b
b
Solution Manual For Intermediate Accounting, 11th Edition by
b b b b b b b
David Spiceland, Mark Nelson, Wayne Thomas, Jennifer
b b b b b b b b
b
b
b
, Chapter 1 Environment and Theoretical Structure of b b b b b b b
b
Financial Accounting b b
b
Question 1–1 b b
Financial accounting is concerned with providing relevant financial information ab
b b b b b b b b b
out various kinds of organizations to different types of external users. The primary focus
b b b b b b b b b b b b b b
of financial accounting is on the financial information provided by profit-
b b b b b b b b b b
oriented companies to their present and potential investors and creditors.
b b b b b b b b b b b
Question 1–2 b b
Resources are efficiently allocated if they are given to enterprises that will use them
b b b b b b b b b b b b b
to provide goods and services desired by society and not to enterprises that will waste th
b b b b b b b b b b b b b b b b
em. The capital markets are the mechanism that fosters this efficient allocation of resour
b b b b b b b b b b b b b
ces. b
Question 1–3 b b
Two extremely important variables that must be considered in any investment decis
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ion are the expected rate of return and the uncertainty or risk of that expected return.
b b b b b b b b b b b b b b b b
Question 1–4 b b
In the long run, a company will be able to provide investors and creditors with a rate
b b b b b b b b b b b b b b b b
of return only if it can generate a profit. That is, it must be able to use the resources provi
b b b b b b b b b b b b b b b b b b b b
ded to it to generate cash receipts from selling a product or service that exceed the cash di
b b b b b b b b b b b b b b b b b
sbursements necessary to provide that product or service. b b b b b b b b
Question 1–5 b b
The primary objective of financial accounting is to provide investors and creditors
b b b b b b b b b b b b
with information that will help them make investment and credit decisions.
b b b b b b b b b b b
Question 1–6 b b
Net operating cash flows are the difference between cash receipts and cash disburse
b b b b b b b b b b b b
ments during a period of time from transactions related to providing goods and services t
b b b b b b b b b b b b b b
o customers. Net operating cash flows may not be a good indicator of future cash flows b
b b b b b b b b b b b b b b b b
ecause, by ignoring uncompleted transactions, they may not match the accomplishments
b b b b b b b b b b
and sacrifices of the period.
b b b b b b
b
b
b
b
Question 1–7
b b
, GAAP (generally accepted accounting principles) are a dynamic set of both broad a
b b b b b b b b b b b b
nd specific guidelines that a company should follow in measuring and reporting the infor
b b b b b b b b b b b b b
mation in their financial statements and related notes. It is important that all companies fo
b b b b b b b b b b b b b b
llow GAAP so that investors can compare financial information across companies to ma
b b b b b b b b b b b b
ke their resource allocation decisions.
b b b b b
Question 1–8 b b
In 1934, Congress created the SEC and gave it the job of setting accounting and repo
b b b b b b b b b b b b b b b
rting standards for companies whose securities are publicly traded. The SEC has retained
b b b b b b b b b b b b b
the power, but has relied on private sector bodies to create the standards. The current priv
b b b b b b b b b b b b b b b
ate sector body responsible for setting accounting standards is the FASB.
b b b b b b b b b b b
Question 1–9 b b
Auditors are independent, professional accountants who examine financial stateme
b b b b b b b b
nts to express an opinion. The opinion reflects the auditors‘ assessment of the statements'
b b b b b b b b b b b b b b
fairness, which is determined by the extent to which they are prepared in compliance with
b b b b b b b b b b b b b b
bGAAP. The auditor adds credibility to the financial statements, which increases the conf
b b b b b b b b b b b b
idence of capital market participants relying on that information.
b b b b b b b b b
b
b
b
Question 1–10 b b
Key provisions included in the text are:
b b b b b b b
Creation of the Public Company Accounting Oversight Board
b b b b b b b b b
Regulate types of non-audit audit services
b b b b b b b
Require lead audit partner rotation every 5 year
b b b b b b b b b
Corporate executive accountability
b b b b
Addresses conflicts of interest for security analysts
b b b b b b b b
Internal control reporting and auditor opinion about controls
b b b b b b b b b
Question 1–11 b b
New accounting standards, or changes in standards, can have significant differentia
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l effects on companies, investors and creditors, and other interest groups by causing redi
b b b b b b b b b b b b b
stribution of wealth. There also is the possibility that standards could harm the economy
b b b b b b b b b b b b b b
as a whole by causing companies to change their behavior.
b b b b b b b b b b
Question 1–12 b b
The FASB undertakes a series of elaborate information gathering steps before issui
b b b b b b b b b b b
ng an accounting standard to determine consensus as to the preferred method of accounti
b b b b b b b b b b b b b
ng, as well as to anticipate adverse economic consequences.
b b b b b b b b b
Question 1–13 b b
, The purpose of the conceptual framework is to guide the Board in developing accou
b b b b b b b b b b b b b
nting standards by providing an underlying foundation and basic reasoning on which to
b b b b b b b b b b b b b
consider merits of alternatives. The framework does not prescribe GAAP.
