CHAPTER 1 B
The Financial Reporting Environment Soluti
B B B B
ons
Questions
Q1-
1BFinancialBinformationBisBaBmuchBbroaderBconceptBthanBsimplyBtheBfinancialBstatementsBandBfoot
notesBtoBtheBfinancialBstatements.BFinancialBinformationBincludesBitemsBsuchBasBtheBPresident‘sBlet
terBtoBtheBowners,Bmanagement‘sBdiscussionBandBanalysis,BtheBauditors‘Breport,BtheBmanagementBr
eportBandBpressBreleases.BOfBcourse,BtheBbasicBfinancialBstatementsBandBfootnotesBareBincludedBinB
theBtermBfinancialBinformation.BTheBbasicBfinancialBstatementsBare:BtheBbalanceBsheetB(alsoB referr
edBtoBasBtheBstatementBofBfinancialBposition),BtheBstatementBofBcomprehensiveBincomeB(alsoBreferr
edBtoBasBtheBstatementBofBnetBincomeBandBtheBstatementBofBcomprehensiveBincome),BtheBstatement
BofBcashBflows,BandBtheBstatementBofBshareholders‘Bequity.BFinancialBinformationBisBnotBsynonym
ousBwithBtheBtermBfinancialBstatementsBbecauseBtheBfinancialBstatementsBareBaBsubsetBofBtheBdiffer
entBtypesBofBfinancialBinformationBprovided.
Q1-
2BTheBpurposeBofBgeneratingBfinancialBstatementsBisBtoBprovideBusefulBinformationBtoBusersBtoBeva
luateBeconomicBentitiesBandBmakeBefficientBresourceBallocationBdecisionsBbasedBonBtheBrisksBandB
returnsBofBaBparticularBinvestment.BTheBFinancialBAccountingBStandardsBBoardB(FASB)Bidentifie
sBinvestors,BlendersBandBotherBcreditorsBasBtheBprimaryBusersBofBtheBfinancialBstatements.BTheBfina
ncialBstatementsBareBtheBculminationBofBtheBfinancialBreportingBprocess.
Q1-
3BCapitalBisBaBscarceBresource.BInvestorsBandBcreditorsBhaveBtoBmakeBdecisionsBasBtoBhowBmuchBca
pitalBtoBinvestBinBanyBgivenBentity;Btherefore,BtheyBdemandBrelevantBandBfaithfullyBrepresentativeBi
nformationBaboutBtheBeconomicBperformanceBandBfinancialBpositionBofBaBcompany.BThisBinformat
ionBisBprovidedBinBtheBfinancialBstatements.
Q1-
4BExternalBauditorsBensureBthatBtheBmanagementBofBaBcompanyBhasBpreparedBfinancialBstatements
BinBaccordanceBwithBGenerallyBAcceptedBAccountingBPrinciplesBandBfairlyBpresentBtheBfinancialBp
ositionBandBeconomicBperformanceBofBaBcompany.BInBaddition,BexternalBauditorsBmustBbeBanBinde
pendentBpartyBandBcannotBbeBemployeesBofBtheBcompanyBtheyBareBauditing.BExternalBauditorsBpro
videBaBsignificantBamountBofBcredibilityBtoBtheBfinancialBstatements.
Q1-
5BDataBanalyticsBisBtheBprocessBofBanalyzingBlargeBdataBsetsBinBorderBtoBdrawBusefulBconclusions.B
ItBinvolvesBconvertingBrawBdataBintoBusefulBknowledge.BInBfinancialBreporting,BdataBanalyticsBcanB
beBusedBtoBimproveBtheBqualityBofBestimatesBandBvaluations.
Q1-
6BStandardBsettersBcreateBaccountingBconcepts,Brules,BandBguidelinesBtoBensureBthatBfinancialBstate
mentsBaccuratelyBpresentBtheBeconomicBperformanceBandBfinancialBpositionBofBaBfirm.BTheBstanda
rdsBencourageBtransparentBandBtruthfulBreporting.
