.
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Types of Pronouncements
Issued by the IASB:
Slide
1-29
•
International Financial Reporting Standards.
•
Framework for financial reporting.
•
International financial reporting interpretations.
LO 5 Identify the major policy-setting bodies and
their role in the standard-setting process.
Types of Pronouncements
Hierarchy of IFRS
Companies first look to:
1.
International Financial Reporting Standards;
2.
International Accounting Standards; and
3.
Interpretations originated by the International Financial
Reporting Interpretations Committee (IFRIC) or the
former Standing Interpretations Committee (SIC).
Slide
1-30
LO 6 Explain the meaning of IFRS.
Types of Pronouncements
Review Question
IFRS is comprised of:
Slide
1-31
a.
International Financial Reporting Standards and FASB
financial reporting standards.
b.
International Financial Reporting Standards, International
Accounting Standards, and international accounting
interpretations.
c.
International Accounting Standards and international
accounting interpretations.
d.
FASB financial reporting standards and International
Accounting Standards.
LO 6 Explain the meaning of IFRS.
Financial Reporting Challenges
IFRS in a Political Environment
Slide
1-32
Illustration 1-6
User Groups that Influence the
Formulation of Accounting Standards
LO 7 Describe the challenges facing financial reporting.
Financial Reporting Challenges
The Expectations Gap
What the public thinks accountants should do vs. what
accountants think they can do.
Significant Financial Reporting Issues
Non-financial measurements
Forward-looking information
Sort assets
Timeliness
Slide
1-33
LO 7 Describe the challenges facing financial reporting.
Financial Reporting Challenges
Ethics in the Environment of Financial Accounting
Slide
1-34
•
Companies that concentrate on “maximizing the bottom
line,” “facing the challenges of competition,” and
“stressing short-term results” place accountants in an
environment of conflict and pressure.
•
IFRS does not always provide an answer.
•
Doing the right thing is not always easy or obvious.
LO 7 Describe the challenges facing financial reporting.
Financial Reporting Challenges
International Convergence
In 2002 the IASB and the FASB formalized their commitment
to the convergence of U.S. GAAP and international
standards. The Boards agreed to:
1.
Make their existing financial reporting standards fully
converged as soon as practicable, and
2.
Coordinate their future work programs to ensure that
once achieved, convergence is maintained.
Slide
1-35
LO 7 Describe the challenges facing financial reporting.
Financial Reporting Challenges
Review Question
The expectations gap is:
Slide
1-36
a.
what financial information management provides and
what users want.
b.
what the public thinks accountants should do and what
accountants think they can do.
c.
what the governmental agencies want from
standard-setting and what the standard-setters provide.
d.
what the users of financial statements want from the
government and what is provided.
LO 7 Describe the challenges facing financial reporting.
The fact that there are differences between IFRS and U.S. GAAP
should not be surprising because standard-setters have developed
standards in response to different user needs.
IFRS tends to be simpler and more flexible in its accounting and
disclosure requirements.
The U.S. SEC recently eliminated the need for foreign companies
that trade shares in U.S. markets to reconcile their accounting with
U.S. GAAP.
Slide
1-37
Appendix 1A
THE U.S. STANDARD-SETTING ENVIRONMENT
Organizations responsible for developing financial
accounting standards (GAAP) in the United States:
1.
Securities and Exchange
Commission (SEC).
2.
Financial Accounting
Standards Board (FASB).
Slide
1-38
http://www.sec.gov/
http://www.fasb.org/
Securities and Exchange Commission
•
Established by federal government
•
Accounting and reporting for public companies
Securities Act
of 1933
Slide
1-39
Securities Act
of 1934
•
Encouraged private standard-setting body
•
SEC requires public companies to adhere to GAAP
•
SEC Oversight
•
Enforcement Authority
LO 8 Identify the major policy-setting bodies and their
role in the standard-setting process.
Financial Accounting Standards Board
Wheat Committee’s recommendations resulted in the creation of a the
Financial Accounting Standards Board (FASB) in 1973.
Slide
1-40
Financial
Accounting
Foundation
• Selects members of the FASB
• Funds their activities
• Exercises general oversight.
