Chapter 1 st

Financial Accounting Standards

1.1 Standard-Setting Bodies in the United States

In the United States, the Securities and Exchange Commission (SEC) has the legal authority to, establish U.S. generally accepted
accounting principles (GAAP). However, in most instances, the SEC has allowed the accounting profession to establish GAAP and self
—regulate. The SEC and three different bodies of the accounting profession have determined GAAP since 1934.
“Securities and Exchange Commission (SEC)"
The SEC was established by the Securities Exchange Act of 1934. All companies that issue securities in the United States are subject
to SEC rules and regulations. The SEC has issued public company specific accounting rules and regulations in Regulation S-X,
Financial Reporting Releases (FRR), Accounting Series Releases (ASR), Interpretative Releases (IR), Staff Accounting Bulletins (SAB),
and EITF Topic D and SEC Observer comments.

“Committee on Accounting Procedure (CAP)”

The Committee on Accounting Procedure (CAP) was a part-time committee of the American Institute of Certified Public Accountants
(AICPA) that promulgated Accounting Research Bulletins (ARB), which determined GAAP from 1939 until 1959.

“ Accounting Principles Board (APB)”

The Accounting Principles Board (APB) was another part-time committee of the AICPA. It issued Accounting Principles Board
Opinions (APBO) and APB Interpretations, which determined GAAP from 1959 until 1973.

“ Financial Accounting Standards Board (FASB)”

In 1973, an independent fuII-time organization called the Financial Accounting Standards Board (FASB) was established, and it has
determined GAAP since then. Through 2009, the FASB issued following Statements
Financial Accounting Standards (SFAS)
FASB Interpretations (FIN)
FASB Technical Bulletins (FTB)
Emerging Issues Task Force Statements (EITF)
FASB Staff Positions
FASB Implementation Guides, and Statements of Financial Accounting Concepts (SFAC).

FASB :
1. The FASB has seven fulI-time members, who serve for five-year terms and may be reappointed to one additional flve-year term.
2. The Board members must sever connections with firms or institutions beforejoining the Board.
1.2 US. GAAP: FASB Accounting Standards Codification”
The vast number of standards issued by the Committee on Accounting Procedures, the Accounting Principles Board, and the
Financial Accounting Standards Board, as well as additional guidance provided by the SEC and the AICPA, made it difficult for users
to access the full body of US. GAAP.

Effective July 1, 2009, the FASB Accounting Standards Codification" became the single source of authoritative nongovernmental US.
GAAP. Accounting and financial reporting practices not included in the codification are not GAAP.

Private Company Council (PCC)

The Financial Accounting Foundation (FAF) created the Private Company Council (PCC) to improve standard setting for
privately held companies in the Us. The goal 0fthe PCC is to establish alternatives to US. GAAP, where appropriate,

to make private company financial statements more relevant, less complex, and cost-beneficial. Accounting alternatives for
private companies are incorporated into the relevant sections of the Accounting Standards Codification (ASC).

Ongoing Standard-Setting Process

The FASB updates the Accounting Standards Codification for new US. GAAP issued by the FASB and for amendments to the SEC
content with Accounting Standards Updates.
Proposed FASB amendments to the ASC are issued for public comment in the form of exposure drafts. A majority vote of the Board
members is required to approve an exposure draft for issuance. At the end of the exposure draft public comment period,

the FASB staff analyzes and studies all comment letters and position papers and then the Board re-deliberates the issue. When the
Board is satisfied that all reasonable alternatives have been adequately considered, the FASB staff prepares an Accounting Standards
Update for Board consideration.

A majority vote of the Board members is required to amend the ASC.

Accounting Standards Updates are not authoritative literature, but instead provide background information, update the codification,
and describe the basis for conclusions on changes in the codification. All new GAAP and SEC amendments are fully integrated into
the existing structure of the codification.

