CHAPTER 1
The Financial Reporting Environment
Solutions
Questions
Q1-
1eFinancialeinformationeiseaemuchebroadereconceptethanesimplyetheefinancialestatementseandefootn
otesetoetheefinancialestatements.eFinancialeinformationeincludeseitemsesucheasetheePresident‘selettere
toetheeowners,emanagement‘sediscussioneandeanalysis,etheeauditors‘ereport,etheemanagementereport
eandepressereleases.eOfecourse,etheebasicefinancialestatementseandefootnoteseareeincludedeinetheeter
mefinancialeinformation.eTheebasicefinancialestatementseare:etheebalanceesheete(alsoe referredetoease
theestatementeofefinancialeposition),etheestatementeofecomprehensiveeincomee(alsoereferredetoeaseth
eestatementeofeneteincomeeandetheestatementeofecomprehensiveeincome),etheestatementeofecasheflo
ws,eandetheestatementeofeshareholders‘eequity.eFinancialeinformationeisenotesynonymousewithetheet
ermefinancialestatementsebecauseetheefinancialestatementseareeaesubseteofetheedifferentetypeseofefina
ncialeinformationeprovided.
Q1-
2eTheepurposeeofegeneratingefinancialestatementseisetoeprovideeusefuleinformationetoeusersetoeevalu
ateeeconomiceentitieseandemakeeefficienteresourceeallocationedecisionsebasedeonetheeriskseanderetu
rnseofeaeparticulareinvestment.eTheeFinancialeAccountingeStandardseBoarde(FASB)eidentifieseinve
stors,elenderseandeotherecreditorseasetheeprimaryeuserseofetheefinancialestatements.eTheefinancialest
atementseareetheeculminationeofetheefinancialereportingeprocess.
Q1-
3eCapitaleiseaescarceeresource.eInvestorseandecreditorsehaveetoemakeedecisionseasetoehowemuchecapit
aletoeinvesteineanyegiveneentity;etherefore,etheyedemanderelevanteandefaithfullyerepresentativeeinfor
mationeaboutetheeeconomiceperformanceeandefinancialepositioneofeaecompany.eThiseinformationeise
providedeinetheefinancialestatements.
Q1-
4eExternaleauditorseensureethatetheemanagementeofeaecompanyehasepreparedefinancialestatementsei
neaccordanceewitheGenerallyeAcceptedeAccountingePrincipleseandefairlyepresentetheefinancialeposi
tioneandeeconomiceperformanceeofeaecompany.eIneaddition,eexternaleauditorsemustebeeaneindepend
entepartyeandecannotebeeemployeeseofetheecompanyetheyeareeauditing.eExternaleauditorseprovideeae
significanteamounteofecredibilityetoetheefinancialestatements.
Q1-
5eDataeanalyticseisetheeprocesseofeanalyzingelargeedataesetseineorderetoedraweusefuleconclusions.eItei
nvolveseconvertingerawedataeintoeusefuleknowledge.eInefinancialereporting,edataeanalyticsecanebeeu
sedetoeimproveetheequalityeofeestimateseandevaluations.
Q1-
6eStandardesettersecreateeaccountingeconcepts,erules,eandeguidelinesetoeensureethatefinancialestatem
entseaccuratelyepresentetheeeconomiceperformanceeandefinancialepositioneofeaefirm.eTheestandardse
encourageetransparenteandetruthfulereporting.
,1e-e2e SeOeLeUeTeIeOeNeSe MeAeNeUeAeLe FeOeRe IeNeTeEeReMeEeDeIeAeTeEe AeCeCeOeUeNe
TeING e
Q1-
7eU.S.ecompanieselistedeoneU.S.estockeexchangesedoenotehaveetheeoptionetoereporteundereIFRS.eHo
wever,eforeignecompaniesethatetradeeinetheeU.S.eexchangesecanereporteundereIFRS.eTheeSECepermi
tsetheeuseeofeIFRS-
basedefinancialestatementsebyeinternationalecompaniesewithesharesetradingeoneU.S.estockeexchange
s.
