,CHAPTER 1 f
The Financial Reporting Environment
f f f
f Solutions
Questions
Q1-1 fFinancial finformation fis fa fmuch fbroader fconcept fthan fsimply fthe ffinancial fstatements fand
ffootnotes fto fthe ffinancial fstatements. fFinancial finformation fincludes fitems fsuch fas fthe
fPresident‘s fletter fto fthe fowners, fmanagement‘s fdiscussion fand fanalysis, fthe fauditors‘ freport, fthe
fmanagement freport fand fpress freleases. fOf fcourse, fthe fbasic ffinancial fstatements fand ffootnotes
fare fincluded fin fthe fterm ffinancial finformation. fThe fbasic ffinancial fstatements fare: fthe fbalance
fsheet f(also f referred fto fas fthe fstatement fof ffinancial fposition), fthe fstatement fof fcomprehensive
fincome f(also freferred fto fas fthe fstatement fof fnet fincome fand fthe fstatement fof fcomprehensive
fincome), fthe fstatement fof fcash fflows, fand fthe fstatement fof fshareholders‘ fequity. fFinancial
finformation fis fnot fsynonymous fwith fthe fterm ffinancial fstatements fbecause fthe ffinancial
fstatements fare fa fsubset fof fthe fdifferent ftypes fof ffinancial finformation fprovided.
Q1-2 fThe fpurpose fof fgenerating ffinancial fstatements fis fto fprovide fuseful finformation fto fusers fto
fevaluate feconomic fentities fand fmake fefficient fresource fallocation fdecisions fbased fon fthe frisks
fand freturns fof fa fparticular finvestment. fThe fFinancial fAccounting fStandards fBoard f(FASB)
fidentifies finvestors, flenders fand fother fcreditors fas fthe fprimary fusers fof fthe ffinancial fstatements.
fThe ffinancial fstatements fare fthe fculmination fof fthe ffinancial freporting fprocess.
Q1-3 fCapital fis fa fscarce fresource. fInvestors fand fcreditors fhave fto fmake fdecisions fas fto fhow
fmuch fcapital fto finvest fin fany fgiven fentity; ftherefore, fthey fdemand frelevant fand ffaithfully
frepresentative finformation fabout fthe feconomic fperformance fand ffinancial fposition fof fa
fcompany. fThis finformation fis fprovided fin fthe ffinancial fstatements.
Q1-4 fExternal fauditors fensure fthat fthe fmanagement fof fa fcompany fhas fprepared ffinancial
fstatements fin faccordance fwith fGenerally fAccepted fAccounting fPrinciples fand ffairly fpresent fthe
ffinancial fposition fand feconomic fperformance fof fa fcompany. fIn faddition, fexternal fauditors fmust
fbe fan findependent fparty fand fcannot fbe femployees fof fthe fcompany fthey fare fauditing. fExternal
fauditors fprovide fa fsignificant famount fof fcredibility fto fthe ffinancial fstatements.
Q1-5 fData fanalytics fis fthe fprocess fof fanalyzing flarge fdata fsets fin forder fto fdraw fuseful
fconclusions. fIt finvolves fconverting fraw fdata finto fuseful fknowledge. fIn ffinancial freporting, fdata
fanalytics fcan fbe fused fto fimprove fthe fquality fof festimates fand fvaluations.
Q1-6 fStandard fsetters fcreate faccounting fconcepts, frules, fand fguidelines fto fensure fthat ffinancial
fstatements faccurately fpresent fthe feconomic fperformance fand ffinancial fposition fof fa ffirm. fThe
fstandards fencourage ftransparent fand ftruthful freporting.
,
, 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
Q1-7 fU.S. fcompanies flisted fon fU.S. fstock fexchanges fdo fnot fhave fthe foption fto freport funder
fIFRS. fHowever, fforeign fcompanies fthat ftrade fin fthe fU.S. fexchanges fcan freport funder fIFRS. fThe
fSEC fpermits fthe fuse fof fIFRS-based ffinancial fstatements fby finternational fcompanies fwith fshares
ftrading fon fU.S. fstock fexchanges.
Q1-8 fThe fFASB fseeks fand fwelcomes fcomments ffrom fall fparties fin fthe ffinancial freporting
fprocess fincluding fmanagers, finvestors, faccountants, fpreparers, fcreditors, flenders, ffinancial
fstatement fusers, fgovernmental fagencies, ffinancial fanalysts, findustry fgroups, fand fauditors. fFASB
falso freceives ffeedback ffrom fpublic froundtable fdiscussions, fpublic fmeetings, fthe fFASAC, fthe
fPrivate fCompany fCouncil, fand fEITF.