“International Financial Reporting Standards (IFRS)”

The International Accounting Standards Board (IASB) was established in 2001 as part of the International Financial Reporting
Standards (IFRS) Foundation.
When the IASB was created, it adopted the International Accounting Standards (IAS) that had been issued by its predecessor, the
Board of the International Accounting Standards Committee. The IASB issues International Financial Reporting Standards (lFRSs) and
related documents, including the Conceptual Framework for Financial Reporting, exposure drafts, and other discussion documents. The
term International Financial Reporting Standards includes IFRSs, IASs, and Interpretations developed by the IFRS Interpretations
Committee (IFRIC) and the former Standard Interpretations Committee (SIC).
Chapter 2nd

Conceptual Framework for Financial Reporting

The FASB has created a conceptual framework (set forth in pronouncements called Statements of Financial Accounting
Concepts, or SFAC) that serves as a basis for all FASB pronouncements. The SFAC are not GAAP, but they provide a basis for
financial accounting concepts for business and nonbusiness enterprises. As phases of this project are completed, the FASB will
issue each component of the conceptual framework

2.1 "The Objective of General Purpose Financial Reporting"

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to the
primary users of general purpose financial reports in making decisions about providing resources to the reporting entity.

“Externally primary Users”

The primary users of general purpose financial reports are existing and potential investors, lenders, and other creditors. Other parties,
including regulators and members of the public who are not investors, lenders, and other creditors, may also use general purpose
financial reports, but are not considered to be primary users.

1. Free cash flow ( Net Cash flow )

2. Earning ( Profit )
3. Growth
4. Required return
5. Risk of Liquidity

“Note : Generally Finacially satement always prepare on accrual basis”

2.2 "Qualitative Characteristics of Useful Financial Information"
The qualitative characteristics of useful financial information are the characteristics that are likely to be most useful to existing
and potential investors, lenders, and other creditors in making decisions about the reporting entity based on financial
information

Fundamental Qualitative Characteristics

The fundamental qualitative characteristics of useful financial information are relevance and faithful representation. Both
characteristics must be present for financial information to
be useful.
1. Relevance: Financial information is relevant if it is capable of making a difference in the decisions made by users. To be
relevant, financial information must have predictive value and/or confirming value, and must be material.

Predictive Information has predictive value if it can be used by users to predict future
2. Faithful Value: outcomes.
Representation:
To be useful,
financial Confirmatory Information has confirmatory value if it provides feedback about evaluations
information Value: previously made by users.
must faithfully
represent the . Materiality: Information is material if an omission or misstatement of the information could
reported affect the decisions made by users based on financial information. Materiality is
economic an entity-specific aspect of relevance. The FASB and IASB have not specified a
phenomena. uniform quantitative threshold for materiality and have not specified what would
Faithful be material in specific situations.
representation
requires the
financial
information to
be complete, neutral, and free from error. Although perfect faithful representation is generally not achievable, these characteristics
must be maximized.

Complete: A complete depiction offinancial information includes all

information necessary for the user to understand the reported
economic event, including descriptions and explanations.
Neutral: A neutral depiction of financial information is free from bias in selection
or presentation
Free from error means that there are no errors in the selection or application
Free From of the process used to produce reported financial information and that there
Error: are no errors or omissions in the descriptions of economic events. Free from
error does not require perfect accuracy because, for example, it is difficult to
determine the accuracy of estimates.

3. Enhancing Qualitative Characteristics

Comparability, verifiability, timeliness, and understandability enhance the usefulness of
information that is relevant and faithfully represented. These characteristics can be used
to determine how an economic event or transaction should be depicted if two ways are
 equally relevant and faithfully represented. The enhancing qualitative characteristics should
be maximized.

Objectives of Financial
Reporting of Comparability: Information is more useful if it can be compared with similar
Nonbusiness information about other entities or from other time periods.
Comparability enables users to identify similarities and differences
among items. Consistency, which is the use of the same methods for
the same items either from period to period within an entity or in a
single period across entities, helps to achieve comparability.
Verifiability: Verifiability means that different knowledgeable and independent
observers can reach consensus that a particular depiction is faithfully
represented. Verifiability does not require complete agreement.

