CHAPTER 1
The Financial Reporting Environment Solutions
Questions
Q1-1 Financial information is a much broader
concept than simply the financial statements and
footnotes to the financial statements. Financial
information includes items such as the President‘s
letter to the owners, management‘s discussion and
analysis, the auditors‘ report, the management
report and press releases. Of course, the basic
financial statements and footnotes are included in
the term financial information. The basic financial
statements are: the balance sheet (also referred to
as the statement of financial position), the
statement of comprehensive income (also referred
to as the statement of net income and the statement
of comprehensive income), the statement of cash
flows, and the statement of shareholders‘ equity.
Financial information is not synonymous with the
term financial statements because the financial
statements are a subset of the different types of
financial information provided.
Q1-2 The purpose of generating financial
statements is to provide useful information to users
,to evaluate economic entities and make efficient
resource allocation decisions based on the risks and
returns of a particular investment. The Financial
Accounting Standards Board (FASB) identifies
investors, lenders and other creditors as the
primary users of the financial statements. The
financial statements are the culmination of the
financial reporting process.
Q1-3 Capital is a scarce resource. Investors and
creditors have to make decisions as to how much
capital to invest in any given entity; therefore, they
demand relevant and faithfully representative
information about the economic performance and
financial position of a company. This information is
provided in the financial statements.
Q1-4 External auditors ensure that the
management of a company has prepared financial
statements in accordance with Generally Accepted
Accounting Principles and fairly present the
financial position and economic performance of a
company. In addition, external auditors must be an
independent party and cannot be employees of the
company they are auditing. External auditors
provide a significant amount of credibility to the
,financial statements.
Q1-5 Data analytics is the process of analyzing
large data sets in order to draw useful conclusions.
It involves converting raw data into useful
knowledge. In financial reporting, data analytics
can be used to improve the quality of estimates and
valuations.
Q1-6 Standard setters create accounting concepts,
rules, and guidelines to ensure that financial
statements accurately present the economic
performance and financial position of a firm. The
standards encourage transparent and truthful
reporting.
, 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 U.S. companies listed on U.S. stock
exchanges do not have the option to report under
IFRS. However, foreign companies that trade in the
U.S. exchanges can report under IFRS. The SEC
permits the use of IFRS-based financial statements
by international companies with shares trading on
U.S. stock exchanges.
Q1-8 The FASB seeks and welcomes comments
from all parties in the financial reporting process
including managers, investors, accountants,
preparers, creditors, lenders, financial statement
users, governmental agencies, financial analysts,
industry groups, and auditors. FASB also receives
feedback from public roundtable discussions, public
meetings, the FASAC, the Private Company
Council, and EITF.
Q1-9 Yes, the promulgation of financial accounting
standards is a political process. There are several
groups that influence the standard setting process.
The standard setting process is a political process
that is affected by the impact of several lobbying
groups. The government, through the SEC,
influences accounting standards. The SEC has the
© 2021 Pearson Education, Inc.
The Financial Reporting Environment Solutions
Questions
Q1-1 Financial information is a much broader
concept than simply the financial statements and
footnotes to the financial statements. Financial
information includes items such as the President‘s
letter to the owners, management‘s discussion and
analysis, the auditors‘ report, the management
report and press releases. Of course, the basic
financial statements and footnotes are included in
the term financial information. The basic financial
statements are: the balance sheet (also referred to
as the statement of financial position), the
statement of comprehensive income (also referred
to as the statement of net income and the statement
of comprehensive income), the statement of cash
flows, and the statement of shareholders‘ equity.
Financial information is not synonymous with the
term financial statements because the financial
statements are a subset of the different types of
financial information provided.
Q1-2 The purpose of generating financial
statements is to provide useful information to users
,to evaluate economic entities and make efficient
resource allocation decisions based on the risks and
returns of a particular investment. The Financial
Accounting Standards Board (FASB) identifies
investors, lenders and other creditors as the
primary users of the financial statements. The
financial statements are the culmination of the
financial reporting process.
Q1-3 Capital is a scarce resource. Investors and
creditors have to make decisions as to how much
capital to invest in any given entity; therefore, they
demand relevant and faithfully representative
information about the economic performance and
financial position of a company. This information is
provided in the financial statements.
Q1-4 External auditors ensure that the
management of a company has prepared financial
statements in accordance with Generally Accepted
Accounting Principles and fairly present the
financial position and economic performance of a
company. In addition, external auditors must be an
independent party and cannot be employees of the
company they are auditing. External auditors
provide a significant amount of credibility to the
,financial statements.
Q1-5 Data analytics is the process of analyzing
large data sets in order to draw useful conclusions.
It involves converting raw data into useful
knowledge. In financial reporting, data analytics
can be used to improve the quality of estimates and
valuations.
Q1-6 Standard setters create accounting concepts,
rules, and guidelines to ensure that financial
statements accurately present the economic
performance and financial position of a firm. The
standards encourage transparent and truthful
reporting.
, 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 U.S. companies listed on U.S. stock
exchanges do not have the option to report under
IFRS. However, foreign companies that trade in the
U.S. exchanges can report under IFRS. The SEC
permits the use of IFRS-based financial statements
by international companies with shares trading on
U.S. stock exchanges.
Q1-8 The FASB seeks and welcomes comments
from all parties in the financial reporting process
including managers, investors, accountants,
preparers, creditors, lenders, financial statement
users, governmental agencies, financial analysts,
industry groups, and auditors. FASB also receives
feedback from public roundtable discussions, public
meetings, the FASAC, the Private Company
Council, and EITF.
Q1-9 Yes, the promulgation of financial accounting
standards is a political process. There are several
groups that influence the standard setting process.
The standard setting process is a political process
that is affected by the impact of several lobbying
groups. The government, through the SEC,
influences accounting standards. The SEC has the
© 2021 Pearson Education, Inc.