Q1-9 fYes, fthe fpromulgation fof ffinancial faccounting fstandards fis fa fpolitical fprocess. fThere fare
fseveral fgroups fthat finfluence fthe fstandard fsetting fprocess. fThe fstandard fsetting fprocess fis fa
fpolitical fprocess fthat fis faffected fby fthe fimpact fof fseveral flobbying fgroups. fThe fgovernment,
fthrough fthe fSEC, finfluences faccounting fstandards. fThe fSEC fhas fthe fauthority fto fissue
faccounting fstandards fbut fhas fassigned fthis fresponsibility fto fthe fprivate fsector. fNonetheless, fthe
fSEC fcan fexert fpressure fon fthe fFASB fto fissue faccounting fstandards fand fveto fthe fstandards
fpromulgated fby fthe fFASB. fAuditing ffirms, fthe fcorporate fsector, fcreditors, ffinancial fanalysts,
fthe ffinancial fcommunity, faccounting forganizations, findustry fgroups, fand finvestors fcan
finfluence fthe fFASB fby fwritten fcomments fabout fExposure fDrafts fand fparticipation fin fpublic
fmeetings fand fpublic froundtables fregarding fa fproposed ffinancial freporting fstandard.
Q1-10 fA fprinciples-based fstandard fis fconsistent fwith fa ftheoretical fframework. fIn fcontrast, fa
frules-based fstandard fdoes fnot fnecessarily frely fon fa fconsistent ftheoretical fframework. fRather,
fit fcontains fmore fspecific fand fprescriptive frules.
Q1-11 fRecently, fthe fFASB fhas ftaken fan fasset/liability fapproach fin fsetting fstandards. fWith fthis
fapproach, fa ftransaction fis frecorded fbased fon fwhether fan fasset for fliability fis fcreated. fAnother
ftrend fhas fbeen fthe fmovement ftoward fthe fuse fof ffair fvalue fmeasurements fas fan falternative fto
fhistorical fcost. fFASB fhas falso ffocused fon fthe fpromulgation fof fprinciples-based fstandards
finstead fof frules-based fstandards.
Brief fExercises
f Solution fto fBE1-1
General-purpose ffinancial fstatements fprovide fgeneral ffinancial finformation fabout fan fentity fthat
fwill fbe fuseful fto fmany ftypes fof fusers. fGeneral-purpose ffinancial fstatements fprovide
finformation fto fa fwide fspectrum fof fuser fgroups: finvestors, fcreditors, ffinancial fanalysts,
fcustomers, femployees, fcompetitors, fsuppliers, funions, fand fgovernment fagencies. fMost ffinancial
finformation fin fgeneral fpurpose ffinancial fstatements fis fprovided fto fsatisfy fusers fwith flimited
fability for fauthority fto fobtain fadditional finformation, fwhich fincludes finvestors fand fcreditors. fThe
fFinancial fAccounting fStandards fBoard f(FASB) fidentifies finvestors, flenders, fand fother fcreditors
fas fthe fprimary fusers fof fthe ffinancial fstatements.
© 2021 Pearson Education, Inc.
The Financial Reporting Environment
f f f
f Solutions
Questions
Q1-1 fFinancial finformation fis fa fmuch fbroader fconcept fthan fsimply fthe ffinancial fstatements fand
ffootnotes fto fthe ffinancial fstatements. fFinancial finformation fincludes fitems fsuch fas fthe
fPresident‘s fletter fto fthe fowners, fmanagement‘s fdiscussion fand fanalysis, fthe fauditors‘ freport, fthe
fmanagement freport fand fpress freleases. fOf fcourse, fthe fbasic ffinancial fstatements fand ffootnotes
fare fincluded fin fthe fterm ffinancial finformation. fThe fbasic ffinancial fstatements fare: fthe fbalance
fsheet f(also f referred fto fas fthe fstatement fof ffinancial fposition), fthe fstatement fof fcomprehensive
fincome f(also freferred fto fas fthe fstatement fof fnet fincome fand fthe fstatement fof fcomprehensive
fincome), fthe fstatement fof fcash fflows, fand fthe fstatement fof fshareholders‘ fequity. fFinancial
finformation fis fnot fsynonymous fwith fthe fterm ffinancial fstatements fbecause fthe ffinancial
fstatements fare fa fsubset fof fthe fdifferent ftypes fof ffinancial finformation fprovided.
Q1-2 fThe fpurpose fof fgenerating ffinancial fstatements fis fto fprovide fuseful finformation fto fusers fto
fevaluate feconomic fentities fand fmake fefficient fresource fallocation fdecisions fbased fon fthe frisks
fand freturns fof fa fparticular finvestment. fThe fFinancial fAccounting fStandards fBoard f(FASB)
fidentifies finvestors, flenders fand fother fcreditors fas fthe fprimary fusers fof fthe ffinancial fstatements.
fThe ffinancial fstatements fare fthe fculmination fof fthe ffinancial freporting fprocess.
Q1-3 fCapital fis fa fscarce fresource. fInvestors fand fcreditors fhave fto fmake fdecisions fas fto fhow
fmuch fcapital fto finvest fin fany fgiven fentity; ftherefore, fthey fdemand frelevant fand ffaithfully
frepresentative finformation fabout fthe feconomic fperformance fand ffinancial fposition fof fa
fcompany. fThis finformation fis fprovided fin fthe ffinancial fstatements.
