Transcript Slide 1

Intermediate Accounting I
Greg Sommers, PhD CPA
[email protected]
http://gsommers.cox.smu.edu/acct3311/
https://www.facebook.com/groups/483384275096780/
Syllabus
• It is our contract to protect you, me and your fellow
students.
• Read it, know it.
My Goal for You
Whatever be the detail with which you cram your
students, the chance of their meeting in after-life
exactly that detail is infinitesimal; and if they do meet
it, they will probably have forgotten what you taught
them about it. The really useful training yields a
comprehension of a few general principles with a
thorough grounding in the way they apply to a
variety of concrete details. In subsequent practice
the students will have forgotten your particular
details; but they will remember by an unconscious
common sense how to apply principles to immediate
circumstances.
Alfred North Whitehead
The Aims of Education and Other Essays
Expectations – Content
• Accounting is different than 8th grade social science
where you learned it and then after the test could forget
it. The content you learn in each accounting course is
the basis for the next course and must be retained.
• You are expected to know and be ready to use what you
learned in Introductory Financial Accounting.
• Solid Footing
• Chapter 3 is essentially a review of Introductory
Financial Accounting. Chapter 6 is Time Value of Money
which most have learned in prior classes.
Expectations – Behavior
• Be ready to begin the discussion promptly and attend the
section for which you registered.
– Your superiors, peers, and client personnel will have the
same expectations in your firm and client assignments.
• You are to occupy available seats from the front of the
classroom first.
– Your superiors and clients would not expect you to sit a
significant distance away during meetings/interactions.
• The use of laptop and other hand-held devices and/or
audio/video recording devices during the class period is
restricted without prior written consent.
– These devices are distracting and their use has the ability
to cause others to be skeptical of your intentions and
commitment.
CHAPTER 1
FINANCIAL ACCOUNTING AND
ACCOUNTING STANDARDS
Sommers – Intermediate I
Discussion Question
Q1-1 Differentiate broadly between financial accounting
and managerial accounting.
Discussion Question
Q1-4 What is the objective of financial reporting?
Objective of Accounting
What is the primary objective of financial accounting?
The primary objective of financial accounting is 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.
What is Information?
Imagine you are locked up in a cell, incommunicado, for the next 24
hours. I offer to tell you the winning number of the lottery that will be
picked this very evening. The will-be-winning ticket, worth
$100,000,000, is still available. How much should you pay for the
information?
Nothing.
This information is worthless to you because you cannot act on it.
Information is valuable insofar as it may allow you to produce better
results that you would have gotten without it. Unless the information
may lead you to act differently than you would have acted had you
not known it, its value is zero.
Since you can neither buy, nor ask someone else to buy the lottery
ticket, the winning number is worthless to you.
Fred Kofman – http://www.linkedin.com/today/post/article/20130819190438-36052017-cut-your-meeting-time-by-90
Discussion Question
Q1-7 What is the likely limitation of “general-purpose
financial statements”?
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.
Equity Investors and Creditors
Investors are the primary user group.
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
1. ability to generate net cash inflows and
2. management’s ability to protect and enhance the capital
providers’ investments.
Investment-Credit Decisions ─
A Cash Flow Perspective
Shareholders
Receive
Cash
1. Dividends
2. Sale of Stock
Creditors
Receive
Cash
1. Interest
2. Loan Repayment
Accounting information should help investors
evaluate the amount, timing, and uncertainty
of the enterprise’s future cash flows.
What do the numbers mean? (p. 5)
“It’s the accounting.” That’s what many investors seem to be saying these
days. Even the slightest hint of any accounting irregularity at a company
leads to a subsequent pounding of the company’s stock price. For
example, the Wall Street Journal has run the following headlines related to
accounting and its effects on the economy.
•
Stocks take a beating as accounting woes spread beyond Enron.
•
Quarterly reports from IBM and Goldman Sachs sent stocks tumbling.
•
VeriFone finds accounting issues; stock price cut in half.
•
Bank of America admits hiding debt.
•
Facebook, Zynga, Groupon: IPO drops due to accounting, not
valuation.
It now has become clear that investors must trust the accounting numbers,
or they will abandon the market and put their resources elsewhere. With
investor uncertainty, the cost of capital increases for companies who need
additional resources. In short, relevant and reliable financial information is
necessary for markets to be efficient.
What do the numbers mean? (p. 6)
In addition to providing decision-useful information about future
cash flows, management also is accountable to investors for the
custody and safekeeping of the company’s economic resources
and for their efficient and profitable use. For example, the
management of The Hershey Company has the responsibility
for protecting its economic resources from unfavorable effects of
economic factors, such as price changes, and technological and
social changes.
Because Hershey’s performance in discharging its
responsibilities (referred to as its stewardship responsibilities)
usually affects its ability to generate net cash inflows, financial
reporting may also provide decision-useful information to assess
management performance in this role.
Financial Accounting Environment
• Relevant financial information is provided
primarily through financial statements and
related disclosure notes.
–
–
–
–
Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Shareholders’ Equity
Expectation GAAP
What the public thinks accountants should do vs.
what accountants think they can do.
– Difficult to close in light of accounting scandals.
– Sarbanes-Oxley Act (2002).
– Public Company Accounting Oversight Board
(PCAOB).
Financial Reporting Challenges
•
•
•
•
•
Non-financial measurements.
Forward-looking information.
Soft assets.
Timeliness
Understandability
Generally Accepted Accounting Principles
FASB Codification

