Complete Solution Manual for Intermediate Accounting, 11th Edition

Complete Solution Manual for Intermediate Accounting, 11th Edition Solutions Manual, Chapter 2 2–1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Question 1–1 Financial accounting is concerned with providing relevant financial information about various kinds of organizations to different types of external users. The primary focus of financial accounting is on the financial information provided by profitoriented companies to their present and potential investors and creditors. Question 1–2 Resources are efficiently allocated if they are given to enterprises that will use them to provide goods and services desired by society and not to enterprises that will waste them. The capital markets are the mechanism that fosters this efficient allocation of resources. Question 1–3 Two extremely important variables 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 long run, a company will be able to provide investors and creditors with a rate of return only if it can generate a profit. That is, it must be able to use the resources provided to it to generate cash receipts from selling a product or service that exceed the cash disbursements necessary to provide that product or service. Question 1–5 The primary objective of financial accounting is to provide investors and creditors with information that will help them make investment and credit decisions. Question 1–6 Net operating cash flows are the difference between cash receipts and cash disbursements during a period of time from transactions related to providing goods and services to customers. Net operating cash flows may not be a good indicator of future cash flows because, by ignoring uncompleted transactions, they may not match the accomplishments and sacrifices of the period. Chapter 1 Environment and Theoretical Structure of Financial Accounting 2–2 Intermediate Accounting, 11/e © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Answers to Questions (continued) Question 1–7 GAAP (generally accepted accounting principles) are a dynamic set of both broad and specific guidelines that a company should follow in measuring and reporting the information in their financial statements and related notes. It is important that all companies follow GAAP so that investors can compare financial information across companies to make their resource allocation 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 publicly traded. The SEC has retained the power, but has relied on private sector bodies to create the standards. The current private sector body responsible for setting accounting standards is the FASB. Question 1–9 Auditors are independent, professional accountants who examine financial statements to express an opinion. The opinion reflects the auditors‘ assessment of the statements' fairness, which is determined by the extent to which they are prepared in compliance with GAAP. The auditor adds credibility to the financial statements, which increases the confidence of capital market participants relying on that information. Complete Solution Manual for Intermediate Accounting, 11th Edition Solutions Manual, Chapter 2 2–3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Answers to Questions (continued) Question 1–10 Key provisions included in the text are:  Creation of the Public Company Accounting Oversight Board  Regulate types of non-audit audit services  Require lead audit partner rotation every 5 year  Corporate executive accountability  Addresses conflicts of interest for security analysts  Internal control reporting and auditor opinion about controls Question 1–11 New accounting standards, or changes in standards, can have significant differential effects on companies, investors and creditors, and other interest groups by causing redistribution of wealth. There also is the possibility that standards could harm the economy as a whole by causing companies to change their behavior. Question 1–12 The FASB undertakes a series of elaborate information gathering steps before issuing an accounting standard to determine consensus as to the preferred method of accounting, as well as to anticipate adverse economic consequences. Question 1–13 The purpose of the conceptual framework is to guide the Board in developing accounting standards by providing an underlying foundation and basic reasoning on which to consider merits of alternatives. The framework does not prescribe GAAP. 2–4 Intermediate Accounting, 11/e © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Answers to Questions (continued) Question 1–14 Relevance and faithful representation are the primary qualitative characteristics that make information decision-useful. Relevant information will possess predictive and/or confirmatory value. Faithful representation is the extent to which there is agreement between a measure or description and the phenomenon it purports to represent. Question 1–15 The components of relevant information are predictive value, confirmatory value and materiality. The components of faithful representation are completeness, neutrality, and freedom from error. Question 1–16 The benefit from providing accounting information is increased decision usefulness. If the information is relevant and possesses faithful representation, it will improve the decisions made by investors and creditors. However, there are costs to providing information that include costs to gather, process, and disseminate that information. There also are costs to users in interpreting the information as well as possible adverse economic consequences that could result from disclosing information. Information should not be provided unless the benefits exceed the costs. Question 1–17 Information is material if it is deemed to have an effect on a decision made by a user. The threshold for materiality will depend principally on the relative dollar amount of the transaction being considered. One consequence of materiality is that GAAP need not be followed in measuring and reporting a transaction if that transaction is not material. The threshold for materiality has been left to subjective judgment