Financial Accounting and Accounting Standards

GAAP stands for: 

1. governmental auditing and accounting practices.
2. generally accepted attest principles.
3. government audit and attest policies. 
4. generally accepted accounting principles

Accounting standard-setters use the following process in establishing accounting standards:

1. Research, exposure draft, discussion paper, standard.
2.  Discussion paper, research, exposure draft, standard.
3.  Research, preliminary views, discussion paper, standard.
4.  Research, discussion paper, exposure draft, standard.

GAAP is comprised of:

1. FASB standards, interpretations, and concepts statements.
2. FASB financial standards.
3. FASB standards, interpretations, EITF consensuses, and accounting rules issued by FASB predecessor organizations.
4. any accounting guidance included in the FASB Codification.

The authoritative status of the conceptual framework is as follows. (a) It is used when there is no standard or interpretation related to the reporting issues under consideration. (b) It is not as authoritative as a standard but takes precedence over any interpretation related to the reporting issue. (c) It takes precedence over all other authoritative literature. (d) It has no authoritative status.

General-purpose financial statements are prepared primarily for:     (a) internal users    (b) external users    (c) auditors    (d) government regulators

Differentiate broadly between financial accounting and managerial accounting.

Differentiate between “financial statements” and “financial reporting.”

How does accounting help the capital allocation process?

What is the objective of financial reporting?

Briefly explain the meaning of decision-usefulness in the context of financial reporting.

Of what value is a common set of standards in financial accounting and reporting?

What is the likely limitation of “general-purpose financial statements”?

In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards?

Question: What was the Committee on Accounting Procedure, and what were its accomplishments and failings?

What was the Committee on Accounting Procedure, and what were its accomplishments and failings?

For what purposes did the AICPA create the Accounting Principles Board?

Distinguish between Opinions of the Accounting Principles Board and Accounting Standards Updates.

If you had to explain or define “generally accepted accounting principles or standards,” What essential characteristics would you explain in your explanation?

How are FASB preliminary views and FASB exposure drafts related to FASB “statements”?

Distinguish between FASB Accounting Standards Updates and FASB Statements of Financial Accounting Concepts.

What is Rule 203 of the Code of Professional Conduct?

The chair of the FASB at one time noted that “the flow of standards can only be slowed if (1) producers focus less on quarterly earnings per share and tax benefits and more on quality products,and

(2) accountants and lawyers rely less on rules and law and more on professional judgement and conduct.” Explain his comment.

Explain the role of the Emerging Issues Task Force in establishing generally accepted accounting principles.

The expectations gap is:

1. What financial information management provides and what users want.
2. What the public thinks accountants do and what accountants think they can do. 
3. What the governmental agencies want form standard-setting and what the standard-setters provide.
4. What the users of financial statements want from the government and what is provided.

(FASB and Standard-Setting) Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false.

1. GAAP is the term used to indicate the whole body of FASB authoritative literature.
2. Any company claiming compliance with GAAP must comply with most standards and interpretations but does not have to follow the disclosure requirements.
3. The primary governmental body that has influence over the FASB is the SEC.
4. The FASB has a government mandate and therefore does not have to follow due process in issuing a standard.

Question: Economic consequences of accounting standard-setting means: 

(a) standard-setters must give first priority to ensuring that companies do not suffer any adverse effect as a result of a new standard.

(b) standard-setters must ensure that no new costs are incurred when a new standard is issued. 

(c) the objective of financial reporting should be politically motivated to ensure acceptance by the general public.

(d) accounting standards can have detrimental impacts on the wealth levels of the providers of financial information

(GAAP and Standard-Setting) Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false.

1. The objective of financial statements emphasizes a stewardship approach for reporting financial information.
2. The purpose of the objective of financial reporting is to prepare a balance sheet, an income statement, a statement of cash flows, and a statement of owners’ or stockholders’ equity.
3. Because they are generally shorter, FASB interpretations are subject to less due process compared to FASB standards.
4. The objective of financial reporting uses an entity rather than a proprietary approach in determining what information to report.

Economic consequences of accounting standard-setting means: 

(a) standard-setters must give first priority to ensuring that companies do not suffer any adverse effect as a result of a new standard.

(b) standard-setters must ensure that no new costs are incurred when a new standard is issued. 

(c) the objective of financial reporting should be politically motivated to ensure acceptance by the general public.

(d) accounting standards can have detrimental impacts on the wealth levels of the providers of financial information. 

The objective of financial reporting places most emphasis on:

1. Reporting to capital providers.
2.  Reporting on stewardship
3. Providing specific guidance related to specific needs.
4. Providing information to individuals who are experts in the field.

In what ways it felt that the pronouncements issued by the Financial Accounting Standards Board would carry greater weight than the opinions issued by the Accounting Principles Board?

What are the sources of pressure that change and influence the development of GAAP?

Some individuals have indicated that the FASB must be cognizant of the economic consequences of its pronouncements. What is meant by “economic consequences”? What dangers exist if politics play too much of role in the development of GAAP?

Question: Describe cost depletion and percentage depletion. Why is the percentage depletion method permitted?

If you were given complete authority in the matter, how would you propose that GAAP should be developed and enforced?

One writer recently noted that 99.4 percent of all companies prepare statements that are in accordance with GAAP. Why then is there such concern about fraudulent financial reporting?

What is the “expectations gap”? What is the profession doing to try to close this gap?

The Sarbanes-Oxley Act was enacted to combat fraud and curb poor reporting practices. What are some key provisions of this legislation?

What are some of the major challenges facing the accounting profession?