,1B-B2B SBOBLBUBTBIBOBNBSB MBABNBUBABLB FBOBRB IBNBTBEBRBMBEBDBIBABTBEB ABCBCBO
BUBNBTBING B
Q1-
7BU.S.BcompaniesBlistedBonBU.S.BstockBexchangesBdoBnotBhaveBtheBoptionBtoBreportBunderBIFRS.B
However,BforeignBcompaniesBthatBtradeBinBtheBU.S.BexchangesBcanBreportBunderBIFRS.BTheBSECB
permitsBtheBuseBofBIFRS-
basedBfinancialBstatementsBbyBinternationalBcompaniesBwithBsharesBtradingBonBU.S.BstockBexchan
ges.
Q1-
8BTheBFASBBseeksBandBwelcomesBcommentsBfromBallBpartiesBinBtheBfinancialBreportingBprocessBi
ncludingBmanagers,Binvestors,Baccountants,Bpreparers,Bcreditors,Blenders,BfinancialBstatementBuse
rs,BgovernmentalBagencies,BfinancialBanalysts,BindustryBgroups,BandBauditors.BFASBBalsoBreceives
BfeedbackBfromBpublicBroundtableBdiscussions,BpublicBmeetings,BtheBFASAC,BtheBPrivateBCompa
nyBCouncil,BandBEITF.
Q1-
9BYes,BtheBpromulgationBofBfinancialBaccountingBstandardsBisBaBpoliticalBprocess.BThereBareBsever
alBgroupsBthatBinfluenceBtheBstandardBsettingBprocess.BTheBstandardBsettingBprocessBisBaBpoliticalB
processBthatBisBaffectedBbyBtheBimpactBofBseveralBlobbyingBgroups.BTheBgovernment,BthroughBtheB
SEC,BinfluencesBaccountingBstandards.BTheBSECBhasBtheBauthorityBtoBissueBaccountingBstandardsB
butBhasBassignedBthisBresponsibilityBtoBtheBprivateBsector.BNonetheless,BtheBSECBcanBexertBpressur
eBonBtheBFASBBtoBissueBaccountingBstandardsBandBvetoBtheBstandardsBpromulgatedBbyBtheBFASB.B
AuditingBfirms,BtheBcorporateBsector,Bcreditors,BfinancialBanalysts,BtheBfinancialBcommunity,Bacco
untingBorganizations,BindustryBgroups,BandBinvestorsBcanBinfluenceBtheBFASBBbyBwrittenBcommen
tsBaboutBExposureBDraftsBandBparticipationBinBpublicBmeetingsBandBpublicBroundtablesBregardingB
aBproposedBfinancialBreportingBstandard.
Q1-10BABprinciples-
basedBstandardBisBconsistentBwithBaBtheoreticalBframework.BInBcontrast,BaBrules-
basedBstandardBdoesBnotBnecessarilyBrelyBonBaBconsistentBtheoreticalBframework.BRather,BitBcont
ainsBmoreBspecificBandBprescriptiveBrules.
Q1-
11BRecently,BtheBFASBBhasBtakenBanBasset/liabilityBapproachBinBsettingBstandards.BWithBthisBappr
oach,BaBtransactionBisBrecordedBbasedBonBwhetherBanBassetBorBliabilityBisBcreated.BAnotherBtrendBh
asBbeenBtheBmovementBtowardBtheBuseBofBfairBvalueBmeasurementsBasBanBalternativeBtoBhistoricalB
cost.BFASBBhasBalsoBfocusedBonBtheBpromulgationBofBprinciples-basedBstandardsBinsteadBofBrules-
basedBstandards.
BriefBExercisesBSolut
ionBtoBBE1-1
General-
purposeBfinancialBstatementsBprovideBgeneralBfinancialBinformationBaboutBanBentityBthatBwillBbeBu
sefulBtoBmanyBtypesBofBusers.BGeneral-
purposeBfinancialBstatementsBprovideBinformationBtoBaBwideBspectrumBofBuserBgroups:Binvestors,Bc
reditors,BfinancialBanalysts,Bcustomers,Bemployees,Bcompetitors,Bsuppliers,Bunions,BandBgovernme
ntBagencies.BMostBfinancialBinformationBinBgeneralBpurposeBfinancialBstatementsBisBprovidedBtoBsa
tisfyBusersBwithBlimitedBabilityBorBauthorityBtoBobtainBadditionalBinformation,BwhichBincludesBinve
storsBandBcreditors.BTheBFinancialBAccountingBStandardsBBoardB(FASB)BidentifiesBinvestors,Blen
©B2021BPearsonBEducation,BInc
.
