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Lecture Notes for Intermediate Accounting, 9th Edition

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    1 - 1 C opyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. CHAPTER 1 ENVIRONMENT AND THEORETICAL STRUCTURE OF FINANCIAL ACCOUNTING Authors’ Perspectives PART A: Financial Accounting Environment LO1 – 1 Describe the function and primary focus of financial accounting. LO1 – 2 Explain the difference between cash and accrual accounting. LO1 – 3 Define generally accepted accounting principles (GAAP) and discuss the historical development of accounting standards, including convergence between U.S. and international standards. LO1 – 4 Explain why the establishment of accounting standards is characterized as a political process. LO1 – 5 Explain factors that encourage high - quality financial reporting. LO1 – 11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of accounting standards and the conceptual framework underlying accounting standards. Remind Students Why We Bother — S tart Day 1 by asking why we bother learning financial accounting. A ll stu d ents have taken introductory accounting, but it’s helpful to point out that they very quickly plunged into the trees and might have lost sight of the forest. Why is financial accounting important ? W hat does it add? This is a nice opportunity for discussion, and inevitably there will be the chance to highlight t he following illustrations. • Illustration 1 - 1 presents the Pathways Commission visualization: “THIS is accounting!” The point here is that we are focusing on providing useful information about a business’s economic activity. That leads to some motivation for the conceptual framework, because it requires that we define terms like “useful” and determine what does and doesn’t qualify as economic activity that is captured by accounting. Because decisions have consequences, this discussion then brings up the idea that everyone in the financial reporting process has incentives, which we need to understand when navigating the many gray areas we will cover in this course, and which helps us understand that the standard setting process is inevitably political. These are conversations to return to later , in Part B of the chapter. [Be sure to note that this and most other Illustrations throughout the textbook are available to instructors in the “Digital Images Library” for presentation as well as being incorporated into the PowerPoint presentations, all of which are available in the Instructor Resources section of Connect.] • Illustrations 1 - 3 and 1 - 4 provide a simple contrast of cash - basis v. accrual accounting. These illustrations constitute a nice mini - review of some simple financial accounting transactions, but the big takeaway is that both cash flows and accrual s are important – having only one of them is not sufficient for the other. T hat can lead to a conversation of what decisions are informed

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    1 - 2 C opyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. by cash flows (e.g., liquidity, risk) v. accruals (e.g., profitability, prediction of future cash flows) , which are decisions we will return to at various times in the course. Another point to make here is that Intermediate is whe re we get into the fun p art s of accounting. In the introductory course, students learned the basics, similar to “Spanish I ”. The focus was on rudimentary syntax and the “do’s and don’t’s” of the language. Now they are in “Spanish II/III ” (yes, Intermediate will feel like twice as much work as Intro!), and the focus will be on more complex conversations, with lots of interesting choices to be made, nuances to be communicated, and underlying meanings to be discerned. This is where accounting gets very interesting. Shakespeare didn’t work at the level of “See Spot run”, and neither will we . Standards Both Guide and Constrain — A simple question leads to a great conversation: What if participants in capital markets don’t believe financial reports? Share prices tumble, banks won’t lend money, companies can’t get financing, etc. We have seen what happens when confidence is shaken (e.g, Enron; the financial crisis of 2008) . S tandards are important because they clarify a good way to account for events, which in turn provides a benchmark against which to assess whether accounting is of high quality , preserving confidence in financial markets and enabling people to transact . In fact, standards are so important that we have government oversight (the SEC), entities that focus on standard setting (the FASB, the IASB), due process to get input from stakeholders, and political pressures to achieve particular outcomes for particular stakeholders, as well as an audit industry that provides assurance that companies are applying standards correctly. We also can discuss somewhat different business and political environments facing the FASB and IASB, which in turn affects the standards that these Boards produce and the extent and pace of convergence. As future practitioners, students will be required to navigate the complexity of financial reporting standards . The FASB’s codification helps with that navigation. It also will be important that students conduct themselves ethically as practitioners , to avoid running afoul of the audit process or undermining the reputations of themselves and their organization , so applying an ethics framework is useful. Finally, it will be important to not lose sight of what accounting standards are intending to communicate. That leads us to considering the conceptual framework. PART B: The Conceptual Framework LO1 – 6 Explain the purpose of the conceptual framework. LO1 – 7 Identify the objective and qualitative characteristics of financial reporting information, and the elements of financial statements. LO1 – 8 Describe the four basic assumptions underlying GAAP. LO1 – 9 Describe the recognition, measurement and disclosure concepts that guide accounting practice. LO1 – 10 Contrast a revenue/expense approach and an asset/liability approach to accounting standard setting. LO1 – 11 Discuss the primary differences between U.S. GAAP and IFRS with respect to the development of accounting standards and the conceptual framework underlying accounting standards.

