CHAPTER 1 m
The Financial Reporting Environment Soluti
m m m m
ons
Questions
Q1-
1mFinancialminformationmismammuchmbroadermconceptmthanmsimplymthemfinancialmstatementsmandmfo
otnotesmtomthemfinancialmstatements.mFinancialminformationmincludesmitemsmsuchmasmthemPresident‘s
mlettermtomthemowners,mmanagement‘smdiscussionmandmanalysis,mthemauditors‘mreport,mthemmanagem
entmreportmandmpressmreleases.mOfmcourse,mthembasicmfinancialmstatementsmandmfootnotesmareminclud
edminmthemtermmfinancialminformation.mThembasicmfinancialmstatementsmare:mthembalancemsheetm(als
om referredmtomasmthemstatementmofmfinancialmposition),mthemstatementmofmcomprehensivemincomem(a
lsomreferredmtomasmthemstatementmofmnetmincomemandmthemstatementmofmcomprehensivemincome),mth
emstatementmofmcashmflows,mandmthemstatementmofmshareholders‘mequity.mFinancialminformationmism
notmsynonymousmwithmthemtermmfinancialmstatementsmbecausemthemfinancialmstatementsmaremamsubs
etmofmthemdifferentmtypesmofmfinancialminformationmprovided.
Q1-
2mThempurposemofmgeneratingmfinancialmstatementsmismtomprovidemusefulminformationmtomusersmtome
valuatemeconomicmentitiesmandmmakemefficientmresourcemallocationmdecisionsmbasedmonmthemrisksma
ndmreturnsmofmamparticularminvestment.mThemFinancialmAccountingmStandardsmBoardm(FASB)miden
tifiesminvestors,mlendersmandmothermcreditorsmasmthemprimarymusersmofmthemfinancialmstatements.mTh
emfinancialmstatementsmaremthemculminationmofmthemfinancialmreportingmprocess.
Q1-
3mCapitalmismamscarcemresource.mInvestorsmandmcreditorsmhavemtommakemdecisionsmasmtomhowmmuchm
capitalmtominvestminmanymgivenmentity;mtherefore,mtheymdemandmrelevantmandmfaithfullymrepresentati
veminformationmaboutmthemeconomicmperformancemandmfinancialmpositionmofmamcompany.mThisminf
ormationmismprovidedminmthemfinancialmstatements.
Q1-
4mExternalmauditorsmensuremthatmthemmanagementmofmamcompanymhasmpreparedmfinancialmstatemen
tsminmaccordancemwithmGenerallymAcceptedmAccountingmPrinciplesmandmfairlympresentmthemfinancia
lmpositionmandmeconomicmperformancemofmamcompany.mInmaddition,mexternalmauditorsmmustmbemanmi
ndependentmpartymandmcannotmbememployeesmofmthemcompanymtheymaremauditing.mExternalmauditor
smprovidemamsignificantmamountmofmcredibilitymtomthemfinancialmstatements.
Q1-
5mDatamanalyticsmismthemprocessmofmanalyzingmlargemdatamsetsminmordermtomdrawmusefulmconclusion
s.mItminvolvesmconvertingmrawmdatamintomusefulmknowledge.mInmfinancialmreporting,mdatamanalyticsm
canmbemusedmtomimprovemthemqualitymofmestimatesmandmvaluations.
Q1-
6mStandardmsettersmcreatemaccountingmconcepts,mrules,mandmguidelinesmtomensuremthatmfinancialmstat
ementsmaccuratelympresentmthemeconomicmperformancemandmfinancialmpositionmofmamfirm.mThemsta
ndardsmencouragemtransparentmandmtruthfulmreporting.
,1-2 S O L U T I O N S M A N U A L F O R I N T E R M E D I A T E A C C O U N T ING
Q1-
7mU.S.mcompaniesmlistedmonmU.S.mstockmexchangesmdomnotmhavemthemoptionmtomreportmundermIFRS
.mHowever,mforeignmcompaniesmthatmtrademinmthemU.S.mexchangesmcanmreportmundermIFRS.mThemSE
CmpermitsmthemusemofmIFRS-
basedmfinancialmstatementsmbyminternationalmcompaniesmwithmsharesmtradingmonmU.S.mstockmexcha
nges.
