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Chapter
14
Accounting Principles
and Reporting Standards
Section 1: Generally Accepted
Accounting Principles
Section Objectives
McGraw-Hill/Irwin
1.
Understand the process used to develop generally
accepted accounting principles.
2.
Identify the major standards-setting bodies and their
roles in the standard-setting process.
3.
Describe the users and uses of financial reports.
© 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Generally Accepted Accounting
Principles (GAAP)

Ensure that financial statements are meaningful and
useful.

Are used whether the business is large or small.

Allow financial statements of different companies to
be compared.

Allow a company to compare its own financial
statements from period to period.
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Objective 1
Understand the process used to develop
generally accepted accounting
principles
In the United States, accounting principles are developed
through a cooperative effort between the public sector
and private sector.
Public sector
government
represented by SEC
Private sector
business
represented by FASB
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Objective 2
Identify the major accounting
standards-setting bodies and
their roles in the standardssetting process
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Securities and Exchange
Commission

Regulates all publicly held companies and all companies
with more than a specified number of shareholders or
owners.

Determines the form and content of accounting reports
filed by companies under its jurisdiction.

Has authority to define accounting terms and to prescribe
accounting principles.

Lets the accounting profession develop principles and
standards, but has the final authority.
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The Public Company Accounting
Oversight Board

Created by the Sarbanes-Oxley Act.

Is a private sector, non-profit corporation whose purpose
is to oversee the CPA firms auditing publicly-held
companies.

Has the power to set auditing, quality control, ethics,
independence and other standards for CPA firms
engaged in auditing publicly-held companies.
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Financial Accounting Standards
Board

Seven member board — each having distinguished
accounting backgrounds — who are full-time employees.

Responsible for developing financial accounting
standards and principles.

Develops and issues Statements of Financial Accounting
Standards.

Has issued about 150 standards that the SEC recognizes
as authoritative.
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American Institute of Certified
Public Accountants (AICPA)

In the past, GAAP were developed by AICPA
committee.

In 1972 the AICPA and other organizations formed
the FASB.

The AICPA requires its members to confirm that
audited companies follow the FASB Statements of
Financial Accounting Standards.
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Federal and State Agencies
 Require detailed systems of accounting for public
utilities.
 Issue income tax rules for companies (IRS).
Some companies adopt tax accounting rules for
financial records, provided the rules don’t conflict
with GAAP.
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Other Organizations

AAA (American Accounting Association)

NYSE (New York Stock Exchange)

IASB (International Accounting Standards
Board)
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American Accounting Association
(AAA)
 Has members who:


teach accounting;

write textbooks and articles.
Stimulates the acceptance of accounting principles.
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New York Stock Exchange
(NYSE)
 Required corporations to publish annual reports
as early as 1930.
 Required independent audits for corporations
since 1933.
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International Accounting Standards
Board (IASB)
 Wants to develop standards that can be adopted
throughout the world.
 Has issued about 50 international accounting
standards.
In an important move, in 2002 the European Union
voted to require companies whose securities are
traded on exchanges in member countries to
prepare financial reports on the basis of IASB
Standards.
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Objective 3
Describe the Users and Uses of
Financial Reports
The FASB has concluded that financial reporting
rules should focus on providing information to
investors and creditors.
The focus is not on
management
tax
authorities
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regulatory
agencies
Chapter
14
Accounting Principles
and Reporting Standards
Section 2: The FASB’s Conceptual
Framework of Accounting
Section Objectives
4.
5.
6.
7.
McGraw-Hill/Irwin
Identify and explain the qualitative
characteristics of accounting information.
Describe and explain the basic assumptions
about accounting reports.
Explain and apply the basic principles of
accounting.
Describe and apply the modifying
constraints on accounting principles.
© 2009 The McGraw-Hill Companies, Inc. All rights reserved.
FASB’s framework of accounting can be
divided into four categories:

Qualitative Characteristics

Basic Assumptions

Basic Accounting Principles

Modifying Constraints
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Objective 4
Identify and explain the qualitative
characteristics of accounting information
Qualitative Characteristics