Q1-
8eTheeFASBeseekseandewelcomesecommentsefromeallepartieseinetheefinancialereportingeprocesseinc
ludingemanagers,einvestors,eaccountants,epreparers,ecreditors,elenders,efinancialestatementeusers,eg
overnmentaleagencies,efinancialeanalysts,eindustryegroups,eandeauditors.eFASBealsoereceivesefeedb
ackefromepubliceroundtableediscussions,epublicemeetings,etheeFASAC,etheePrivateeCompanyeCou
ncil,eandeEITF.
Q1-
9eYes,etheepromulgationeofefinancialeaccountingestandardseiseaepoliticaleprocess.eThereeareeseverale
groupsethateinfluenceetheestandardesettingeprocess.eTheestandardesettingeprocesseiseaepoliticaleproce
ssethateiseaffectedebyetheeimpacteofeseveralelobbyingegroups.eTheegovernment,ethroughetheeSEC,ein
fluenceseaccountingestandards.eTheeSECehasetheeauthorityetoeissueeaccountingestandardsebutehaseas
signedethiseresponsibilityetoetheeprivateesector.eNonetheless,etheeSECecaneexertepressureeonetheeFA
SBetoeissueeaccountingestandardseandevetoetheestandardsepromulgatedebyetheeFASB.eAuditingefirm
s,etheecorporateesector,ecreditors,efinancialeanalysts,etheefinancialecommunity,eaccountingeorganiza
tions,eindustryegroups,eandeinvestorsecaneinfluenceetheeFASBebyewrittenecommentseabouteExposur
eeDraftseandeparticipationeinepublicemeetingseandepubliceroundtableseregardingeaeproposedefinanci
alereportingestandard.
Q1-10eAeprinciples-
basedestandardeiseconsistentewitheaetheoreticaleframework.eInecontrast,eaerules-
basedestandardedoesenotenecessarilyerelyeoneaeconsistentetheoreticaleframework.eRather,eitecontai
nsemoreespecificeandeprescriptiveerules.
Q1-
11eRecently,etheeFASBehasetakeneaneasset/liabilityeapproacheinesettingestandards.eWithethiseapproa
ch,eaetransactioneiserecordedebasedeonewhethereaneasseteoreliabilityeisecreated.eAnotheretrendehasebe
enetheemovementetowardetheeuseeofefairevalueemeasurementseaseanealternativeetoehistoricalecost.eF
ASBehasealsoefocusedeonetheepromulgationeofeprinciples-basedestandardseinsteadeoferules-
basedestandards.
BriefeExerciseseSoluti
onetoeBE1-1
General-
purposeefinancialestatementseprovideegeneralefinancialeinformationeabouteaneentityethatewillebeeuse
fuletoemanyetypeseofeusers.eGeneral-
purposeefinancialestatementseprovideeinformationetoeaewideespectrumeofeuseregroups:einvestors,ecre
ditors,efinancialeanalysts,ecustomers,eemployees,ecompetitors,esuppliers,eunions,eandegovernmente
agencies.eMostefinancialeinformationeinegeneralepurposeefinancialestatementseiseprovidedetoesatisfy
eusersewithelimitedeabilityeoreauthorityetoeobtaineadditionaleinformation,ewhicheincludeseinvestorsea
ndecreditors.eTheeFinancialeAccountingeStandardseBoarde(FASB)eidentifieseinvestors,elenders,eand
©e2021ePearsoneEducation,eInc
.
, CeHeAePeTeEeRe 1e TeHeEe FeIeNeAeNeCeIeAeLe ReEePeOeReTeIeNeGe EeNeVeIeReOeNe 1e-e3e
MeEeNeT
otherecreditorseasetheeprimaryeuserseofetheefinancialestatements.
e
©e2021ePearsoneEducation,eInc
.
, 1e-e4e SeOeLeUeTeIeOeNeSe MeAeNeUeAeLe FeOeRe IeNeTeEeReMeEeDeIeAeTeEe AeCeCeOeUeNe
TeING e
SolutionetoeBE1-2
Financialeaccountingeisetheeprocesseofeidentifying,emeasuring,eandecommunicatingefinancialeinfor
mationeabouteaneeconomiceentityetoevariouseuseregroupsewithinetheelegal,eeconomic,epolitical,eande
socialeenvironment.eThisedefinitionecontainsefouremajoreelements:e1.e Financialeinformation;e2.Eco
nomiceentity;e3.eUseregroupseande4.eLegal,eeconomic,epolitical,eandesocialeenvironment
SolutionetoeBE1-3
FinancialeStatementeUserse
andeOthereParties Role
10. Areeshareholderseofetheecompany.
e10eEquityeInvestors
1. Areebankseandeotherefinancialeinstitutionsethatelende
1 Creditors
e e moneyetoetheecompany.