Financial
Accounting
Standards Board
• Mission to establish and improve
standards of financial accounting
and reporting.
Financial Accounting
Standards Advisory
Council
• Consult on major policy issues.
LO 8 Identify the major policy-setting bodies and their
role in the standard-setting process.
Financial Accounting Standards Board
Missions is to establish and improve standards of financial
accounting and reporting. Differences between FASB and
APB include:
Slide
1-41
•
Smaller Membership
•
Full-time, Remunerated Membership
•
Greater Autonomy
•
Increased Independence
•
Broader Representation
LO 6 Identify the major policy-setting bodies and their
role in the standard-setting process.
Financial Accounting Standards Board
Due Process
FASB relies on two basic premises:
(1)
Responsive to entire economic community
(2)
Operate in full view of the public
Step 1 = Topic placed on agenda
Step 2 = Research conducted and Discussion Memorandum issued.
Step 3 = Public hearing
Step 4 = Board evaluates research, public response and issues
Exposure Draft
Step 5 = Board evaluates responses and issues final Statement of
Financial Accounting Standard
Slide
1-42
LO 8 Identify the major policy-setting bodies and their
role in the standard-setting process.
Financial Accounting Standards Board
Types of Pronouncements
Slide
1-43
•
Standards, Interpretations, and Staff Positions.
•
Financial Accounting Concepts
•
Emerging Issues Task Force Statements
LO 8 Identify the major policy-setting bodies and their
role in the standard-setting process.
Financial Accounting Standards Board
U.S. Generally Accepted Accounting Principles
Principles that have substantial authoritative support.
Major sources of GAAP:
•
FASB Standards, Interpretations, and Staff Positions
•
APB Opinions
•
AICPA Accounting Research Bulletins
When the Board approves a new standard, staff position, etc., the results are
included in the Codification through an Accounting Standards Update.
Slide
1-44
LO 8 Identify the major policy-setting bodies and their
role in the standard-setting process.
Financial Accounting Standards Board
Illustration 1A-2
The
Codification
Framework
Slide
1-45
LO 8 Identify the major policy-setting bodies and their
role in the standard-setting process.
International Accounting Convergence
Improvements in Accounting Standards
IASB and FASB have set up an extensive work plan to achieve
one set of international standards.
Illustration 1A-3
IFRS Adoption Timeline
Slide
1-46
LO 8 Identify the major policy-setting bodies and their
role in the standard-setting process.
International Accounting Convergence
SEC Work Plan
Slide
1-47
•
Sufficient development and application of IFRS.
•
Independent standard-setting for the benefit of investors.
•
Investor understanding and education.
•
Regulatory environment.
•
Impact on large and small financial statement preparers.
•
Human capital readiness.
LO 8 Identify the major policy-setting bodies and their
role in the standard-setting process.
Copyright
Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
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Request for further information should be addressed to the
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programs or from the use of the information contained herein.
Slide
1-48
Chapter
2-1
CHAPTER
2
CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
Chapter
2-2
Learning Objectives
1.
Describe the usefulness of a conceptual framework.
2.
Describe efforts to construct a conceptual framework.
3.
Understand the objective of financial reporting.
4.
Identify the qualitative characteristics of accounting information.
5.
Define the basic elements of financial statements.
6.
Describe the basic assumptions of accounting.
7.
Explain the application of the basic principles of accounting.
8.
Describe the impact that constraints have on reporting
accounting information.
Chapter
2-3
Conceptual Framework For Financial Reporting
Conceptual
Framework
• Need
• Development
• Overview
First Level: Basic
Objective
Second Level:
Fundamental
Concepts
• Qualitative
characteristics
• Basic elements
Third Level:
Recognition,
Measurement, and
Disclosure
Concepts
• Basic assumptions
• Basic principles
• Constraints
• Summary of the
structure
Chapter
2-4
Conceptual Framework
Conceptual Framework establishes the concepts
that underlie financial reporting.
Need for a Conceptual Framework
Chapter
2-5
•
Rule-making should build on and relate to an
established body of concepts.
•
Enables IASB to issue more useful and consistent
pronouncements over time.
LO 1 Describe the usefulness of a conceptual framework.