, CBHBABPBTBEBRB 1B TBHBEB FBIBNBABNBCBIBABLB RBEBPBOBRBTBIBNBGB EBNBVBIBR 1B-B3B
BOBNBMBEBNBT
ders,BandBotherBcreditorsBasBtheBprimaryBusersBofBtheBfinancialBstatements.
©B2021BPearsonBEducation,BInc
.
, 1B-B4B SBOBLBUBTBIBOBNBSB MBABNBUBABLB FBOBRB IBNBTBEBRBMBEBDBIBABTBEB ABCBCBO
BUBNBTBING B
SolutionBtoBBE1-2
FinancialBaccountingBisBtheBprocessBofBidentifying,Bmeasuring,BandBcommunicatingBfinancialBinfo
rmationBaboutBanBeconomicBentityBtoBvariousBuserBgroupsBwithinBtheBlegal,Beconomic,Bpolitical,Ba
ndBsocialBenvironment.BThisBdefinitionBcontainsBfourBmajorBelements:B1.B FinancialBinformation;B
2.EconomicBentity;B3.BUserBgroupsBandB4.BLegal,Beconomic,Bpolitical,BandBsocialBenvironment
SolutionBtoBBE1-3
FinancialBStatementBUsersB
andBOtherBParties Role
B10BEquityBInvestors 10. AreBshareholdersBofBtheBcompany.
1. AreBbanksBandBotherBfinancialBinstitutionsBthatBlen
B1BCreditors dBmoneyBtoBtheBcompany.
5.B UseBfinancialBinformationBtoBreviewBandBanalyze
B5BFinancialBAnalysts BreportedBresultsBofBtheBcompaniesBtheyBcoverBan
dBmakeBinvestmentBrecommendations.
B8BEmployeesBandBLaborBUnions
8. UseBfinancialBinformationBduringBnegotiationBofBne
B2BSuppliersBandBCustomers wBlaborBagreementsBandBcompensationBcontracts.
2. UseBfinancialBstatementsBtoBdetermineBwhetherBto
B7BGovernmentBAgencies BconductBbusinessBorBpurchaseBproductsBfromBaBc
ompany.
B 3BCompetitors 7.B ReviewBtheBfinancialBstatementsBofBpubliclyBtradedBc
ompaniesBforBaBvarietyBofBreasonsBthatBareBinBtheBpu
B4BExternalBAuditors
blicBinterest.
B6BInternalBAuditors 3. UseBfinancialBinformationBtoBdetermineBtheirBmarket
BpositionBrelativeBtoBtheBreportingBentityBandBtoBatte
B11BRegulatoryBBodies mptBtoBidentifyBfutureBstrategiesBofBtheBreportingBen
tity.
B9BProfessionalBOrganizations 4. AreBindependentBofBtheBcompanyBandBresponsible
BforBensuringBthatBmanagementBpreparesBandBissue
sBfinancialBstatementsBthatBcomplyBwithBaccounti
ngBstandardsBandBfairlyBpresentBtheBfinancialBposit
ionBandBeconomicBperformanceBofBtheBcompany.
6.B AreBemployeesBofBtheBcompanyBservingBinBanBadviso
ryBroleBtoBmanagement.BTheyBprovideBinformationBt
oBmanagementBregardingBtheBcompany‘sBoperationsB
andBproperBfunctioningBofBitsBinternalBcontrols.
11. ProtectBinvestorsBandBoverseeBtheBaccountingBand
BauditingBstandardBsettingBprocesses.
9. SupportBaccountingBprofessionalsBthroughoutBtheir
©B2021BPearsonBEducation,BInc
.
