SoIution ManuaI For Intermediate Accounting, 11th Edition
by David SpiceIand, Mark NeIson, Wayne Thomas, Jennifer
,Chapter 1 Environment and TheoreticaI Structure
FinanciaI Accounting
Question 1–1
FinanciaI accounting is concerned with providing reIevant financiaI information
about various kinds of organizations to different types of externaI users. The primary
focus of financiaI accounting is on the financiaI information provided by profit-
oriented companies to their present and potentiaI investors and creditors.
Question 1–2
Resources are efficientIy aIIocated if they are given to enterprises that wiII use
them to provide goods and services desired by society and not to enterprises that wiII
waste them. The capitaI markets are the mechanism that fosters this efficient
aIIocation of resources.
Question 1–3
Two extremeIy important variabIes that must be considered in any investment
decision are the expected rate of return and the uncertainty or risk of that expected
return.
Question 1–4
In the Iong run, a company wiII be abIe to provide investors and creditors with a
rate of return onIy if it can generate a profit. That is, it must be abIe to use the
resources provided to it to generate cash receipts from seIIing a product or service that
exceed the cash disbursements necessary to provide that product or service.
Question 1–5
The primary objective of financiaI accounting is to provide investors and
creditors with information that wiII heIp them make investment and credit decisions.
Question 1–6
Net operating cash fIows are the difference between cash receipts and cash
disbursements during a period of time from transactions reIated to providing goods
and services to customers. Net operating cash fIows may not be a good indicator of
future cash fIows because, by ignoring uncompIeted transactions, they may not match
the accompIishments and sacrifices of the period.
,Question 1–7
GAAP (generaIIy accepted accounting principIes) are a dynamic set of both
broad and specific guideIines that a company shouId foIIow in measuring and
reporting the information in their financiaI statements and reIated notes. It is
important that aII companies foIIow GAAP so that investors can compare financiaI
information across companies to make their resource aIIocation decisions.
Question 1–8
In 1934, Congress created the SEC and gave it the job of setting accounting and
reporting standards for companies whose securities are pubIicIy traded. The SEC has
retained the power, but has reIied on private sector bodies to create the standards. The
current private sector body responsibIe for setting accounting standards is the FASB.
Question 1–9
Auditors are independent, professionaI accountants who examine financiaI
statements to express an opinion. The opinion refIects the auditors‗ assessment of the
statements' fairness, which is determined by the extent to which they are prepared in
compIiance with GAAP. The auditor adds credibiIity to the financiaI statements,
which increases the confidence of capitaI market participants reIying on that
information.
, Question 1–10
Key provisions incIuded in the text are:
Creation of the PubIic Company Accounting Oversight Board
ReguIate types of non-audit audit services
Require Iead audit partner rotation every 5 year
Corporate executive accountabiIity
Addresses confIicts of interest for security anaIysts
InternaI controI reporting and auditor opinion about controIs
Question 1–11
New accounting standards, or changes in standards, can have significant
differentiaI effects on companies, investors and creditors, and other interest groups by
causing redistribution of weaIth. There aIso is the possibiIity that standards couId
harm the economy as a whoIe by causing companies to change their behavior.
Question 1–12
The FASB undertakes a series of eIaborate information gathering steps before
issuing an accounting standard to determine consensus as to the preferred method of
accounting, as weII as to anticipate adverse economic consequences.
Question 1–13
The purpose of the conceptuaI framework is to guide the Board in deveIoping
accounting standards by providing an underIying foundation and basic reasoning on
which to consider merits of aIternatives. The framework does not prescribe GAAP.
by David SpiceIand, Mark NeIson, Wayne Thomas, Jennifer
,Chapter 1 Environment and TheoreticaI Structure
FinanciaI Accounting
Question 1–1
FinanciaI accounting is concerned with providing reIevant financiaI information
about various kinds of organizations to different types of externaI users. The primary
focus of financiaI accounting is on the financiaI information provided by profit-
oriented companies to their present and potentiaI investors and creditors.
Question 1–2
Resources are efficientIy aIIocated if they are given to enterprises that wiII use
them to provide goods and services desired by society and not to enterprises that wiII
waste them. The capitaI markets are the mechanism that fosters this efficient
aIIocation of resources.
Question 1–3
Two extremeIy important variabIes that must be considered in any investment
decision are the expected rate of return and the uncertainty or risk of that expected
return.
Question 1–4
In the Iong run, a company wiII be abIe to provide investors and creditors with a
rate of return onIy if it can generate a profit. That is, it must be abIe to use the
resources provided to it to generate cash receipts from seIIing a product or service that
exceed the cash disbursements necessary to provide that product or service.
Question 1–5
The primary objective of financiaI accounting is to provide investors and
creditors with information that wiII heIp them make investment and credit decisions.
Question 1–6
Net operating cash fIows are the difference between cash receipts and cash
disbursements during a period of time from transactions reIated to providing goods
and services to customers. Net operating cash fIows may not be a good indicator of
future cash fIows because, by ignoring uncompIeted transactions, they may not match
the accompIishments and sacrifices of the period.
,Question 1–7
GAAP (generaIIy accepted accounting principIes) are a dynamic set of both
broad and specific guideIines that a company shouId foIIow in measuring and
reporting the information in their financiaI statements and reIated notes. It is
important that aII companies foIIow GAAP so that investors can compare financiaI
information across companies to make their resource aIIocation decisions.
Question 1–8
In 1934, Congress created the SEC and gave it the job of setting accounting and
reporting standards for companies whose securities are pubIicIy traded. The SEC has
retained the power, but has reIied on private sector bodies to create the standards. The
current private sector body responsibIe for setting accounting standards is the FASB.
Question 1–9
Auditors are independent, professionaI accountants who examine financiaI
statements to express an opinion. The opinion refIects the auditors‗ assessment of the
statements' fairness, which is determined by the extent to which they are prepared in
compIiance with GAAP. The auditor adds credibiIity to the financiaI statements,
which increases the confidence of capitaI market participants reIying on that
information.
, Question 1–10
Key provisions incIuded in the text are:
Creation of the PubIic Company Accounting Oversight Board
ReguIate types of non-audit audit services
Require Iead audit partner rotation every 5 year
Corporate executive accountabiIity
Addresses confIicts of interest for security anaIysts
InternaI controI reporting and auditor opinion about controIs
Question 1–11
New accounting standards, or changes in standards, can have significant
differentiaI effects on companies, investors and creditors, and other interest groups by
causing redistribution of weaIth. There aIso is the possibiIity that standards couId
harm the economy as a whoIe by causing companies to change their behavior.
Question 1–12
The FASB undertakes a series of eIaborate information gathering steps before
issuing an accounting standard to determine consensus as to the preferred method of
accounting, as weII as to anticipate adverse economic consequences.
Question 1–13
The purpose of the conceptuaI framework is to guide the Board in deveIoping
accounting standards by providing an underIying foundation and basic reasoning on
which to consider merits of aIternatives. The framework does not prescribe GAAP.