Q1-4 fExternal fauditors fensure fthat fthe fmanagement fof fa fcompany fhas fprepared ffinancial
fstatements fin faccordance fwith fGenerally fAccepted fAccounting fPrinciples fand ffairly fpresent fthe
ffinancial fposition fand feconomic fperformance fof fa fcompany. fIn faddition, fexternal fauditors fmust
fbe fan findependent fparty fand fcannot fbe femployees fof fthe fcompany fthey fare fauditing. fExternal
fauditors fprovide fa fsignificant famount fof fcredibility fto fthe ffinancial fstatements.
Q1-5 fData fanalytics fis fthe fprocess fof fanalyzing flarge fdata fsets fin forder fto fdraw fuseful
fconclusions. fIt finvolves fconverting fraw fdata finto fuseful fknowledge. fIn ffinancial freporting, fdata
fanalytics fcan fbe fused fto fimprove fthe fquality fof festimates fand fvaluations.
Q1-6 fStandard fsetters fcreate faccounting fconcepts, frules, fand fguidelines fto fensure fthat ffinancial
fstatements faccurately fpresent fthe feconomic fperformance fand ffinancial fposition fof fa ffirm. fThe
fstandards fencourage ftransparent fand ftruthful freporting.
,
, 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
Q1-7 fU.S. fcompanies flisted fon fU.S. fstock fexchanges fdo fnot fhave fthe foption fto freport funder
fIFRS. fHowever, fforeign fcompanies fthat ftrade fin fthe fU.S. fexchanges fcan freport funder fIFRS. fThe
fSEC fpermits fthe fuse fof fIFRS-based ffinancial fstatements fby finternational fcompanies fwith fshares
ftrading fon fU.S. fstock fexchanges.
Q1-8 fThe fFASB fseeks fand fwelcomes fcomments ffrom fall fparties fin fthe ffinancial freporting
fprocess fincluding fmanagers, finvestors, faccountants, fpreparers, fcreditors, flenders, ffinancial
fstatement fusers, fgovernmental fagencies, ffinancial fanalysts, findustry fgroups, fand fauditors. fFASB
falso freceives ffeedback ffrom fpublic froundtable fdiscussions, fpublic fmeetings, fthe fFASAC, fthe
fPrivate fCompany fCouncil, fand fEITF.
Q1-9 fYes, fthe fpromulgation fof ffinancial faccounting fstandards fis fa fpolitical fprocess. fThere fare
fseveral fgroups fthat finfluence fthe fstandard fsetting fprocess. fThe fstandard fsetting fprocess fis fa
fpolitical fprocess fthat fis faffected fby fthe fimpact fof fseveral flobbying fgroups. fThe fgovernment,
fthrough fthe fSEC, finfluences faccounting fstandards. fThe fSEC fhas fthe fauthority fto fissue
faccounting fstandards fbut fhas fassigned fthis fresponsibility fto fthe fprivate fsector. fNonetheless, fthe
fSEC fcan fexert fpressure fon fthe fFASB fto fissue faccounting fstandards fand fveto fthe fstandards
fpromulgated fby fthe fFASB. fAuditing ffirms, fthe fcorporate fsector, fcreditors, ffinancial fanalysts,
fthe ffinancial fcommunity, faccounting forganizations, findustry fgroups, fand finvestors fcan
finfluence fthe fFASB fby fwritten fcomments fabout fExposure fDrafts fand fparticipation fin fpublic
fmeetings fand fpublic froundtables fregarding fa fproposed ffinancial freporting fstandard.
Q1-10 fA fprinciples-based fstandard fis fconsistent fwith fa ftheoretical fframework. fIn fcontrast, fa
frules-based fstandard fdoes fnot fnecessarily frely fon fa fconsistent ftheoretical fframework. fRather,
fit fcontains fmore fspecific fand fprescriptive frules.
Q1-11 fRecently, fthe fFASB fhas ftaken fan fasset/liability fapproach fin fsetting fstandards. fWith fthis
fapproach, fa ftransaction fis frecorded fbased fon fwhether fan fasset for fliability fis fcreated. fAnother
ftrend fhas fbeen fthe fmovement ftoward fthe fuse fof ffair fvalue fmeasurements fas fan falternative fto
fhistorical fcost. fFASB fhas falso ffocused fon fthe fpromulgation fof fprinciples-based fstandards
finstead fof frules-based fstandards.
Brief fExercises
f Solution fto fBE1-1
General-purpose ffinancial fstatements fprovide fgeneral ffinancial finformation fabout fan fentity fthat
fwill fbe fuseful fto fmany ftypes fof fusers. fGeneral-purpose ffinancial fstatements fprovide
finformation fto fa fwide fspectrum fof fuser fgroups: finvestors, fcreditors, ffinancial fanalysts,
fcustomers, femployees, fcompetitors, fsuppliers, funions, fand fgovernment fagencies. fMost ffinancial
finformation fin fgeneral fpurpose ffinancial fstatements fis fprovided fto fsatisfy fusers fwith flimited
fability for fauthority fto fobtain fadditional finformation, fwhich fincludes finvestors fand fcreditors. fThe
fFinancial fAccounting fStandards fBoard f(FASB) fidentifies finvestors, flenders, fand fother fcreditors
fas fthe fprimary fusers fof fthe ffinancial fstatements.
© 2021 Pearson Education, Inc.