Goal in developing the Codification is to provide in one place
all the authoritative literature related to a particular topic.

Creates one level of GAAP, which is considered authoritative.

All other accounting literature is considered non-authoritative.
FASB has developed the Financial Accounting
Standards Board Codification Research
System (CRS). CRS is an online real-time
database that provides easy access to the
Codification.
Generally Accepted Accounting Principles
Illustration 1-5
FASB Codification
Framework
Issues in Financial Reporting
GAAP in a Political Environment
GAAP is as
much a product
of political
action as they
are of careful
logic or
empirical
findings.
Illustration 1-6
User Groups that
Influence the Formulation
of Accounting Standards
Issues in Financial Reporting
International Accounting Standards
Two sets of standards accepted for international use:

U.S. GAAP, issued by the FASB.

International Financial Reporting Standards
(IFRS), issued by the IASB.
FASB and IASB recognize that global markets will best be
served if only one set of GAAP is used.
IFRS Insights – Relevant Facts
– International standards are referred to as International Financial
Reporting Standards (IFRS), developed by the International
Accounting Standards Board (IASB). Recent events in the global
capital markets have underscored the importance of financial
disclosure and transparency not only in the United States but in
markets around the world.
– U.S standards, referred to as generally accepted accounting
principles (GAAP), are developed by the Financial Accounting
Standards Board (FASB). The fact that there are differences
between what is in this textbook (which is based on U.S. standards)
and IFRS should not be surprising because the FASB and IASB
have responded to different user needs. In some countries, the
primary users of financial statements are private investors; in others,
the primary users are tax authorities or central government planners.
It appears that the United States and the international standardsetting environment are primarily driven by meeting the needs of
investors and creditors.
IFRS Insights – Relevant Facts
– The internal control standards applicable to SarbanesOxley (SOX) apply only to large public companies listed
on U.S. exchanges. There is a continuing debate as to
whether non-U.S. companies should have to comply with
this extra layer of regulation. Debate about international
companies (non-U.S.) adopting SOX-type standards
centers on whether the benefits exceed the costs. The
concern is that the higher costs of SOX compliance are
making the U.S. securities markets less competitive.
– The textbook mentions a number of ethics violations,
such as WorldCom, AIG, and Lehman Brothers. These
problems have also occurred internationally, for example,
at Satyam Computer Services (India), Parmalat (Italy),
and Royal Ahold (the Netherlands).
IFRS Insights – Relevant Facts
– IFRS tends to be simpler in its accounting and disclosure
requirements; some people say more “principles-based.”
GAAP is more detailed; some people say more “rulesbased.” This difference in approach has resulted in a
debate about the merits of “principles-based” versus
“rules-based” standards.
– The SEC allows foreign companies that trade shares in
U.S. markets to file their IFRS financial statements
without reconciliation to GAAP.
A Move Away from Rules-Based Standards?
• Rules based accounting standards vs.
objectives-oriented approach
US GAAP → IFRS
• Objectives oriented (principles-based) approach
stresses professional judgment
IFRS Insights
ABOUT THE NUMBERS
Illustration IFRS1-1
Global Companies
When Will US Move to IFRS?
CFO.com Article –
“SEC Stands Pat as Global Accounting Forges Ahead”