5.e Useefinancialeinformationetoerevieweandeanalyzeer
5 FinancialeAnalysts
e e
eportederesultseofetheecompaniesetheyecovereande
makeeinvestmenterecommendations.
8 EmployeeseandeLaboreUnions
e e
8. Useefinancialeinformationeduringenegotiationeofene
2 SupplierseandeCustomers
e e
welaboreagreementseandecompensationecontracts.
2. Useefinancialestatementsetoedetermineewhetheretoe
7 GovernmenteAgencies
e e conductebusinesseorepurchaseeproductsefromeaeco
mpany.
e 3eCompetitors 7.e Reviewetheefinancialestatementseofepubliclyetradedeco
mpanieseforeaevarietyeofereasonsethateareeinetheepubli
4 ExternaleAuditors
e e
ceinterest.
6 InternaleAuditors
e e 3. Useefinancialeinformationetoedetermineetheiremarkete
positionerelativeetoetheereportingeentityeandetoeattem
e11eRegulatoryeBodies ptetoeidentifyefutureestrategieseofetheereportingeentity
.
9 ProfessionaleOrganizations
e e
4. Areeindependenteofetheecompanyeanderesponsiblee
foreensuringethatemanagementeprepareseandeissuese
financialestatementsethatecomplyewitheaccountinge
standardseandefairlyepresentetheefinancialepositione
andeeconomiceperformanceeofetheecompany.
6.e Areeemployeeseofetheecompanyeservingeineaneadvisor
yeroleetoemanagement.eTheyeprovideeinformationetoe
managementeregardingetheecompany‘seoperationsean
deproperefunctioningeofeitseinternalecontrols.
11. Protecteinvestorseandeoverseeetheeaccountingeande
auditingestandardesettingeprocesses.
9. Supporteaccountingeprofessionalsethroughoutetheir
©e2021ePearsoneEducation,eInc
.
The Financial Reporting Environment
Solutions
Questions
Q1-
1eFinancialeinformationeiseaemuchebroadereconceptethanesimplyetheefinancialestatementseandefootn
otesetoetheefinancialestatements.eFinancialeinformationeincludeseitemsesucheasetheePresident‘selettere
toetheeowners,emanagement‘sediscussioneandeanalysis,etheeauditors‘ereport,etheemanagementereport
eandepressereleases.eOfecourse,etheebasicefinancialestatementseandefootnoteseareeincludedeinetheeter
mefinancialeinformation.eTheebasicefinancialestatementseare:etheebalanceesheete(alsoe referredetoease
theestatementeofefinancialeposition),etheestatementeofecomprehensiveeincomee(alsoereferredetoeaseth
eestatementeofeneteincomeeandetheestatementeofecomprehensiveeincome),etheestatementeofecasheflo
ws,eandetheestatementeofeshareholders‘eequity.eFinancialeinformationeisenotesynonymousewithetheet
ermefinancialestatementsebecauseetheefinancialestatementseareeaesubseteofetheedifferentetypeseofefina
ncialeinformationeprovided.
Q1-
2eTheepurposeeofegeneratingefinancialestatementseisetoeprovideeusefuleinformationetoeusersetoeevalu
ateeeconomiceentitieseandemakeeefficienteresourceeallocationedecisionsebasedeonetheeriskseanderetu
rnseofeaeparticulareinvestment.eTheeFinancialeAccountingeStandardseBoarde(FASB)eidentifieseinve
stors,elenderseandeotherecreditorseasetheeprimaryeuserseofetheefinancialestatements.eTheefinancialest
atementseareetheeculminationeofetheefinancialereportingeprocess.
Q1-
3eCapitaleiseaescarceeresource.eInvestorseandecreditorsehaveetoemakeedecisionseasetoehowemuchecapit
aletoeinvesteineanyegiveneentity;etherefore,etheyedemanderelevanteandefaithfullyerepresentativeeinfor
mationeaboutetheeeconomiceperformanceeandefinancialepositioneofeaecompany.eThiseinformationeise
providedeinetheefinancialestatements.