Q1-
8mThemFASBmseeksmandmwelcomesmcommentsmfrommallmpartiesminmthemfinancialmreportingmprocess
mincludingmmanagers,minvestors,maccountants,mpreparers,mcreditors,mlenders,mfinancialmstatementmu
sers,mgovernmentalmagencies,mfinancialmanalysts,mindustrymgroups,mandmauditors.mFASBmalsomrecei
vesmfeedbackmfrommpublicmroundtablemdiscussions,mpublicmmeetings,mthemFASAC,mthemPrivatemCo
mpanymCouncil,mandmEITF.
Q1-
9mYes,mthempromulgationmofmfinancialmaccountingmstandardsmismampoliticalmprocess.mTheremaremsev
eralmgroupsmthatminfluencemthemstandardmsettingmprocess.mThemstandardmsettingmprocessmismampolitic
almprocessmthatmismaffectedmbymthemimpactmofmseveralmlobbyingmgroups.mThemgovernment,mthroughm
themSEC,minfluencesmaccountingmstandards.mThemSECmhasmthemauthoritymtomissuemaccountingmstand
ardsmbutmhasmassignedmthismresponsibilitymtomthemprivatemsector.mNonetheless,mthemSECmcanmexertm
pressuremonmthemFASBmtomissuemaccountingmstandardsmandmvetomthemstandardsmpromulgatedmbymth
emFASB.mAuditingmfirms,mthemcorporatemsector,mcreditors,mfinancialmanalysts,mthemfinancialmcomm
unity,maccountingmorganizations,mindustrymgroups,mandminvestorsmcanminfluencemthemFASBmbymwri
ttenmcommentsmaboutmExposuremDraftsmandmparticipationminmpublicmmeetingsmandmpublicmroundta
blesmregardingmamproposedmfinancialmreportingmstandard.
Q1-10mAmprinciples-
basedmstandardmismconsistentmwithmamtheoreticalmframework.mInmcontrast,mamrules-
basedmstandardmdoesmnotmnecessarilymrelymonmamconsistentmtheoreticalmframework.mRather,mitmco
ntainsmmoremspecificmandmprescriptivemrules.
Q1-
11mRecently,mthemFASBmhasmtakenmanmasset/liabilitymapproachminmsettingmstandards.mWithmthismap
proach,mamtransactionmismrecordedmbasedmonmwhethermanmassetmormliabilitymismcreated.mAnothermtre
ndmhasmbeenmthemmovementmtowardmthemusemofmfairmvaluemmeasurementsmasmanmalternativemtomhist
oricalmcost.mFASBmhasmalsomfocusedmonmthempromulgationmofmprinciples-
basedmstandardsminsteadmofmrules-basedmstandards.
BriefmExercisesmSolut
ionmtomBE1-1
General-
purposemfinancialmstatementsmprovidemgeneralmfinancialminformationmaboutmanmentitymthatmwillmbem
usefulmtommanymtypesmofmusers.mGeneral-
purposemfinancialmstatementsmprovideminformationmtomamwidemspectrummofmusermgroups:minvestors,
mcreditors,mfinancialmanalysts,mcustomers,memployees,mcompetitors,msuppliers,munions,mandmgovern
mentmagencies.mMostmfinancialminformationminmgeneralmpurposemfinancialmstatementsmismprovidedmt
omsatisfymusersmwithmlimitedmabilitymormauthoritymtomobtainmadditionalminformation,mwhichmincludes
minvestorsmandmcreditors.mThemFinancialmAccountingmStandardsmBoardm(FASB)midentifiesminvestor
© 2021 Pearson Education, Inc.
, CH APTER 1 T HE FIN ANC I AL RE PO RT IN G EN VIR ON MENT 1-3
s,mlenders,mandmothermcreditorsmasmthemprimarymusersmofmthemfinancialmstatements.
© 2021 Pearson Education, Inc.
, 1-4 S O L U T I O N S M A N U A L F O R I N T E R M E D I A T E A C C O U N T ING
SolutionmtomBE1-2
Financialmaccountingmismthemprocessmofmidentifying,mmeasuring,mandmcommunicatingmfinancialmin
formationmaboutmanmeconomicmentitymtomvariousmusermgroupsmwithinmthemlegal,meconomic,mpolitica
l,mandmsocialmenvironment.mThismdefinitionmcontainsmfourmmajormelements:m1.m Financialminformati
on;m2.Economicmentity;m3.mUsermgroupsmandm4.mLegal,meconomic,mpolitical,mandmsocialmenvironme
nt
SolutionmtomBE1-3
FinancialmStatementmUsers
mandmOthermParties Role
m 10mEquitymInvestors 10. Aremshareholdersmofmthemcompany.