Timeliness: Timeliness means that information is available to users in time to

becapable of influencing their decisions.

Understandability: Information is understandable if it is classified, characterized, and

presented clearly and concisely. However, even well-informed and
diligent users may need the assistance of advisors to understand
complex and difficult transactions.
Organizations
The objectives of the financial reporting of nonbusiness organizations are to provide:
1. Information useful in making resource allocation decisions.
2. Information useful in assessing services and the ability to provide services.
3. Information useful in assessing management stewardship and performance.
4. Information about economic resources, obligations, and net resources; organization performance; the nature of and
relationship between inflows and outflows; service efforts and accomplishments; and liquidity.

Recognition and Measurement in the Financial Statements

This statement sets forth the recognition criteria and guidance on what and when information should be incorporated in the
financial statements.

Full Set of Financial Statements

1. Statement of financial position (the balance sheet)
 2. Statement of earnings (the income statement)
3. .Statement of comprehensive income
4. Statement of cash flows
5. Statement of changes in owners' equity

Recognition Criteria
Recognition is the process of formally recording or incorporating an item in the financial statements of an entity and
classifying it as asset, liability, equity, revenue, or expense.
1. Definitions: The item meets the definition of an element of financiél statements.
2. Measurability: The item has a relevant attribute measurable with sufficient reliability.
3. Relevance: The information about it is capable of making a difference to a financial statement user.
4. Reliability: The information is representationally faithful, verifiable, and neutral.

Fundamental Assumptions and Principles

1. Entity Assumption: Economic activity can be accounted for when considering an identifiable set of activities (e.g., a separate
corporation or division).
2. Going Concern Assumption: For financial accounting, it is presumed (subject to rebuttal by evidence to the contrary)
that the entity will continue to operate in the foreseeable future.
3. Monetary Unit Assumption: It is assumed that money is an appropriate basis by which to measure economic activity.
The assumption is that the monetary unit does not change over time; thus, the effects of inflation are not reflected in the
financial statements.
4. Periodicity Assumption: Economic activity can be divided into meaningful time periods.
 Measurement Principle: Financial statements use a mixed attribute system that allows
assets and liabilities to be measured at various bases, including historical cost, fair value,
net realizable value, and present value of future cash flows. As a general rule, however,
financial information is accounted for and based on cost, not on current market value.

1. Accrual Accounting: Revenues are recognized when the performance obligation is

satisfied and expenses are recognized in the same period as the related revenue, not
necessarily in the period in which the cash is received or expended by the company.
2. Revenue Recognition Principle: As a general rule, revenues are recognized when an entity
satisfies a performance obligation by transferring either a good or a service to a customer.
3. Expense Recognition Principle: Expenses are necessarily incurred to generate
revenue. Expenses incurred to generate a specific amount of revenue in a period are
matched against that revenue (for example, cost of goods sold). Expenses that do not
have a direct link with revenue may be recognized when cash is spent or liabilities are
incurred (for example, selling, general and administrative expenses). Other expenses
are allocated by systematic and rational procedures to the periods in which the assets
provide benefit (for example, depreciation expense). Losses may result when it is
evident that future economic benefits of an asset have been reduced or eliminated.

4. Full disclosure Principle: it is important that the user be given information that
would make a difference in the decision process, but not so much information that the
user is impeded in analyzing what is important
should implement the five-step approach described below:

Step 1: Identify the contract with the customer

Step 2: Identify the separate performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the separate performance obligations
Step 5: Recognize revenue when or as the entity satisfies each performance obligation

Required: Determine the journal entries that Bulldog will book to account for this transaction.
Solution:
March 1, Year 1, journal entry: No entry is required because neither party has performed
according to the contract.
August 1, Year 1, journal entry:
A contract liability (e.g. unearned
sales revenue) is recognized
when the cash is received in advance.

DR Unearned Sale Revenue

CR Sales Revenue

DR Cost of Goods sold

CR Inventory

September 1 year 1,Journal enteries : Revenue is recorded when the products is

transfered from the seller to the buyer.