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    1 - 3 C opyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. The Conceptual Framework is a Constitution — Students often gloss over the c onceptual framework – it’s wordy, ha s lots of definitions, and doesn’t seem like real accounting (no numbers!). However, we can make this topic seem more applicable to students by explaining that , like the United States’ Constitution, the conceptual framework is the source document from which standards are derived, providing guidance to standard setters that helps them enhance the consistency of financial accounting standards and withstand political pressures to provide exceptions for particular circumstances. By understanding the conceptual framework, we understand the thought process that goes into setting accounting standards, which in turn helps us understand why standards are as they are and to apply them in situations that are not clear cut. Three illustrations clarify these points and are foundations for many future discussions throughout Intermediate Accounting. • Illustration 1 - 11 helps us rigorously define what we meant earlier when we talked about financial information being “useful”. Students really need to understand what these words mean. It’s helpful to walk through the definitions of Relevance and Faithful Representation and how those concepts sometimes are in conflict with each other, as well as to discuss the components/aspects that underlie them and the enhancing characteristics of Comparability (and Consistency), Verifiability and Timeliness. Students pay more attention when they understand that these are concepts that will appear again and again throughout the course — they may as well understand them now. • Illustration 1 - 15 is absolutely critical. I nstructors can highlight that Intermediate Accounting is much easier to learn and apply if we realize the distinction between recognition (when an event merits inclusion in a journal entry and therefore the accounts) and measurement (what number we assign to the event we’re recognizing). So recognition is about when , and measurement is about how much . Disclosure captures other useful information, such as amounts that aren’t yet recognized but might be some day, or further insight into measurements, including alternative measurements that highlight different attributes from those used in the financial statements. • Illustration 1 - 14, the fair value hierarchy, flows well when discussed in class as a nice example of information that is disclosed but that is helpful in better understanding a particular measurement. The point here is that all fair values are not created equal, and user s might change their view of the representational faithfulness of a fair value based on th e inputs used to estimate that fair value. Students will see disclosures about fair value inputs in several chapters. A final point to bring out is that the formal role of the conceptual framework differs slightly between U.S. GAAP and IFRS. In IFRS, the conceptual framework is specified as indicating GAAP whenever an IFRS standard does not provide guidance. Think of it as the grout that fills in the gaps in IFRS guidance. In U.S. GAAP, the conceptual framework is intended more as guidance for standard setters. Yet, even in U.S. GAAP, practitioners use the conceptual framework to help them grapple with novel or confusing situations, so it isn’t clear that this distinction is that important. Certainly, regardless of whether we are talking about U.S. GAAP or IFRS, students need to understand and be prepared to apply the conceptual framework throughout Intermediate Accounting.