b b b b b b b b b b
b
b
Question 1–14 b b
Relevance and faithful representation are the primary qualitative characteristics that
b b b b b b b b b
bmake information decision- b b
useful. Relevant information will possess predictive and/or confirmatory value. Faithful
b b b b b b b b b b
representation is the extent to which there is agreement between a measure or description
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and the phenomenon it purports to represent.
b b b b b b b
Question 1–15 b b
The components of relevant information are predictive value, confirmatory value an
b b b b b b b b b b
d materiality. The components of faithful representation are completeness, neutrality, an
b b b b b b b b b b
d freedom from error.
b b b b
Question 1–16 b b
The benefit from providing accounting information is increased decision usefulness
b b b b b b b b b
. If the information is relevant and possesses faithful representation, it will improve the d
b b b b b b b b b b b b b b
ecisions made by investors and creditors. However, there are costs to providing informati
b b b b b b b b b b b b
on that include costs to gather, process, and disseminate that information. There also are
b b b b b b b b b b b b b b
costs to users in interpreting the information as well as possible adverse economic conseq
b b b b b b b b b b b b b
uences that could result from disclosing information. Information should not be provided
b b b b b b b b b b b
bunless the benefits exceed the costs.
b b b b b b
Question 1–17 b b
Information is material if it is deemed to have an effect on a decision made by a user.
b b b b b b b b b b b b b b b b b
bThe threshold for materiality will depend principally on the relative dollar amount of the
b b b b b b b b b b b b b b
transaction being considered. One consequence of materiality is that GAAP need not be f
b b b b b b b b b b b b b
ollowed in measuring and reporting a transaction if that transaction is not material. The th
b b b b b b b b b b b b b b
reshold for materiality has been left to subjective judgment.
b b b b b b b b b
b
Question 1–18 b b
1. Assets are probable future economic benefits obtained or controlled by a particular
b b b b b b b b b b b b
entity as a result of past transactions or events.
b b b b b b b b b
2. Liabilities are probable future sacrifices of economic benefits arising from present
b b b b b b b b b b b
obligations of a particular entity to transfer assets or provide services to other entiti
b b b b b b b b b b b b b
es in the future as a result of past transactions.
b b b b b b b b b b
3. Equity is the residual interest in the assets of any entity that remains after deducting
b b b b b b b b b b b b b b
bits liabilities.
b b
4. Investments by owners are increases in equity resulting from transfers of resources,
b b b b b b b b b b b
busually cash, to a company in exchange for ownership interest.
b b b b b b b b b b
b
Solution Manual For Intermediate Accounting, 11th Edition by
b b b b b b b
David Spiceland, Mark Nelson, Wayne Thomas, Jennifer
b b b b b b b b
b
b
b
, Chapter 1 Environment and Theoretical Structure of b b b b b b b
b
Financial Accounting b b
b
Question 1–1 b b
Financial accounting is concerned with providing relevant financial information ab
b b b b b b b b b
out various kinds of organizations to different types of external users. The primary focus
b b b b b b b b b b b b b b
of financial accounting is on the financial information provided by profit-
b b b b b b b b b b
oriented companies to their present and potential investors and creditors.
b b b b b b b b b b b
Question 1–2 b b
Resources are efficiently allocated if they are given to enterprises that will use them
b b b b b b b b b b b b b
to provide goods and services desired by society and not to enterprises that will waste th
b b b b b b b b b b b b b b b b
em. The capital markets are the mechanism that fosters this efficient allocation of resour
b b b b b b b b b b b b b
ces. b
Question 1–3 b b
Two extremely important variables that must be considered in any investment decis
b b b b b b b b b b b
ion are the expected rate of return and the uncertainty or risk of that expected return.
b b b b b b b b b b b b b b b b
Question 1–4 b b
In the long run, a company will be able to provide investors and creditors with a rate
b b b b b b b b b b b b b b b b
of return only if it can generate a profit. That is, it must be able to use the resources provi
b b b b b b b b b b b b b b b b b b b b
ded to it to generate cash receipts from selling a product or service that exceed the cash di
b b b b b b b b b b b b b b b b b
sbursements necessary to provide that product or service. b b b b b b b b
Question 1–5 b b
The primary objective of financial accounting is to provide investors and creditors
b b b b b b b b b b b b
with information that will help them make investment and credit decisions.
b b b b b b b b b b b
Question 1–6 b b
Net operating cash flows are the difference between cash receipts and cash disburse
b b b b b b b b b b b b
ments during a period of time from transactions related to providing goods and services t
b b b b b b b b b b b b b b
o customers. Net operating cash flows may not be a good indicator of future cash flows b
b b b b b b b b b b b b b b b b
ecause, by ignoring uncompleted transactions, they may not match the accomplishments
b b b b b b b b b b
and sacrifices of the period.
b b b b b b
b
b
b
b
Question 1–7
b b
, GAAP (generally accepted accounting principles) are a dynamic set of both broad a
b b b b b b b b b b b b
nd specific guidelines that a company should follow in measuring and reporting the infor
b b b b b b b b b b b b b
mation in their financial statements and related notes. It is important that all companies fo
b b b b b b b b b b b b b b
llow GAAP so that investors can compare financial information across companies to ma
b b b b b b b b b b b b
ke their resource allocation decisions.