The Financial Reporting Environment Soluti
B B B B
ons
Questions
Q1-
1BFinancialBinformationBisBaBmuchBbroaderBconceptBthanBsimplyBtheBfinancialBstatementsBandBfoot
notesBtoBtheBfinancialBstatements.BFinancialBinformationBincludesBitemsBsuchBasBtheBPresident‘sBlet
terBtoBtheBowners,Bmanagement‘sBdiscussionBandBanalysis,BtheBauditors‘Breport,BtheBmanagementBr
eportBandBpressBreleases.BOfBcourse,BtheBbasicBfinancialBstatementsBandBfootnotesBareBincludedBinB
theBtermBfinancialBinformation.BTheBbasicBfinancialBstatementsBare:BtheBbalanceBsheetB(alsoB referr
edBtoBasBtheBstatementBofBfinancialBposition),BtheBstatementBofBcomprehensiveBincomeB(alsoBreferr
edBtoBasBtheBstatementBofBnetBincomeBandBtheBstatementBofBcomprehensiveBincome),BtheBstatement
BofBcashBflows,BandBtheBstatementBofBshareholders‘Bequity.BFinancialBinformationBisBnotBsynonym
ousBwithBtheBtermBfinancialBstatementsBbecauseBtheBfinancialBstatementsBareBaBsubsetBofBtheBdiffer
entBtypesBofBfinancialBinformationBprovided.
Q1-
2BTheBpurposeBofBgeneratingBfinancialBstatementsBisBtoBprovideBusefulBinformationBtoBusersBtoBeva
luateBeconomicBentitiesBandBmakeBefficientBresourceBallocationBdecisionsBbasedBonBtheBrisksBandB
returnsBofBaBparticularBinvestment.BTheBFinancialBAccountingBStandardsBBoardB(FASB)Bidentifie
sBinvestors,BlendersBandBotherBcreditorsBasBtheBprimaryBusersBofBtheBfinancialBstatements.BTheBfina
ncialBstatementsBareBtheBculminationBofBtheBfinancialBreportingBprocess.
Q1-
3BCapitalBisBaBscarceBresource.BInvestorsBandBcreditorsBhaveBtoBmakeBdecisionsBasBtoBhowBmuchBca
pitalBtoBinvestBinBanyBgivenBentity;Btherefore,BtheyBdemandBrelevantBandBfaithfullyBrepresentativeBi
nformationBaboutBtheBeconomicBperformanceBandBfinancialBpositionBofBaBcompany.BThisBinformat
ionBisBprovidedBinBtheBfinancialBstatements.
Q1-
4BExternalBauditorsBensureBthatBtheBmanagementBofBaBcompanyBhasBpreparedBfinancialBstatements
BinBaccordanceBwithBGenerallyBAcceptedBAccountingBPrinciplesBandBfairlyBpresentBtheBfinancialBp
ositionBandBeconomicBperformanceBofBaBcompany.BInBaddition,BexternalBauditorsBmustBbeBanBinde
pendentBpartyBandBcannotBbeBemployeesBofBtheBcompanyBtheyBareBauditing.BExternalBauditorsBpro
videBaBsignificantBamountBofBcredibilityBtoBtheBfinancialBstatements.
Q1-
5BDataBanalyticsBisBtheBprocessBofBanalyzingBlargeBdataBsetsBinBorderBtoBdrawBusefulBconclusions.B
ItBinvolvesBconvertingBrawBdataBintoBusefulBknowledge.BInBfinancialBreporting,BdataBanalyticsBcanB
beBusedBtoBimproveBtheBqualityBofBestimatesBandBvaluations.
Q1-
6BStandardBsettersBcreateBaccountingBconcepts,Brules,BandBguidelinesBtoBensureBthatBfinancialBstate
mentsBaccuratelyBpresentBtheBeconomicBperformanceBandBfinancialBpositionBofBaBfirm.BTheBstanda
rdsBencourageBtransparentBandBtruthfulBreporting.
