Accounting Theory 1 Exam 1

Accounting Theory 1 Exam 1 Most common financial statements - 1) Balance Sheet (Statement of Financial Position) 2) Income Statement (Statement of Operations)/ Profit and Loss Statement 3) Statement of Cash Flows 4) Statement of Shareholder's Equity Rate of return for investors - Dividends+Share Price Appreciation/Initial Investment Primary objective of financial accounting - To provide investors and creditors with information that will help them make investment and credit decisions. That information should help investors and creditors evaluate the amounts, timing, and uncertainty Generally Accepted Accounting Principles (GAAP): - a dynamic set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes 1933 Securities Act - sets forth accounting and disclosure requirements for initial offerings of securities (stocks and bonds). 1934 Securities Exchange Act - applies to secondary market transactions and mandates reporting requirements for companies whose securities are publicly traded on either organized stock exchanges or in over-the-counter markets Securities and Exchange Commission (SEC) - Also created by the 1934 Act. Congress gave the SEC the authority to set accounting and reporting standards for companies whose securities are publicly traded. However, the SEC, a government appointed body, has delegated the task of setting accounting standards to the private sector. If the SEC does not agree with a particular standard issued by the private sector, it can force a change in the standard. First Accounting Standards Setting Body - The first private sector body to assume the task of setting accounting standards was the Committee on Accounting Procedure (CAP). The CAP was a committee of the American Institute of Accountants (AIA). The AIA was renamed the American Institute of Certified Public Accountants (AICPA). Accounting Principles Board - In 1959, the Accounting Principles Board (APB) replaced CAP. -suffered from a variety of problems -was never able to establish a conceptual framework for financial accounting and reporting that was broadly accepted -members served on the APB on a voluntary, part-time basis, so it was not able to act quickly enough to keep up with developing issues -perceived lack of independence from the AICPA Financial Accounting Standards Board - Criticism of the APB led to the creation in 1973 of the FInancial Accounting Standards Board (FASB) and its supporting structure. -Seven full time members FASB is suppored by its parent organization Financial Accounting Foundations (FAF) IN 1984, FASB's Emerging Issues Task Force (EITF) was formed to improve financial reporting by resolving narrowly defined financial accounting issues within the framework of existing GAAP. Codification - The FASB has developed a conceptual framework that is not authoritative GAAP but provides an underlying structure for the development of accounting standards -Accounting Standards Updates (ASUs) -Statements of Financial Accounting Standards (SFASs) -Interpreations -Staff Positions -Technical Bulletins -EITF Issue Consensuses The Codification integrates and topically organizes all relevant accounting pronouncements comprising GAAP in a searchable online database. International Accounting Standards Board - IASB's main objective is to develop a single set of high-quality, understandable, and enforceable global accounting standards to help participants in the world's capital markets and other users make economic decisions.