1. Arembanksmandmothermfinancialminstitutionsmthatmlen
m 1mCreditors dmmoneymtomthemcompany.
5.m Usemfinancialminformationmtomreviewmandmanalyz
m5mFinancialmAnalysts emreportedmresultsmofmthemcompaniesmtheymcoverm
andmmakeminvestmentmrecommendations.
m8mEmployeesmandmLabormUnion
s 8. Usemfinancialminformationmduringmnegotiationmofmn
ewmlabormagreementsmandmcompensationmcontracts.
m2mSuppliersmandmCustomers 2. Usemfinancialmstatementsmtomdeterminemwhethermt
omconductmbusinessmormpurchasemproductsmfromm
m7mGovernmentmAgencies amcompany.
7.m Reviewmthemfinancialmstatementsmofmpubliclymtradedm
m 3mCompetitors companiesmformamvarietymofmreasonsmthatmareminmthemp
ublicminterest.
m 4mExternalmAuditors
3. Usemfinancialminformationmtomdeterminemtheirmmarke
m 6mInternalmAuditors tmpositionmrelativemtomthemreportingmentitymandmtomatt
emptmtomidentifymfuturemstrategiesmofmthemreportingm
m 11mRegulatorymBodies entity.
4. Aremindependentmofmthemcompanymandmresponsibl
m9mProfessionalmOrganizations emformensuringmthatmmanagementmpreparesmandmiss
uesmfinancialmstatementsmthatmcomplymwithmaccou
ntingmstandardsmandmfairlympresentmthemfinancialmp
ositionmandmeconomicmperformancemofmthemcompa
ny.
6.m Arememployeesmofmthemcompanymservingminmanmadvis
orymrolemtommanagement.mTheymprovideminformation
mtommanagementmregardingmthemcompany‘smoperatio
nsmandmpropermfunctioningmofmitsminternalmcontrols.
11. Protectminvestorsmandmoverseemthemaccountingman
dmauditingmstandardmsettingmprocesses.
9. Supportmaccountingmprofessionalsmthroughoutmtheir
© 2021 Pearson Education, Inc.
The Financial Reporting Environment Soluti
m m m m
ons
Questions
Q1-
1mFinancialminformationmismammuchmbroadermconceptmthanmsimplymthemfinancialmstatementsmandmfo
otnotesmtomthemfinancialmstatements.mFinancialminformationmincludesmitemsmsuchmasmthemPresident‘s
mlettermtomthemowners,mmanagement‘smdiscussionmandmanalysis,mthemauditors‘mreport,mthemmanagem
entmreportmandmpressmreleases.mOfmcourse,mthembasicmfinancialmstatementsmandmfootnotesmareminclud
edminmthemtermmfinancialminformation.mThembasicmfinancialmstatementsmare:mthembalancemsheetm(als
om referredmtomasmthemstatementmofmfinancialmposition),mthemstatementmofmcomprehensivemincomem(a
lsomreferredmtomasmthemstatementmofmnetmincomemandmthemstatementmofmcomprehensivemincome),mth
emstatementmofmcashmflows,mandmthemstatementmofmshareholders‘mequity.mFinancialminformationmism
notmsynonymousmwithmthemtermmfinancialmstatementsmbecausemthemfinancialmstatementsmaremamsubs
etmofmthemdifferentmtypesmofmfinancialminformationmprovided.
Q1-
2mThempurposemofmgeneratingmfinancialmstatementsmismtomprovidemusefulminformationmtomusersmtome
valuatemeconomicmentitiesmandmmakemefficientmresourcemallocationmdecisionsmbasedmonmthemrisksma
ndmreturnsmofmamparticularminvestment.mThemFinancialmAccountingmStandardsmBoardm(FASB)miden
tifiesminvestors,mlendersmandmothermcreditorsmasmthemprimarymusersmofmthemfinancialmstatements.mTh
emfinancialmstatementsmaremthemculminationmofmthemfinancialmreportingmprocess.
Q1-
3mCapitalmismamscarcemresource.mInvestorsmandmcreditorsmhavemtommakemdecisionsmasmtomhowmmuchm
capitalmtominvestminmanymgivenmentity;mtherefore,mtheymdemandmrelevantmandmfaithfullymrepresentati
veminformationmaboutmthemeconomicmperformancemandmfinancialmpositionmofmamcompany.mThisminf
ormationmismprovidedminmthemfinancialmstatements.