Q1-
4eExternaleauditorseensureethatetheemanagementeofeaecompanyehasepreparedefinancialestatementsei
neaccordanceewitheGenerallyeAcceptedeAccountingePrincipleseandefairlyepresentetheefinancialeposi
tioneandeeconomiceperformanceeofeaecompany.eIneaddition,eexternaleauditorsemustebeeaneindepend
entepartyeandecannotebeeemployeeseofetheecompanyetheyeareeauditing.eExternaleauditorseprovideeae
significanteamounteofecredibilityetoetheefinancialestatements.
Q1-
5eDataeanalyticseisetheeprocesseofeanalyzingelargeedataesetseineorderetoedraweusefuleconclusions.eItei
nvolveseconvertingerawedataeintoeusefuleknowledge.eInefinancialereporting,edataeanalyticsecanebeeu
sedetoeimproveetheequalityeofeestimateseandevaluations.
Q1-
6eStandardesettersecreateeaccountingeconcepts,erules,eandeguidelinesetoeensureethatefinancialestatem
entseaccuratelyepresentetheeeconomiceperformanceeandefinancialepositioneofeaefirm.eTheestandardse
encourageetransparenteandetruthfulereporting.
,1e-e2e SeOeLeUeTeIeOeNeSe MeAeNeUeAeLe FeOeRe IeNeTeEeReMeEeDeIeAeTeEe AeCeCeOeUeNe
TeING e
Q1-
7eU.S.ecompanieselistedeoneU.S.estockeexchangesedoenotehaveetheeoptionetoereporteundereIFRS.eHo
wever,eforeignecompaniesethatetradeeinetheeU.S.eexchangesecanereporteundereIFRS.eTheeSECepermi
tsetheeuseeofeIFRS-
basedefinancialestatementsebyeinternationalecompaniesewithesharesetradingeoneU.S.estockeexchange
s.
Q1-
8eTheeFASBeseekseandewelcomesecommentsefromeallepartieseinetheefinancialereportingeprocesseinc
ludingemanagers,einvestors,eaccountants,epreparers,ecreditors,elenders,efinancialestatementeusers,eg
overnmentaleagencies,efinancialeanalysts,eindustryegroups,eandeauditors.eFASBealsoereceivesefeedb
ackefromepubliceroundtableediscussions,epublicemeetings,etheeFASAC,etheePrivateeCompanyeCou
ncil,eandeEITF.
Q1-
9eYes,etheepromulgationeofefinancialeaccountingestandardseiseaepoliticaleprocess.eThereeareeseverale
groupsethateinfluenceetheestandardesettingeprocess.eTheestandardesettingeprocesseiseaepoliticaleproce
ssethateiseaffectedebyetheeimpacteofeseveralelobbyingegroups.eTheegovernment,ethroughetheeSEC,ein
fluenceseaccountingestandards.eTheeSECehasetheeauthorityetoeissueeaccountingestandardsebutehaseas
signedethiseresponsibilityetoetheeprivateesector.eNonetheless,etheeSECecaneexertepressureeonetheeFA
SBetoeissueeaccountingestandardseandevetoetheestandardsepromulgatedebyetheeFASB.eAuditingefirm
s,etheecorporateesector,ecreditors,efinancialeanalysts,etheefinancialecommunity,eaccountingeorganiza
tions,eindustryegroups,eandeinvestorsecaneinfluenceetheeFASBebyewrittenecommentseabouteExposur
eeDraftseandeparticipationeinepublicemeetingseandepubliceroundtableseregardingeaeproposedefinanci
alereportingestandard.
Q1-10eAeprinciples-
basedestandardeiseconsistentewitheaetheoreticaleframework.eInecontrast,eaerules-
basedestandardedoesenotenecessarilyerelyeoneaeconsistentetheoreticaleframework.eRather,eitecontai
nsemoreespecificeandeprescriptiveerules.
Q1-
11eRecently,etheeFASBehasetakeneaneasset/liabilityeapproacheinesettingestandards.eWithethiseapproa
ch,eaetransactioneiserecordedebasedeonewhethereaneasseteoreliabilityeisecreated.eAnotheretrendehasebe
enetheemovementetowardetheeuseeofefairevalueemeasurementseaseanealternativeetoehistoricalecost.eF
ASBehasealsoefocusedeonetheepromulgationeofeprinciples-basedestandardseinsteadeoferules-
basedestandards.