Conceptual Framework
Development of a Conceptual Framework
Chapter
2-6
•
IASB and FASB are working on a joint project to
develop a common conceptual framework
•
Framework will build on existing IASB and FASB
frameworks.
•
Project has identified the objective of financial
reporting (Chapter 1) and the qualitative
characteristics of decision-useful financial reporting
information.
LO 2 Describe efforts to construct a conceptual framework.
Conceptual Framework
Overview of the Conceptual Framework
Three levels:
•
First Level = Basic objective
•
Second Level = Qualitative characteristics and
elements of financial statements
•
Third Level = Recognition, measurement, and
disclosure concepts
Chapter
2-7
LO 2 Describe efforts to construct a conceptual framework.
ASSUMPTIONS
PRINCIPLES
CONSTRAINTS
1. Economic entity
1. Measurement
1. Cost
2. Going concern
2. Revenue recognition
2. Materiality
3. Monetary unit
3. Expense recognition
4. Periodicity
4. Full disclosure
Third
level
5. Accrual
QUALITATIVE
CHARACTERISTICS
1. Fundamental
qualities
2. Enhancing
qualities
Illustration 2-7
Framework for Financial
Reporting
Chapter
2-8
ELEMENTS
1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses
OBJECTIVE
Provide information
about the reporting
entity that is useful
to present and potential
equity investors,
lenders, and other
creditors in their
capacity as capital
Providers.
Second level
First level
LO 2 Describe efforts to construct
a conceptual framework.
First Level: Basic Objective
OBJECTIVE
“To provide financial information about the reporting entity
that is useful to present and potential equity investors,
lenders, and other creditors in making decisions in their
capacity as capital providers.”
Provided by issuing general-purpose financial statements.
Assumption is that users have reasonable knowledge of business
and financial accounting matters to understand the information.
Chapter
2-9
LO 3 Understand the objectives of financial reporting.
Second Level: Fundamental Concepts
Qualitative Characteristics of Accounting
Information
IASB identified the Qualitative Characteristics of
accounting information that distinguish better (more
useful) information from inferior (less useful)
information for decision-making purposes.
Chapter
2-10
LO 4 Identify the qualitative characteristics of accounting information.
Second Level: Fundamental Concepts
Illustration 2-2
Hierarchy of Accounting
Qualities
Chapter
2-11
LO 4 Identify the qualitative characteristics of accounting information.
Second Level: Fundamental Concepts
Fundamental Quality – Relevance
Relevance is one of the two fundamental qualities that make
accounting information useful for decision-making.
Chapter
2-12
LO 4 Identify the qualitative characteristics of accounting information.
Second Level: Fundamental Concepts
Fundamental Quality – Faithful Representation
Faithful representation means that the numbers and
descriptions match what really existed or happened.
Chapter
2-13
LO 4 Identify the qualitative characteristics of accounting information.
Second Level: Fundamental Concepts
Enhancing Qualities
Distinguish more-useful information from less-useful
information.
Chapter
2-14
LO 4 Identify the qualitative characteristics of accounting information.
ASSUMPTIONS
PRINCIPLES
CONSTRAINTS
1. Economic entity
1. Measurement
1. Cost
2. Going concern
2. Revenue recognition
2. Materiality
3. Monetary unit
3. Expense recognition
4. Periodicity
Third
level
Basic
Elements
4. Full disclosure
5. Accrual
QUALITATIVE
CHARACTERISTICS
1. Fundamental
qualities
2. Enhancing
qualities
Illustration 2-7
Framework for Financial
Reporting
Chapter
2-15
ELEMENTS
1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses
OBJECTIVE
Provide information
about the reporting
entity that is useful
to present and potential
equity investors,
lenders, and other
creditors in their
capacity as capital
Providers.
Second level
First level
LO 4
Second Level: Basic Elements
Chapter
2-16
LO 5 Define the basic elements of financial statements.
Second Level: Basic Elements
Exercise 2-4: Identify the qualitative characteristic(s) to be used
given the information provided.
Characteristics
(a)
(b)
(c)
(d)
Chapter
2-17
Qualitative characteristic being
employed when companies in the
same industry are using the same
accounting principles.
Relevance
Quality of information that confirms
users’ earlier expectations.