Q1-
4mExternalmauditorsmensuremthatmthemmanagementmofmamcompanymhasmpreparedmfinancialmstatemen
tsminmaccordancemwithmGenerallymAcceptedmAccountingmPrinciplesmandmfairlympresentmthemfinancia
lmpositionmandmeconomicmperformancemofmamcompany.mInmaddition,mexternalmauditorsmmustmbemanmi
ndependentmpartymandmcannotmbememployeesmofmthemcompanymtheymaremauditing.mExternalmauditor
smprovidemamsignificantmamountmofmcredibilitymtomthemfinancialmstatements.
Q1-
5mDatamanalyticsmismthemprocessmofmanalyzingmlargemdatamsetsminmordermtomdrawmusefulmconclusion
s.mItminvolvesmconvertingmrawmdatamintomusefulmknowledge.mInmfinancialmreporting,mdatamanalyticsm
canmbemusedmtomimprovemthemqualitymofmestimatesmandmvaluations.
Q1-
6mStandardmsettersmcreatemaccountingmconcepts,mrules,mandmguidelinesmtomensuremthatmfinancialmstat
ementsmaccuratelympresentmthemeconomicmperformancemandmfinancialmpositionmofmamfirm.mThemsta
ndardsmencouragemtransparentmandmtruthfulmreporting.
,1-2 S O L U T I O N S M A N U A L F O R I N T E R M E D I A T E A C C O U N T ING
Q1-
7mU.S.mcompaniesmlistedmonmU.S.mstockmexchangesmdomnotmhavemthemoptionmtomreportmundermIFRS
.mHowever,mforeignmcompaniesmthatmtrademinmthemU.S.mexchangesmcanmreportmundermIFRS.mThemSE
CmpermitsmthemusemofmIFRS-
basedmfinancialmstatementsmbyminternationalmcompaniesmwithmsharesmtradingmonmU.S.mstockmexcha
nges.
Q1-
8mThemFASBmseeksmandmwelcomesmcommentsmfrommallmpartiesminmthemfinancialmreportingmprocess
mincludingmmanagers,minvestors,maccountants,mpreparers,mcreditors,mlenders,mfinancialmstatementmu
sers,mgovernmentalmagencies,mfinancialmanalysts,mindustrymgroups,mandmauditors.mFASBmalsomrecei
vesmfeedbackmfrommpublicmroundtablemdiscussions,mpublicmmeetings,mthemFASAC,mthemPrivatemCo
mpanymCouncil,mandmEITF.
Q1-
9mYes,mthempromulgationmofmfinancialmaccountingmstandardsmismampoliticalmprocess.mTheremaremsev
eralmgroupsmthatminfluencemthemstandardmsettingmprocess.mThemstandardmsettingmprocessmismampolitic
almprocessmthatmismaffectedmbymthemimpactmofmseveralmlobbyingmgroups.mThemgovernment,mthroughm
themSEC,minfluencesmaccountingmstandards.mThemSECmhasmthemauthoritymtomissuemaccountingmstand
ardsmbutmhasmassignedmthismresponsibilitymtomthemprivatemsector.mNonetheless,mthemSECmcanmexertm
pressuremonmthemFASBmtomissuemaccountingmstandardsmandmvetomthemstandardsmpromulgatedmbymth
emFASB.mAuditingmfirms,mthemcorporatemsector,mcreditors,mfinancialmanalysts,mthemfinancialmcomm
unity,maccountingmorganizations,mindustrymgroups,mandminvestorsmcanminfluencemthemFASBmbymwri
ttenmcommentsmaboutmExposuremDraftsmandmparticipationminmpublicmmeetingsmandmpublicmroundta
blesmregardingmamproposedmfinancialmreportingmstandard.
Q1-10mAmprinciples-
basedmstandardmismconsistentmwithmamtheoreticalmframework.mInmcontrast,mamrules-
basedmstandardmdoesmnotmnecessarilymrelymonmamconsistentmtheoreticalmframework.mRather,mitmco
ntainsmmoremspecificmandmprescriptivemrules.