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    1 - 4 C opyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. PowerPoint Slides PowerPoint presentations of the chapter are available in the Connect Library: 1. With “Concept Checks” useful for classroom presentation, permitting the instructor to intersperse in the presentation short exercises students can be asked to solve individually or in small groups before the solution is “revealed” by the instructor. {These are available only within Instructor Resources.} 2. Without the “Concept Checks” so students don’t have the solutions before being asked to solve individually or in small groups. 3. Accessible PowerPoint Presentations. Accessibility is becoming even more important in the education marketplace. Students and instructors with disabilities use many different assistive technologies, and McGraw - Hill Education is working to increase compatibility and access that will not only help those with disabilities achieve better learning outcomes, but also serve the institutions that are teaching these students. Accessible PowerPoint allows slide content to be read by a screen reader and provides alternative text descriptions for any image files used that enrich the learning experience. Accessible PowerPoint is also designed with high - contrast color palettes and uses texture when possible, instead of color to denote different aspects of the imagery used within the slide. Note: The slides are intended to provide comprehensive coverage of the chapter, but can be easily edited to allow instructors to change numbers and content in illustrations or to delete slides pertaining to topics they choose to omit or deemphasize. (Using your students’ names for company names in the Concept Checks or Illustrations can be fun.)

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    1 - 5 C opyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. Suggestions for Class Activities 1. Real World Scenario America Online (AOL) is a leader in the Internet access provider industry. In 1996, the company changed a controversial accounting method involving the treatment of the cost of advertising and free trials. The following is an excerpt from a May 15, 2000, CNET News.com article: America Online will pay a civil penalty of $3.5 million as part of a settlement with the Securities and Exchange Commission over the accounting of advertising costs. According to the SEC, the Internet and media giant improperly reported most of the costs of acquiring new subscribers – such as the expense of sending computer disks to potential customers – as an asset. As a result, the SEC said AOL posted a profit for six of eight quarters in 1995 and 1996 but would have recorded a loss if the company followed recommended accounting practices. AOL, backed by its auditor, defended the accounting method of capitalizing these costs arguing that spreading the costs over two years was a justifiable way to match expenses against revenue flows that would emerge later. In 1996, AOL switched to expensing these costs in the period incurred. Suggestions Have the class consider the general treatment of advertising and promotion costs. Why are these costs normally expensed in the period incurred even though they are incurred with the intention of generating future revenues? Why did they expense these costs over a two - year period? Then discuss the possible reasons why AOL chose a different approach followed by a discussion of the possible reasons why the company decided to change its method. Another interesting discussion is the civil penalty of $3.5 million leveled by the SEC four years after AOL changed its method. This could lead to a general discussion of the SEC’s role in the financial reporting process. Points to note Perhaps an important factor prompting the switch was the increased competition in the industry and the loss of customers that prompted AOL to implement a new pricing scheme. The loss of customers creates significant uncertainty with respect to the realization of deferred advertising and promotion costs. Another reason is pressure exerted by the SEC to make the switch and another is that AOL’s competitors all expensed these costs.

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    1 - 6 C opyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. 2. Target Analysis Have students, individually or in groups, go to the most recent Target annual report using EDGAR which can be located at: ww.sec.gov . Ask them to: 1. Compare revenues, total costs and expenses, net income, total assets and total shareholder s' equity with those in the 201 7 report in Appendix B of the text (i.e., the report for the year ending February 3, 2018) . Are there any discernible trends? How might they be interpreted? 2. Use EDGAR to locate the most recent annual report information for Walmart, one of Target’s chief competitor s . Using the most recent annual report information for both companies, compare: a. growth rates in revenues and net income, and b. the relationship between revenues and net income (profit margin). What could account for any differences you identify?