,1B-B2B SBOBLBUBTBIBOBNBSB MBABNBUBABLB FBOBRB IBNBTBEBRBMBEBDBIBABTBEB ABCBCBO
BUBNBTBING B
Q1-
7BU.S.BcompaniesBlistedBonBU.S.BstockBexchangesBdoBnotBhaveBtheBoptionBtoBreportBunderBIFRS.B
However,BforeignBcompaniesBthatBtradeBinBtheBU.S.BexchangesBcanBreportBunderBIFRS.BTheBSECB
permitsBtheBuseBofBIFRS-
basedBfinancialBstatementsBbyBinternationalBcompaniesBwithBsharesBtradingBonBU.S.BstockBexchan
ges.
Q1-
8BTheBFASBBseeksBandBwelcomesBcommentsBfromBallBpartiesBinBtheBfinancialBreportingBprocessBi
ncludingBmanagers,Binvestors,Baccountants,Bpreparers,Bcreditors,Blenders,BfinancialBstatementBuse
rs,BgovernmentalBagencies,BfinancialBanalysts,BindustryBgroups,BandBauditors.BFASBBalsoBreceives
BfeedbackBfromBpublicBroundtableBdiscussions,BpublicBmeetings,BtheBFASAC,BtheBPrivateBCompa
nyBCouncil,BandBEITF.
Q1-
9BYes,BtheBpromulgationBofBfinancialBaccountingBstandardsBisBaBpoliticalBprocess.BThereBareBsever
alBgroupsBthatBinfluenceBtheBstandardBsettingBprocess.BTheBstandardBsettingBprocessBisBaBpoliticalB
processBthatBisBaffectedBbyBtheBimpactBofBseveralBlobbyingBgroups.BTheBgovernment,BthroughBtheB
SEC,BinfluencesBaccountingBstandards.BTheBSECBhasBtheBauthorityBtoBissueBaccountingBstandardsB
butBhasBassignedBthisBresponsibilityBtoBtheBprivateBsector.BNonetheless,BtheBSECBcanBexertBpressur
eBonBtheBFASBBtoBissueBaccountingBstandardsBandBvetoBtheBstandardsBpromulgatedBbyBtheBFASB.B
AuditingBfirms,BtheBcorporateBsector,Bcreditors,BfinancialBanalysts,BtheBfinancialBcommunity,Bacco
untingBorganizations,BindustryBgroups,BandBinvestorsBcanBinfluenceBtheBFASBBbyBwrittenBcommen
tsBaboutBExposureBDraftsBandBparticipationBinBpublicBmeetingsBandBpublicBroundtablesBregardingB
aBproposedBfinancialBreportingBstandard.
Q1-10BABprinciples-
basedBstandardBisBconsistentBwithBaBtheoreticalBframework.BInBcontrast,BaBrules-
basedBstandardBdoesBnotBnecessarilyBrelyBonBaBconsistentBtheoreticalBframework.BRather,BitBcont
ainsBmoreBspecificBandBprescriptiveBrules.
Q1-
11BRecently,BtheBFASBBhasBtakenBanBasset/liabilityBapproachBinBsettingBstandards.BWithBthisBappr
oach,BaBtransactionBisBrecordedBbasedBonBwhetherBanBassetBorBliabilityBisBcreated.BAnotherBtrendBh
asBbeenBtheBmovementBtowardBtheBuseBofBfairBvalueBmeasurementsBasBanBalternativeBtoBhistoricalB
cost.BFASBBhasBalsoBfocusedBonBtheBpromulgationBofBprinciples-basedBstandardsBinsteadBofBrules-
basedBstandards.
BriefBExercisesBSolut
ionBtoBBE1-1
General-
purposeBfinancialBstatementsBprovideBgeneralBfinancialBinformationBaboutBanBentityBthatBwillBbeBu
sefulBtoBmanyBtypesBofBusers.BGeneral-
purposeBfinancialBstatementsBprovideBinformationBtoBaBwideBspectrumBofBuserBgroups:Binvestors,Bc
reditors,BfinancialBanalysts,Bcustomers,Bemployees,Bcompetitors,Bsuppliers,Bunions,BandBgovernme
ntBagencies.BMostBfinancialBinformationBinBgeneralBpurposeBfinancialBstatementsBisBprovidedBtoBsa
tisfyBusersBwithBlimitedBabilityBorBauthorityBtoBobtainBadditionalBinformation,BwhichBincludesBinve
storsBandBcreditors.BTheBFinancialBAccountingBStandardsBBoardB(FASB)BidentifiesBinvestors,Blen
©B2021BPearsonBEducation,BInc
.