Q1-
11mRecently,mthemFASBmhasmtakenmanmasset/liabilitymapproachminmsettingmstandards.mWithmthismap
proach,mamtransactionmismrecordedmbasedmonmwhethermanmassetmormliabilitymismcreated.mAnothermtre
ndmhasmbeenmthemmovementmtowardmthemusemofmfairmvaluemmeasurementsmasmanmalternativemtomhist
oricalmcost.mFASBmhasmalsomfocusedmonmthempromulgationmofmprinciples-
basedmstandardsminsteadmofmrules-basedmstandards.
BriefmExercisesmSolut
ionmtomBE1-1
General-
purposemfinancialmstatementsmprovidemgeneralmfinancialminformationmaboutmanmentitymthatmwillmbem
usefulmtommanymtypesmofmusers.mGeneral-
purposemfinancialmstatementsmprovideminformationmtomamwidemspectrummofmusermgroups:minvestors,
mcreditors,mfinancialmanalysts,mcustomers,memployees,mcompetitors,msuppliers,munions,mandmgovern
mentmagencies.mMostmfinancialminformationminmgeneralmpurposemfinancialmstatementsmismprovidedmt
omsatisfymusersmwithmlimitedmabilitymormauthoritymtomobtainmadditionalminformation,mwhichmincludes
minvestorsmandmcreditors.mThemFinancialmAccountingmStandardsmBoardm(FASB)midentifiesminvestor
© 2021 Pearson Education, Inc.
, CH APTER 1 T HE FIN ANC I AL RE PO RT IN G EN VIR ON MENT 1-3
s,mlenders,mandmothermcreditorsmasmthemprimarymusersmofmthemfinancialmstatements.
© 2021 Pearson Education, Inc.
, 1-4 S O L U T I O N S M A N U A L F O R I N T E R M E D I A T E A C C O U N T ING
SolutionmtomBE1-2
Financialmaccountingmismthemprocessmofmidentifying,mmeasuring,mandmcommunicatingmfinancialmin
formationmaboutmanmeconomicmentitymtomvariousmusermgroupsmwithinmthemlegal,meconomic,mpolitica
l,mandmsocialmenvironment.mThismdefinitionmcontainsmfourmmajormelements:m1.m Financialminformati
on;m2.Economicmentity;m3.mUsermgroupsmandm4.mLegal,meconomic,mpolitical,mandmsocialmenvironme
nt
SolutionmtomBE1-3
FinancialmStatementmUsers
mandmOthermParties Role
m 10mEquitymInvestors 10. Aremshareholdersmofmthemcompany.
1. Arembanksmandmothermfinancialminstitutionsmthatmlen
m 1mCreditors dmmoneymtomthemcompany.
5.m Usemfinancialminformationmtomreviewmandmanalyz
m5mFinancialmAnalysts emreportedmresultsmofmthemcompaniesmtheymcoverm
andmmakeminvestmentmrecommendations.
m8mEmployeesmandmLabormUnion
s 8. Usemfinancialminformationmduringmnegotiationmofmn
ewmlabormagreementsmandmcompensationmcontracts.
m2mSuppliersmandmCustomers 2. Usemfinancialmstatementsmtomdeterminemwhethermt
omconductmbusinessmormpurchasemproductsmfromm
m7mGovernmentmAgencies amcompany.
7.m Reviewmthemfinancialmstatementsmofmpubliclymtradedm
m 3mCompetitors companiesmformamvarietymofmreasonsmthatmareminmthemp
ublicminterest.
m 4mExternalmAuditors
3. Usemfinancialminformationmtomdeterminemtheirmmarke
m 6mInternalmAuditors tmpositionmrelativemtomthemreportingmentitymandmtomatt
emptmtomidentifymfuturemstrategiesmofmthemreportingm
m 11mRegulatorymBodies entity.
4. Aremindependentmofmthemcompanymandmresponsibl
m9mProfessionalmOrganizations emformensuringmthatmmanagementmpreparesmandmiss
uesmfinancialmstatementsmthatmcomplymwithmaccou
ntingmstandardsmandmfairlympresentmthemfinancialmp
ositionmandmeconomicmperformancemofmthemcompa
ny.
6.m Arememployeesmofmthemcompanymservingminmanmadvis
orymrolemtommanagement.mTheymprovideminformation
mtommanagementmregardingmthemcompany‘smoperatio
nsmandmpropermfunctioningmofmitsminternalmcontrols.
11. Protectminvestorsmandmoverseemthemaccountingman
dmauditingmstandardmsettingmprocesses.
9. Supportmaccountingmprofessionalsmthroughoutmtheir
© 2021 Pearson Education, Inc.