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    1 - 7 C opyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. 3. Group/Research Activity The debate over principles - based versus rules - based accounting standards provides an excellent opportunity for class discussion, in - class debate, or for a writing assignment. One suggestion is to form groups of 4 or 5 students to research the issue. Assign half of the groups to defend a principles - based approach and the other half to defend the rules - based approach. There are numerous articles written on the subject. A google search will find many hits. For example , the March 2005 issue of Accounting Horizons contains a commentary entitled “Rules - Based Standards and the Lack of Principles in Accounting.” 4. International Accounting Activity What are the advantages and disadvantages to accounting convergence? Two 5 articles in Accounting Horizons provide an excellent overview of the research evidence: • Luzi Hail, Christian Leuz, and Peter Wysocki (2010) Global Accounting Convergence and the Potential Adoption of IFRS by the U.S. (Part I): Conceptual Underpinnings and Economic Analysis. Accounting Horizons : September 2010, Vol. 24, No. 3, pp. 355 - 394. • Luzi Hail, Christian Leuz, and Peter Wysocki (2010) Global Accounting Convergence and the Potential Adoption of IFRS by the U.S. (Part II): Political Factors and Futre Scenarios for U.S. Accounting Standards. Accounting Horizons : Decmber 2010, Vol. 24, No. 4, pp. 567 - 588. Suggestions Have your students write a paper summarizing the issue and the papers ’ results. Alternatively, have a debate in which different groups of students take pro - vs. con - convergence positions. 5. Professional Skills Development Activities The following are suggested assignments from the end - of - chapter material that will help your students develop their communication, research, analysis and judgment skills. Communication Skills. In addition to Communication Case 1 - 6 , Judgment Case 1 - 1 0 can be adapted to ask students to write a letter to the client. Communication Case 1 - 5 and Convergence Case 1 - 12 do well as g roup assignments and/or class presentations . Ethics Case 1 - 7 and Judgment Cases 1 - 1, 1 - 8 and 1 - 9 create good class discussions. Research Skills. In their careers, our graduates will be required to locate and extract relevant information from available resource material to determine the correct accounting practice, perhaps identifying the appropriate authoritative literature to support a decision. Research Cases 1 - 2, 1 - 3, and 1 - 4 and Exercises 1 - 3 and 1 - 4 provide excellent opportunities to help students develop this skill by introducing them to some important resources available on the Internet. Analysis Skills. Brief Exercise 1 - 1, Exercises 1 - 1 and 1 - 2, and Real World Case 1 - 1 1 provide opportunities to develop and sharpen analytical skills. In addition, the Data Analytics case develops students’ ability to use Tableau in performing and presenting analyses.

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    1 - 8 C opyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. Judgment Skills. The “ Decision Makers’ Perspective ” section includes Judgment Cases that require students to critically analyze issues to apply concepts learned to business situations in order to evaluate options for decision - making and provide an appropriate conclusion. This chapter includes Judgment Cases 1 - 1, 1 - 8, 1 - 9, 1 - 10, and 1 - 11. 6. Ethical Dilemma The chapter contains the following ethical dilemma: E THICAL D ILEMMA You have recently been employed by a large retail chain that sells sporting goods. One of your tasks is to help prepare periodic financial statements for external distribution. The chain's largest creditor, National Savings & Loan, requires quarterly financial statements, and you are currently working on the statements for the three - m onth period ending June 30, 20 21 . During the months of May and June, the company spent $1,200,000 on a large radio and TV advertising campaign. The $1,200,000 included the costs of producing the commercials as well as the radio and TV time purchased to run the commercials. All of the costs were charged to advertising expense. The company’s chief financial officer (CFO) has asked you to prepare a June 30 adjusting entry to remove the costs from advertising expense and to set up an asset called prepaid advertising that will be expensed in July. The CFO explained that “This advertising campaign has produced significant sales in May and June and I think it will continue to bring in customers through the month of July. By recording the ad costs as an asset, we can match the cost of the advertising with the additional July sales. Besides, if we expense the advertising in May and June, we will show an operating loss on our income statement for the quarter. The bank requires that we continue to show quarterly profits in order to maintain our loan in good standing.” You may wish to discuss this in class. If so, discussion should include these elements. Step 1 — The Facts: One of your tasks as an employee of a large sporting goods chain is to prepare financial statements for external use. You are currently preparing quarterly statements for the quarter ending June 3 0, 20 21 , that will be given to the chain's largest creditor, National Savings & Loan. The CFO has asked you to capitalize (charge to a prepaid asset) the $1,200,00 cost for an advertising campaign c onducted in May and June of 20 21 . The capitalization of advertising will prevent an operating loss for the quarter and maintain the company's good standing with the creditor. The CFO believes that the commercials improved sales in May and June and expects the advertising effect to continue in July. The matching principle states that expenses are recognized in the same period as the related revenue. In some situations it is impossible to determine in which periods revenues will be earned from expenses such as advertising. Because of the difficulty in estimating the effect of advertising expenditures, accounting principles dictate that advertising should be recognized as an expense in the period incurred. Step 2 — The Ethical Issue and the Stakeholders:

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    1 - 9 C opyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. The ethical issue or dilemma is whether your obligation to challenge the CFO's request for capitalization of the advertising expense is stronger than your obligation to your employer's financial interests. Stakeholders include you, the accountant, the CFO, other corporate managers, company employees, the bank and other creditors, and current and future investors. Step 3 — Values: Values include competence, honesty, integrity, objectivity, loyalty to your employer, and responsibility to users of financial statements. Step 4 — Alternatives: 1. Follow the suggestion of the CFO to record the advertising costs as a prepaid asset. 2. Record the advertising costs as an expense in the quarter ending June 30, 20 21 . 3. Report the CFO's request to a higher level of management, the audit committee, or the auditors. 4. Resign from the company and seek employment elsewhere. Step 5 — Evaluation of Alternatives in Terms of Values: 1. Alternative 1 illustrates loyalty to the employer. 2. Alternative 2 exhibits the values of competence, honesty, integrity, objectivity, and responsibility to users of the financial statements. 3. Alternative 3 illustrates loyalty to the employer at a level higher than that of the CFO, but also includes the values of honesty, integrity, and objectivity on the part of the accountant. 4. Alternative 4 supports the values of honesty and integrity, but does not reflect competence or responsibility to financial statement users. Step 6 — Consequences: Alternative 1 Positive consequences: You would keep your job and please the CFO. The company would remain in good standing with the bank. Negative consequences: Users of the financial statements would be misinformed. Users of financial statements may sue the company upon learning the truth if the amount of advertising is material and affects their financial decisions. You may lose your self - respect and the respect of co - workers. Alternative 2 Positive consequences: Users of financial statements would receive more conservative information concerning advertising costs. You would maintain your integrity. Negative consequences: You may incur disfavor with the CFO and other top management, resulting in a loss of future promotions or your job. You also may lose the trust of other employees. Alternative 3 Positive consequences: You would maintain your integrity. Users may receive more conservative information concerning advertising costs if upper management levels or the audit committee compel fair presentation in the financial statements.

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    1 - 10 C opyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. Negative consequences: You may incur disfavor with the CFO and other top management, resulting in a loss of future promotions or your job. You also may lose the trust of other employees. Whistle blowers often are not rewarded. Alternative 4 Positive consequences: You maintain your integrity and avoid conflict with management and other employees. Negative consequences: You have no job and you may have difficulty getting references for a new job. Users of financial statements still do not receive correct information regarding advertising costs. Step 7 — Decision: Student(s) must decide their course of action.