BriefeExerciseseSoluti
onetoeBE1-1
General-
purposeefinancialestatementseprovideegeneralefinancialeinformationeabouteaneentityethatewillebeeuse
fuletoemanyetypeseofeusers.eGeneral-
purposeefinancialestatementseprovideeinformationetoeaewideespectrumeofeuseregroups:einvestors,ecre
ditors,efinancialeanalysts,ecustomers,eemployees,ecompetitors,esuppliers,eunions,eandegovernmente
agencies.eMostefinancialeinformationeinegeneralepurposeefinancialestatementseiseprovidedetoesatisfy
eusersewithelimitedeabilityeoreauthorityetoeobtaineadditionaleinformation,ewhicheincludeseinvestorsea
ndecreditors.eTheeFinancialeAccountingeStandardseBoarde(FASB)eidentifieseinvestors,elenders,eand
©e2021ePearsoneEducation,eInc
.
, CeHeAePeTeEeRe 1e TeHeEe FeIeNeAeNeCeIeAeLe ReEePeOeReTeIeNeGe EeNeVeIeReOeNe 1e-e3e
MeEeNeT
otherecreditorseasetheeprimaryeuserseofetheefinancialestatements.
e
©e2021ePearsoneEducation,eInc
.
, 1e-e4e SeOeLeUeTeIeOeNeSe MeAeNeUeAeLe FeOeRe IeNeTeEeReMeEeDeIeAeTeEe AeCeCeOeUeNe
TeING e
SolutionetoeBE1-2
Financialeaccountingeisetheeprocesseofeidentifying,emeasuring,eandecommunicatingefinancialeinfor
mationeabouteaneeconomiceentityetoevariouseuseregroupsewithinetheelegal,eeconomic,epolitical,eande
socialeenvironment.eThisedefinitionecontainsefouremajoreelements:e1.e Financialeinformation;e2.Eco
nomiceentity;e3.eUseregroupseande4.eLegal,eeconomic,epolitical,eandesocialeenvironment
SolutionetoeBE1-3
FinancialeStatementeUserse
andeOthereParties Role
10. Areeshareholderseofetheecompany.
e10eEquityeInvestors
1. Areebankseandeotherefinancialeinstitutionsethatelende
1 Creditors
e e moneyetoetheecompany.
5.e Useefinancialeinformationetoerevieweandeanalyzeer
5 FinancialeAnalysts
e e
eportederesultseofetheecompaniesetheyecovereande
makeeinvestmenterecommendations.
8 EmployeeseandeLaboreUnions
e e
8. Useefinancialeinformationeduringenegotiationeofene
2 SupplierseandeCustomers
e e
welaboreagreementseandecompensationecontracts.
2. Useefinancialestatementsetoedetermineewhetheretoe
7 GovernmenteAgencies
e e conductebusinesseorepurchaseeproductsefromeaeco
mpany.
e 3eCompetitors 7.e Reviewetheefinancialestatementseofepubliclyetradedeco
mpanieseforeaevarietyeofereasonsethateareeinetheepubli
4 ExternaleAuditors
e e
ceinterest.
6 InternaleAuditors
e e 3. Useefinancialeinformationetoedetermineetheiremarkete
positionerelativeetoetheereportingeentityeandetoeattem
e11eRegulatoryeBodies ptetoeidentifyefutureestrategieseofetheereportingeentity
.
9 ProfessionaleOrganizations
e e
4. Areeindependenteofetheecompanyeanderesponsiblee
foreensuringethatemanagementeprepareseandeissuese
financialestatementsethatecomplyewitheaccountinge
standardseandefairlyepresentetheefinancialepositione
andeeconomiceperformanceeofetheecompany.
6.e Areeemployeeseofetheecompanyeservingeineaneadvisor
yeroleetoemanagement.eTheyeprovideeinformationetoe
managementeregardingetheecompany‘seoperationsean
deproperefunctioningeofeitseinternalecontrols.
11. Protecteinvestorseandeoverseeetheeaccountingeande
auditingestandardesettingeprocesses.
9. Supporteaccountingeprofessionalsethroughoutetheir
©e2021ePearsoneEducation,eInc
.