b b b b b
Question 1–8 b b
In 1934, Congress created the SEC and gave it the job of setting accounting and repo
b b b b b b b b b b b b b b b
rting standards for companies whose securities are publicly traded. The SEC has retained
b b b b b b b b b b b b b
the power, but has relied on private sector bodies to create the standards. The current priv
b b b b b b b b b b b b b b b
ate sector body responsible for setting accounting standards is the FASB.
b b b b b b b b b b b
Question 1–9 b b
Auditors are independent, professional accountants who examine financial stateme
b b b b b b b b
nts to express an opinion. The opinion reflects the auditors‘ assessment of the statements'
b b b b b b b b b b b b b b
fairness, which is determined by the extent to which they are prepared in compliance with
b b b b b b b b b b b b b b
bGAAP. The auditor adds credibility to the financial statements, which increases the conf
b b b b b b b b b b b b
idence of capital market participants relying on that information.
b b b b b b b b b
b
b
b
Question 1–10 b b
Key provisions included in the text are:
b b b b b b b
Creation of the Public Company Accounting Oversight Board
b b b b b b b b b
Regulate types of non-audit audit services
b b b b b b b
Require lead audit partner rotation every 5 year
b b b b b b b b b
Corporate executive accountability
b b b b
Addresses conflicts of interest for security analysts
b b b b b b b b
Internal control reporting and auditor opinion about controls
b b b b b b b b b
Question 1–11 b b
New accounting standards, or changes in standards, can have significant differentia
b b b b b b b b b b
l effects on companies, investors and creditors, and other interest groups by causing redi
b b b b b b b b b b b b b
stribution of wealth. There also is the possibility that standards could harm the economy
b b b b b b b b b b b b b b
as a whole by causing companies to change their behavior.
b b b b b b b b b b
Question 1–12 b b
The FASB undertakes a series of elaborate information gathering steps before issui
b b b b b b b b b b b
ng an accounting standard to determine consensus as to the preferred method of accounti
b b b b b b b b b b b b b
ng, as well as to anticipate adverse economic consequences.
b b b b b b b b b
Question 1–13 b b
, The purpose of the conceptual framework is to guide the Board in developing accou
b b b b b b b b b b b b b
nting standards by providing an underlying foundation and basic reasoning on which to
b b b b b b b b b b b b b
consider merits of alternatives. The framework does not prescribe GAAP.
b b b b b b b b b b
b
b
Question 1–14 b b
Relevance and faithful representation are the primary qualitative characteristics that
b b b b b b b b b
bmake information decision- b b
useful. Relevant information will possess predictive and/or confirmatory value. Faithful
b b b b b b b b b b
representation is the extent to which there is agreement between a measure or description
b b b b b b b b b b b b b b
and the phenomenon it purports to represent.
b b b b b b b
Question 1–15 b b
The components of relevant information are predictive value, confirmatory value an
b b b b b b b b b b
d materiality. The components of faithful representation are completeness, neutrality, an
b b b b b b b b b b
d freedom from error.
b b b b
Question 1–16 b b
The benefit from providing accounting information is increased decision usefulness
b b b b b b b b b
. If the information is relevant and possesses faithful representation, it will improve the d
b b b b b b b b b b b b b b
ecisions made by investors and creditors. However, there are costs to providing informati
b b b b b b b b b b b b
on that include costs to gather, process, and disseminate that information. There also are
b b b b b b b b b b b b b b
costs to users in interpreting the information as well as possible adverse economic conseq
b b b b b b b b b b b b b
uences that could result from disclosing information. Information should not be provided
b b b b b b b b b b b
bunless the benefits exceed the costs.
b b b b b b
Question 1–17 b b
Information is material if it is deemed to have an effect on a decision made by a user.
b b b b b b b b b b b b b b b b b
bThe threshold for materiality will depend principally on the relative dollar amount of the
b b b b b b b b b b b b b b
transaction being considered. One consequence of materiality is that GAAP need not be f
b b b b b b b b b b b b b
ollowed in measuring and reporting a transaction if that transaction is not material. The th
b b b b b b b b b b b b b b
reshold for materiality has been left to subjective judgment.
b b b b b b b b b
b
Question 1–18 b b
1. Assets are probable future economic benefits obtained or controlled by a particular
b b b b b b b b b b b b
entity as a result of past transactions or events.
b b b b b b b b b
2. Liabilities are probable future sacrifices of economic benefits arising from present
b b b b b b b b b b b
obligations of a particular entity to transfer assets or provide services to other entiti
b b b b b b b b b b b b b
es in the future as a result of past transactions.
b b b b b b b b b b
3. Equity is the residual interest in the assets of any entity that remains after deducting
b b b b b b b b b b b b b b
bits liabilities.
b b
4. Investments by owners are increases in equity resulting from transfers of resources,
b b b b b b b b b b b
busually cash, to a company in exchange for ownership interest.
b b b b b b b b b b