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    1 - 11 C opyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. Assignment Chart Access to the FASB codification is required for any exercises like 1 - 3 and 1 - 4. FASB controls access to the codification, but they have an academic program that departments can sign up for. If your school has paid for a site license of the Academic Accounting Access Program, faculty and students will have free access to the FASB Codification. Check with your accounting department to determine if your school has registered for this program. All of the features available with the Professional View version ( http://asc.fasb.org ) are included with the Academic Accounting Access Program. Learning Est. time Questions Objective(s) Topic (min.) 1 - 1 1 - 1 Function and primary focus of financial accounting 5 1 - 2 1 - 1 Efficient allocation of resources 5 1 - 3 1 - 1 Investment - credit decision 5 1 - 4 1 - 1 Investment - credit decision 5 1 - 5 1 - 1 Objective of financial accounting 5 1 - 6 1 - 2 Cash versus accrual accounting 5 1 - 7 1 - 3 Generally accepted accounting principles 5 1 - 8 1 - 3 Roles of the SEC and FASB 5 1 - 9 1 - 5 Role of the auditor 5 1 - 10 1 - 5 Sarbanes - Oxley Act 5 1 - 11 1 - 4 Economic consequences of accounting standards 5 1 - 12 1 - 4 FASB's standard - setting process 5 1 - 13 1 - 6 Purpose of the conceptual framework 5 1 - 14 1 - 7 Relevance and faithful representation 5 1 - 15 1 - 7 Compone nts of relevance and faithful representation 5 1 - 16 1 - 7 Cost effectiveness 5 1 - 17 1 - 7 Materiality 5 1 - 18 1 - 7 Financial accounting elements 5 1 - 19 1 - 8 Assumptions underlying GAAP 5 1 - 20 1 - 8 Going concern assumption 5 1 - 21 1 - 8 Periodicity assumption 5 1 - 22 1 - 9 Broad accounting principles 5 1 - 23 1 - 9 Historical cost; justification 5 1 - 24 1 - 9 Revenue recognition criteria 5 1 - 25 1 - 9 Expense recognition criteria 5 1 - 26 1 - 9 Full - disclosure principle 5 1 - 27 1 - 9 Fair value hierarchy 5 1 - 28 1 - 9 Measurement attributes 5 1 - 29 1 - 10 Revenue/expense and asset/liability approaches 5 1 - 30 1 - 11 Conceptual framework under IFRS 5 1 - 31 1 - 11 International standard setting 5 1 - 32 1 - 11 Accounting convergence 5

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    1 - 12 C opyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. Brief Learning Est. time Exercises Objective(s) Topic (min.) 1 - 1 1 - 2 Accrual accounting 15 1 - 2 1 - 7 Financial statement elements 5 1 - 3 1 - 7 , 1 - 8 , 1 - 9 Basic assumptions and principles 10 1 - 4 1 - 7 , 1 - 8 , 1 - 9 Basic assumptions and principles 10 1 - 5 1 - 7 , 1 - 8 , 1 - 9 Basic assumptions and principles 10 1 - 6 1 - 11 IFRS organizations 10 Learning Est. time Exercises Objective(s) Topic (min.) 1 - 1 1 - 2 Accrual accounting 20 1 - 2 1 - 2 Accrual accounting 15 1 - 3 1 - 3 FASB codification research 15 1 - 4 1 - 3 FASB codification research 20 1 - 5 1 - 3 Participants in establishing GAAP 10 1 - 6 1 - 7 Financial statement elements 10 1 - 7 1 - 7 Concepts; terminology; conceptual framework 10 1 - 8 1 - 7 Qualitative characteristics 15 1 - 9 1 - 7 Basic assumptions, principles, and constraints 10 1 - 10 1 - 7 , 1 - 8 , 1 - 9 Basic assumpti ons and principles 10 1 - 11 1 - 7 , 1 - 8 , 1 - 9 Basic assumptions and principles 15 1 - 12 1 - 8 , 1 - 9 Basic assumptions and principles 15 1 - 13 1 - 7 , 1 - 8 , 1 - 9 Basic assumptions, principles, and constraints 15 1 - 14 1 - 7 , 1 - 8 , 1 - 9 Basic assumptions, principles, and constraints 15 1 - 15 1 - 7 , 1 - 8 , 1 - 9 Multiple choice; concept statements, basic assumptions, principles 15 CPA/CMA Learning Est. time Exam Questions Objective(s) Topic (min.) CPA - 1 1 - 7 Qualitative characteristics 3 CPA - 2 1 - 7 Qualitative characteristics 3 CPA - 3 1 - 3 Standard - setting 3 CPA - 4 1 - 7 Qualitative characteristics 3 CPA - 5 1 - 7 Qualitative characteristics 3 CPA - 6 1 - 7 Qualitative characteristics 3 CPA - 7 1 - 1 Objective of financial reporting 3 CPA - 8 1 - 7 Financial statement elements 3 CPA - 9 1 - 11 IFRS standard setting structure 3 CPA - 10 1 - 11 IFRS conceptual framework 3 CMA - 1 1 - 3 Standard - setting 3 CMA - 2 1 - 7 Qualitative characteristics 3 CMA - 3 1 - 7 Recognition concepts 3