Neutrality
Imperative for providing comparisons
of a company from period to period.
Timeliness
Ignores the economic consequences
of a standard or rule.
Understandability
Faithful representation
Predictive value
Confirmatory value
Completeness
Verifiability
Comparability
LO 5
Second Level: Basic Elements
Exercise 2-4: Identify the qualitative characteristic(s) to be used
given the information provided.
Characteristics
(e)
(f)
(g)
Requires a high degree of consensus
among individuals on a given
measurement.
Relevance
Predictive value is an ingredient of this
fundamental quality of information.
Confirmatory value
Qualitative characteristics that
enhance both relevance and faithful
representation.
Completeness
Faithful representation
Predictive value
Neutrality
Timeliness
Verifiability
Understandability
Comparability
Chapter
2-18
LO 5
Second Level: Basic Elements
Exercise 2-4: Identify the qualitative characteristic(s) to be used
given the information provided.
Characteristics
(h)
(i)
(j)
Neutrality and completeness are
ingredients of this fundamental quality
of accounting information.
Relevance
Two fundamental qualities that make
accounting information useful for
decision-making purposes.
Confirmatory value
Issuance of interim reports is an
example of what enhancing
ingredient?
Timeliness
Faithful representation
Predictive value
Neutrality
Completeness
Verifiability
Understandability
Comparability
Chapter
2-19
LO 5
Third Level: Recognition, Measurement, and
Disclosure Concepts
These concepts explain how companies should recognize,
measure, and report financial elements and events.
Recognition, Measurement, and Disclosure Concepts
ASSUMPTIONS
PRINCIPLES
CONSTRAINTS
1. Economic entity
1. Measurement
1. Cost
2. Going concern
2. Revenue recognition
2. Materiality
3. Monetary unit
3. Expense recognition
4. Periodicity
4. Full disclosure
5. Accrual
Illustration 2-7
Framework for
Financial Reporting
Chapter
2-20
LO 6 Describe the basic assumptions of accounting.
Third Level: Assumptions
Basic Assumptions
Economic Entity – company keeps its activity separate from
its owners and other business unit.
Going Concern – company to last long enough to fulfill
objectives and commitments.
Monetary Unit – money is the common denominator.
Periodicity – company can divide its economic activities into
time periods.
Accrual Basis of Accounting – transactions are recorded in
the periods in which the events occur.
Chapter
2-21
LO 6 Describe the basic assumptions of accounting.
Third Level: Assumptions
E2-8: Identify which basic assumption of accounting is best
described in each item below.
(a)
The economic activities of FedEx Corporation
(USA) are divided into 12-month periods for the
purpose of issuing annual reports.
Periodicity
(b)
Total S.A. (FRA) does not adjust amounts in its
financial statements for the effects of inflation.
Monetary
Unit
(c)
Barclays (GBR) reports current and non-current
classifications in its statement of financial
position.
Going
Concern
(d)
The economic activities of Tokai Rubber
Industries (JPN) and its subsidiaries are merged
for accounting and reporting purposes.
Economic
Entity
Chapter
2-22
LO 6 Describe the basic assumptions of accounting.
Third Level: Principles
Principles
Measurement
Chapter
2-23
•
Cost is generally thought to be a faithful representation of the
amount paid for a given item.
•
Fair value is “the amount for which an asset could be exchanged,
a liability settled, or an equity instrument granted could be
exchanged, between knowledgeable, willing parties in an arm’s
length transaction.”
•
IASB has taken the step of giving companies the option to use fair
value as the basis for measurement of financial assets and
financial liabilities.
LO 7 Explain the application of the basic principles of accounting.
Third Level: Principles
Revenue Recognition – revenue is to be recognized when it
is probable that future economic benefits will flow to the company
and reliable measurement of the amount of revenue is possible.
Illustration 2-3
Timing of Revenue Recognition
Chapter
2-24
LO 7 Explain the application of the basic principles of accounting.
Third Level: Principles
Expense Recognition – outflows or “using up” of assets
or incurring of liabilities (or a combination of both) during a
period as a result of delivering or producing goods and/or
rendering services.
Illustration 2-4
Expense Recognition
“Let the expense follow the revenues.”