, CBHBABPBTBEBRB 1B TBHBEB FBIBNBABNBCBIBABLB RBEBPBOBRBTBIBNBGB EBNBVBIBR 1B-B3B
BOBNBMBEBNBT
ders,BandBotherBcreditorsBasBtheBprimaryBusersBofBtheBfinancialBstatements.
©B2021BPearsonBEducation,BInc
.
, 1B-B4B SBOBLBUBTBIBOBNBSB MBABNBUBABLB FBOBRB IBNBTBEBRBMBEBDBIBABTBEB ABCBCBO
BUBNBTBING B
SolutionBtoBBE1-2
FinancialBaccountingBisBtheBprocessBofBidentifying,Bmeasuring,BandBcommunicatingBfinancialBinfo
rmationBaboutBanBeconomicBentityBtoBvariousBuserBgroupsBwithinBtheBlegal,Beconomic,Bpolitical,Ba
ndBsocialBenvironment.BThisBdefinitionBcontainsBfourBmajorBelements:B1.B FinancialBinformation;B
2.EconomicBentity;B3.BUserBgroupsBandB4.BLegal,Beconomic,Bpolitical,BandBsocialBenvironment
SolutionBtoBBE1-3
FinancialBStatementBUsersB
andBOtherBParties Role
B10BEquityBInvestors 10. AreBshareholdersBofBtheBcompany.
1. AreBbanksBandBotherBfinancialBinstitutionsBthatBlen
B1BCreditors dBmoneyBtoBtheBcompany.
5.B UseBfinancialBinformationBtoBreviewBandBanalyze
B5BFinancialBAnalysts BreportedBresultsBofBtheBcompaniesBtheyBcoverBan
dBmakeBinvestmentBrecommendations.
B8BEmployeesBandBLaborBUnions
8. UseBfinancialBinformationBduringBnegotiationBofBne
B2BSuppliersBandBCustomers wBlaborBagreementsBandBcompensationBcontracts.
2. UseBfinancialBstatementsBtoBdetermineBwhetherBto
B7BGovernmentBAgencies BconductBbusinessBorBpurchaseBproductsBfromBaBc
ompany.
B 3BCompetitors 7.B ReviewBtheBfinancialBstatementsBofBpubliclyBtradedBc
ompaniesBforBaBvarietyBofBreasonsBthatBareBinBtheBpu
B4BExternalBAuditors
blicBinterest.
B6BInternalBAuditors 3. UseBfinancialBinformationBtoBdetermineBtheirBmarket
BpositionBrelativeBtoBtheBreportingBentityBandBtoBatte
B11BRegulatoryBBodies mptBtoBidentifyBfutureBstrategiesBofBtheBreportingBen
tity.
B9BProfessionalBOrganizations 4. AreBindependentBofBtheBcompanyBandBresponsible
BforBensuringBthatBmanagementBpreparesBandBissue
sBfinancialBstatementsBthatBcomplyBwithBaccounti
ngBstandardsBandBfairlyBpresentBtheBfinancialBposit
ionBandBeconomicBperformanceBofBtheBcompany.
6.B AreBemployeesBofBtheBcompanyBservingBinBanBadviso
ryBroleBtoBmanagement.BTheyBprovideBinformationBt
oBmanagementBregardingBtheBcompany‘sBoperationsB
andBproperBfunctioningBofBitsBinternalBcontrols.
11. ProtectBinvestorsBandBoverseeBtheBaccountingBand
BauditingBstandardBsettingBprocesses.
9. SupportBaccountingBprofessionalsBthroughoutBtheir
©B2021BPearsonBEducation,BInc
.