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    1 - 13 C opyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. Learning Est. time Cases Objective(s) Topic (min.) Judgment Case 1 - 1 1 - 3 The development of accounting standards 30 Research Case 1 - 2 1 - 3 Accessing SEC information through the Internet 35 Research Case 1 - 3 1 - 4 Accessing FASB information through the Internet 40 Research Case 1 - 4 1 - 3 , 1 - 11 Accessing IASB information through the Internet 40 Research Case 1 - 5 1 - 3, 1 - 4 Accounting standards in China 60 Communication Case 1 - 6 1 - 7 Relevance and reliability 30 Communication Case 1 - 7 1 - 4 Accounting standard setting 60 Ethics Case 1 - 8 1 - 5 The auditors' responsibility 30 Judgment Case 1 - 9 1 - 7 Qualitative characteristics 20 Judgment Case 1 - 10 1 - 5 , 1 - 7 GAAP; comparability and the role of the auditor 20 Judgment Case 1 - 11 1 - 7 Cost effectiveness 30 Judgment Case 1 - 12 1 - 9 The realization principle 20 Analysis Case 1 - 13 1 - 9 The matching principle 25 Judgment Case 1 - 14 1 - 9 Capitalize or expense? 20 Real World Case 1 - 15 1 - 7 , 1 - 9 Elements; disclosures; The GAP 20 Judgment Case 1 - 16 1 - 11 Convergence 20 Air France - KLM Case 1 - 11 Air France - KLM , Financial statements, accounting principles 30

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    12 - 1 Copyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. CHAPTER 2 REVIEW OF THE ACCOUNTING PROCESS Authors’ Perspectives Reexamination — The purpose of accounting is to provide information to decision makers. The purpose of this chapter is to review the fundamental accounting process used to produce the financial statements that he lp to impart that information. This review establishes a framework for the study of the concepts covered in intermediate accounting. The emphasis you place on this review and the class time you devote to it will depend in part on the depth and recency of students’ prior preparation in introductory accounting courses. LO2 – 1 Understand routine economic events — transactions — and determine their effects on a company’s financial position and on specific accounts. LO2 – 2 Describe the steps in the accounting processing cycle. LO2 – 3 Analyze and record transactions using journal entries. LO2 – 4 Post the effects of journal entries to general ledger accounts and prepar e an unadjusted trial balance. LO2 – 5 Identify and describe the different types of adjusting journal entries. LO2 – 6 Record adjusting journal entries in general journal format, post entries, and prepare an adjusted trial balance. LO2 – 7 Describe the four basic financial statements. LO2 – 8 Explain the closing process. LO2 – 9 Convert from cash - basis net income to accrual - basis net income. This Will Be a “Hands - On” Class — Ask your students to k eep in mind as they study this chapter that the accounting information systems that companies use are quite different from firm to firm . Larger businesses typically use more complex systems than smaller companies use. We focus on the many features that tend to be common to all accounting systems. It’s important for students to understand that we don’t intend to describe actual accounting systems. For most companies , the sheer volume of data that must be processed precludes using a manual accounting system , so most businesses use a computer ized system . We describe and illustrate a manual accounting information system to provide an overview of the basic model that underlies the computer software programs actually used to process accounting data . The Accounting Equation — Establish up front that the accounting equation underlies the process used to capture the effect of economic events and is the key to all we do in this chapter and beyond : Assets = Liabilities + Owners’ Equity This general expression portrays the equality between the total economic resources of a business (its assets) — shown on the left side of the equation — and the total claims against the business (liabilities and equity) — shown on the right side. In other words, the resources of a company are claimed by creditors and owners . Shareholders’ Equity — Advise your students that we use the corporate format throughout this chapter and the rest of the book. Remind them that owners of a corporation are its shareholders, so owners’ equity for a corporation is referred to as shareholders’ equity (or stockholders’ equity) . Shareholders’ equity for a corpora -

