SMG AC 347 Chapter 1-4: AC347 Study Guide

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7 Feb 2017
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AC347 Study Guide
Chapter 1 Financial Accounting and Accounting Standards
Financial reporting environment
Essential characteristics of accounting
1. The identification, measurement, and communication of financial information about
2. Economic entities to
3. Interested parties
Purpose of information presented in notes to the financial statements
o To provide disclosure required by GAAP
Accounting and capital allocation
o Financial reporting Users Capital Allocation
Financial reporting
The financial information a company provides to help users with capital
allocation decisions about the company
Users
Investors and creditors use financial reports to make their capital allocation
decisions
Capital Allocation the process of determining how and at what cost money is
allocated among competing interests
o An effective process of capital allocation is critical to a healthy economy, which
Promotes productivity
Encourages innovation
Provides an efficient and liquid market for buying and selling securities
Objectives of financial reporting
o Provide information about the reporting entity that is useful to
Present and potential equity investors
Lenders, and
Other creditors
o In making decisions in their capacity as capital providers
Objective of financial accounting
o General-purpose financial statements
Provide financial reporting information to a wide variety of users
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Provide the most useful information possible at the least cost
o Equity investors and creditors
Investors are the primary user group
o Entity perspective
Companies viewed as separate and distinct from their owners
o Decision usefulness
Iestos ae iteested i assessig the opa’s
Ability to generate net cash flows and
Maageet’s ailit to potet ad ehae the apital poides’ iestets
Parties involved in standard setting
Three organizations
o Securities and Exchange Commission (SEC)
Established by federal government
Accounting and reporting for public companies
Encouraged private standard-setting body
SEC requires public companies to adhere to GAAP
SEC Oversight
Enforcement Authority
o American Institute of Certified Public Accountants (AICPA)
National professional organization
Established the following:
Committee on Accounting Procedures
Accounting Principles Board
o Financial Accounting Standards Board (FASB)
Missions is to establish
and improve standards of
financial accounting and
reporting
Differences between
FASB and APB
Smaller
membership
Full-time,
remunerated
membership
Greater autonomy
Increased independence
Broader representation
Steps taken in the establishment of a typical FASB statement
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Types of pronouncements
Accounting Standards Updates
Financial Accounting Concepts
Generally Accepted Accounting Principles principles that have substantial authoritative support
Major sources of GAAP
o FASB standards, interpretations, and staff positions
o APB opinions
o AICPA Accounting Research Bulletins
FASB Codification
o FASB developed the Financial Accounting Standards Board Codification Research System (CRS)
o Goal in developing the Codification is the provide in one place all the authoritative literature
related to a particular topic
o Creates one level of GAAP, which is considered authoritative
o All other accounting literature is considered non-authoritative
o Codification framework
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