Usefulness
 Understandability
 Relevance
 Reliability
 Neutrality

Comparability
 Consistency
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Qualitative Characteristics
Usefulness
Information should be useful to
decision makers
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Qualitative Characteristics
Understandability
The information should be presented in a
clear and understandable manner
assuming users have some basic
knowledge of business and economics
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Qualitative Characteristics
Relevance
The information should be appropriate for and
have a bearing on decisions to be made by the
users.
Timeliness—The
information should be
reported promptly so that it can be used in
making current business decisions.
The
information provided should have both
predictive and feedback value.
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Qualitative Characteristics
Reliability
The information should be dependable, that is, free
from error and also free from any bias on the part
of the preparer.
Verifiability—
Implies that supporting
documents such as checks, invoices, and
contracts support the information supplied in
the financial statements and that they are
available for examination.
Faithfulness – Implies that
the data shown in the financial reports reflect
what really happened.
Representational
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Qualitative Characteristics
Neutrality
The information should not favor one group of
users over another group. The information should
be prepared in such a way that it is helpful to all
groups.
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Qualitative Characteristics
Comparability
The information should be presented so that it can
be compared with the financial statements of other
businesses as well as previous financial
statements of the business itself.
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Qualitative Characteristics
Consistency
Means that an entity uses the same accounting
treatment for similar events and data from period
to period.
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Objective 5 Describe and explain the basic assumptions
about accounting reports
Underlying Assumptions

Separate Economic Entity

Going Concern

Monetary Unit

Periodicity of Income
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QUESTION:
What is the separate economic entity
assumption?
ANSWER:
The separate economic entity assumption
assumes that the business is separate from
its owners.
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QUESTION:
What is the going concern assumption?
ANSWER:
The going concern assumption is
the concept that a firm will continue
to operate indefinitely.
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QUESTION:
What is the monetary unit
assumption?
ANSWER:
The monetary unit assumption is the
concept that records are kept in terms of
money and the value of money is stable.
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QUESTION:
What is the periodicity of income
assumption?
ANSWER:
The periodicity of income assumption is
the concept that income should be
reported in certain time periods.
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Objective 6
Explain and apply the basic
principles of accounting
General Principles

Historical Cost Basis
 Revenue Recognition
 Matching
 Full Disclosure
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QUESTION:
What is the historical cost basis principle?
ANSWER:
The historical cost basis principle is
the principle that requires assets to
be recorded at their cost at the time
they are acquired.
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QUESTION:
What is recognition of revenue?
ANSWER:
Recognition is determining the
period in which to record revenue
and report it on the income
statement.
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QUESTION:
What is the matching principle?
ANSWER:
The matching principle is the
concept that revenue and costs
incurred in earning that revenue
should be matched in the
appropriate accounting period.
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QUESTION:
What is the full disclosure principle?
ANSWER:
The full disclosure principle is the
requirement that all information that
might affect the user’s interpretation
of financial statements be disclosed
in the statements or in the
footnotes.
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Objective 7
Describe and apply the modifying
constraints on accounting principles
Modifying Constraints

Materiality

Cost-Benefit Test

Conservatism

Industry Practice
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QUESTION:
What is materiality?
ANSWER:
Materiality is the significance of an
item in relation to a particular
situation or set of facts.
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QUESTION:
What is the Cost Benefit Test?
ANSWER:
Cost Benefit Test says that the cost of
gathering information to fully comply
with an accounting principle or rule
may be much higher than the benefit
revealed. (Example, creating a
depreciation schedule to depreciate
the cost of a trash can or stapler)
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QUESTION:
What is conservatism?
ANSWER:
Conservatism is the concept that
revenue and assets should be
understated rather than overstated if
GAAP allows alternatives.
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QUESTION:
What is Industry Practice?
ANSWER:
Some industries have unusual tax
laws or regulatory requirements and
so have developed special
accounting principles and
procedures for their industry.
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Thank You
for using
College Accounting, 12th Edition
Price • Haddock • Farina
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