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    12 - 2 Copyright © 2020 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. tion arises primarily from two sources: ( a ) amounts invested by shareholders in the corpora tion and ( b ) amounts earned by the corporation (on behalf of its shareholders). These are reported as ( a ) paid - in capital and ( b ) retained earnings. • Illustration 2 – 1 shows the basic accounting equation for a corporation with shareholders’ equity expanded to highlight its composition : Assets = Liabilities + Shareholders’ Equity One Step at a Time — After a review of the basics of the double - entry system, we look closer at the process used to identify, analyze, record, and summarize transactions and prepare finan cial statements. The 10 steps in the accounting processing cycle are listed in Illustration 2 – 4. Steps 1 – 4 occur during the accounting period while steps 5 – 8 are applied at the end of the accounting period . Steps 9 and 10 are needed only at the end of the year . You might provide a brief overview of each step as on pages 53 - 54, and then explore each one in more detail. This is demonstrated in Illustrations 2 - 6 and 2 - 7 (journal entries); Illustration 2 - 8 (ledger); and Illustrations 2 - 9 (trial balance) . Most of the illustrations in the chapter actually are parts of a single “incremental Illustration” in which we use a single situation and each illustration build s upon the previous one using the same data set. Step 6 is the preparation of adjusting entries . For many students, mastery of this step provides the “aha!” moment in their study of financial accounting because i t drives home the point of accrual accounting. Emphasize that adjusting entries are needed to help ensure that all revenues are recognized in the period goods or services are transferred to customers, regardless of when the cash is received. Similarly , they enable a company to rec ognize all expenses incurred during a period, regardless of when cash payment is made . • Illustration 2 – 11 recaps adjusting entries demonstrated in the preceding paragraphs . • After the adjusting entries are posted to the general ledger accounts, the next step — step 7 — in the processing cycle is to prepare an adjusted trial balance a s shown in Illustration 2 – 12. The term adjusted refers to the fact that adjusting entries have now been incorporated into the account balances . The Purpose Fulfilled — Remind your students that the purpose of each of the steps in the processing cycle to this point is to provide informa tion for step 8 — preparing the financial statements , and that the financial statements are the primary means of com municating financial information to external parties. The adjusted trial balance contains the information necessary to prepare the statements. • Illustration 2 – 13 shows the income statement , and Illustration 2 - 14 shows the balance sheet for the hypothetical company we’ve used throughout the chapter . These are followed in Illustrations 2 - 15 and 2 - 16 for a basic statement of cash flows and statement of shareholders’ equity for that same company. The Closing — Students might tend to relax after the financial statements are prepared, but remind them that we still ha ve a couple things to wrap up. A t the end of the reporting period , two final steps are necessary, closing the temporary accounts — step 9 — and preparing a post - closing trial balance — step 10. The closing process serves a dual purpose: (1) the temporary accounts (revenues, expenses, gains , losses, and dividends) are reduced to zero balances, ready to measure activity in the upcoming accounting period, and (2) these temporary account balances are closed (transferred) to retained earnings to reflect the changes that have occurred in that account during the period. After we post the closing entries to the ledger accounts, we prepare a post - closing trial balance . The purpose of this trial balance is to verify that the closing entries were prepared and posted correctly and that the accounts are now ready for next year’s transactions.

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