Chapter
2-25
LO 7 Explain the application of the basic principles of accounting.
Third Level: Principles
Full Disclosure – providing information that is of sufficient
importance to influence the judgment and decisions of an
informed user.
Provided through:
Chapter
2-26
•
Financial Statements
•
Notes to the Financial Statements
•
Supplementary information
LO 7 Explain the application of the basic principles of accounting.
Third Level: Principles
BE2-9: Identify which basic principle of accounting is best
described in each item below.
(a) Parmalat (ITA) reports revenue in its income
statement when it is earned instead of when the
cash is collected.
Revenue
Recognition
(b) Google (USA) recognizes depreciation expense for
a machine over the 2-year period during which that
machine helps the company earn revenue.
Expense
Recognition
(c) KC Corp. (USA) reports information about pending
lawsuits in the notes to its financial statements.
Full
Disclosure
(d) Fuji Film (JPN) reports land on its balance sheet at
the amount paid to acquire it, even though the
estimated fair market value is greater.
Chapter
2-27
Measuremen
t
LO 7 Explain the application of the basic principles of accounting.
Third Level: Constraints
Constraints
Cost – the cost of providing the information must be weighed
against the benefits that can be derived from using it.
Materiality – an item is material if its inclusion or omission
would influence or change the judgment of a reasonable
person.
Chapter
2-28
LO 8 Describe the impact that constraints have on
reporting accounting information.
Third Level: Constraints
E2-11: What accounting constraints are illustrated by the
items below?
(a) Willis Company does not disclose any
information in the notes to the financial
statements unless the value of the information
to users exceeds the expense of gathering it.
Cost
(b) Beckham Corporation expenses the cost of
wastebaskets in the year they are acquired.
Materiality
Chapter
2-29
LO 8 Describe the impact that constraints have on
reporting accounting information.
Summary of
the Structure
Chapter
2-30
The existing conceptual frameworks underlying U.S. GAAP and IFRS
are very similar.
The converged framework should be a single document, unlike the two
conceptual frameworks that presently exist.
Both the IASB and FASB have similar measurement principles, based
on historical cost and fair value. However, U.S. GAAP has a concept
statement to guide estimation of fair values when market-related data is
not available (Statement of Financial Accounting Concepts No. 7,
“Using Cash Flow Information and Present Value in Accounting”). The
IASB is considering a proposal to provide expanded guidance on
estimating fair values.
Chapter
2-31
Copyright
Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
Chapter
2-32
Slide
3-1
CHAPTER
3
THE ACCOUNTING
INFORMATION SYSTEM
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
Slide
3-2
Learning Objectives
Slide
3-3
1.
Understand basic accounting terminology.
2.
Explain double-entry rules.
3.
Identify steps in the accounting cycle.
4.
Record transactions in journals, post to ledger accounts, and
prepare a trial balance.
5.
Explain the reasons for preparing adjusting entries.
6.
Prepare financial statement from the adjusted trial balance.
7.
Prepare closing entries.
The Accounting Information System
Accounting
Information System
• Basic terminology
• Debits and credits
• Accounting equation
• Financial statements
and ownership
structure
Slide
3-4
The Accounting
Cycle
Financial Statements
For Merchandisers
• Identifying and recording
• Journalizing
• Posting
• Trial balance
• Adjusting entries
• Adjusted trial balance
• Preparing financial
statements
• Closing
• Post-closing trial balance
• Reversing entries
• Summary
• Income statement
• Statement of retained
earnings
• Statement of financial
position
• Closing entries
Accounting Information System
Accounting Information System (AIS)
Slide
3-5
•
Collects and processes transaction data.
•
Disseminates the information to interested parties.
Accounting Information System
Helps management answer such questions as:
Slide
3-6
•
How much and what kind of debt is outstanding?
•
Were sales higher this period than last?
•
What assets do we have?
•
What were our cash inflows and outflows?
•
Did we make a profit last period?
•
Are any of our product lines or divisions operating at a loss?
•
Can we safely increase our dividends to shareholders?
•
Is our rate of return on net assets increasing?
Basic Terminology
Slide
3-7
• Event
• Journal
• Transaction
• Posting
• A