How are financial accountants challenged in their work to make ethical decisions? Is technical mastery of GAAP not sufficient to the practice of financial accounting?

CA 1-4 (Financial Accounting) Omar Morena has recently completed his first year of studying accounting. His instructor for next semester has indicated that the primary focus will be the area of financial accounting.

Instructions

1. Differentiate between financial accounting and managerial accounting.
2. One part of financial accounting involves the preparation of financial statements. What are the financial statements most frequently provided?
3. What is the difference between financial statements and financial reporting?

(Objective of Financial Reporting) Karen Sepan, a recent graduate of the local state university, is presently employed by a large manufacturing company. She has been asked by Jose Martinez, controller, to prepare the company’s response to a current Preliminary Views published by the Financial Accounting Standards Board (FASB). Sepan knows that the FASB has a conceptual framework, and she believes that these concept statements could be used to support the company’s response to the Preliminary Views. She has prepared a rough draft of the response citing the objective of financial reporting. Instructions

1. Identify the objective of financial reporting. 
2. Describe the level of sophistication expected of the users of financial information by the objective of financial reporting.

(Accounting Numbers and the Environment) Hardly a day goes by without an article appearing on the continu fallout from the financial crisis of 2008. An overheated real estate market, fueled by home purchase incentives, poor lend practices, and securitization through high-risk, mortgage-backed securities, led to a near collapse of global capital markets. a consequence, many have argued that if the financial institutions had been required to report their loans (and loan-bac: investments) at fair value instead of cost, large losses would have been reported earlier. This would have signaled regulator the problems in the mortgage markets and therefore minimized the losses to U.S. taxpayers. 

Instructions 

Explain how reported accounting numbers might affect an individual's perceptions and actions. Cite two examples.

CA1-7 WRITING (Need for GAAP) Some argue that having various organizations establish accounting principles is wasteful and inefficient. Rather than mandating accounting rules, each company could voluntarily disclose the type of information it considered important. In addition, if an investor wants additional information, the investor could contact the company and pay to receive the additional information desired.InstructionsComment on the appropriateness of this viewpoint.

One of the major groups that has been involved in the standard-setting process is the American Institute of Certified Public Accountants. Initially, it was the primary organization that established accounting principles in the United States. Subsequently, it relinquished its power to the FASB.

Instructions

1. Identify the two committees of the AICPA that established accounting principles prior to the establishment of the FASB.
2. Speculate as to why these two organizations failed. In your answer, identify steps the FASB has taken to avoid failure.
3. What is the present role of the AICPA in the rule-making environment?

What is the difference between the codification and the codification research system?

What are the primary advantages of having a codification of generally accepted accounting principles?

(FASB Role in Rule-making) A press release announcing the appointment of the trustees of the new Financial Accounting Foundation stated that the Financial Accounting Standards Board (to be appointed by the trustees)”…will become the established authority for setting accounting principles under which corporations report to the shareholders and others” (AICPA news release July 20,1972).

Instructions

1. Identify the sponsoring organization of the FASB and the process by which the FASB arrives at a decision and issues an accounting standard.
2. Indicate the major types of pronouncements issued by the FASB and the purpose of each of these pronouncements.

Some accountants have politicization in the development and acceptance of generally accepted accounting principles (i.e., rule-making) is taking place. Some use the term “politicization” in a narrow sense to mean the influence by governmental agencies, particularly the securities and Exchange Commission, on the development of generally accepted accounting principles. Others use it more broadly to mean the compromise that results when the bodies responsible for developing generally accepted accounting principles are pressured by interest groups (SEC, American Accounting Association, businesses through their various organizations, Institute of Management Accountants, financial analysts, bankers, lawyers, and so on).Instructions 

(a) The Committee on Accounting Procedure of the AICPA was established in the mid-to late 1930s and functioned until 1959, at which time the Accounting Principles Board came into existence. In 1973, the Financial Accounting Standards Board was formed and the APB went out of existence. Do the reasons these groups were formed, their methods of operation while in existence, and the reasons for the demise of the first two indicate an increasing politicization (as the term is used in the broad sense) of accounting standard setting? Explain your answer by indicating how the CAP, the APB, and the FASB operated or operate. Cite specific developments that tend to support your answer. 

(b) What arguments can be raised to support the “politicization” of accounting rule-making? 

(c) What arguments can be raised against the “politicization” of accounting rule-making?

Presented below are three models for setting GAAP.

1. The purely political approach, where national legislative action decrees GAAP.
2. The private, professional approach, where GAAP is set and enforced by private professional actions only.
3. The public/ private mixed approach, where GAAP is basically set by private-sector bodies that behave as though they were public agencies and whose standards to a great extent are enforced through governmental agencies.

Instructions

1. Which of these three models best describes standard-setting in the United States? Provide justification for your answer.
2. Why do companies, financial analysts, labor unions, industry trade associations, and others take such an active interest in standard-setting? 
3. Cite an example of a group other than the FASB that attempts to establish accounting standards. Speculate as to why another group might wish to set its own standards.

Question: CA1-12 GROUPWORK (GAAP Terminology) Wayne Rogers, an administrator at a major university, recently said, “I’ve got some CDs in my IRA, which I set up to beat the IRS.” As elsewhere, in the world of accounting and finance, it often helps to be fluent in abbreviations and acronyms.

Instructions

Presented below is a list of common accounting acronyms. Identify the term for which each acronym stands, and provide a brief definition of each term.

(a) AICPA (e) FAF (l) FASB(b) CAP (f) FASAC (j) SEC(c) EITF (g) GAAP (k) IASB(d) APB (h) CPA