The Financial Reporting Environment Solutions// SOLUTION MANUAL// ALL CHAPTERS

CHAPTER 1
The Financial Reporting Environment
Solutions
Questions

Q1-
1 Financial information is a much broader concept than simply the financial statements and footnot
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es to the financial statements. Financial information includes items such as the President‘s letter to t
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he owners, management‘s discussion and analysis, the auditors‘ report, the management report and
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press releases. Of course, the basic financial statements and footnotes are included in the term finan
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cial information. The basic financial statements are: the balance sheet (also referred to as the state
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ment of financial position), the statement of comprehensive income (also referred to as the stateme
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nt of net income and the statement of comprehensive income), the statement of cash flows, and the
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statement of shareholders‘ equity. Financial information is not synonymous with the term financial
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statements because the financial statements are a subset of the different types of financial informat
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ion provided. AJ




Q1-
2 The purpose of generating financial statements is to provide useful information to users to evaluat
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e economic entities and make efficient resource allocation decisions based on the risks and returns
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of a particular investment. The Financial Accounting Standards Board (FASB) identifies investors
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, lenders and other creditors as the primary users of the financial statements. The financial stateme
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nts are the culmination of the financial reporting process.
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Q1-
3 Capital is a scarce resource. Investors and creditors have to make decisions as to how much capital
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to invest in any given entity; therefore, they demand relevant and faithfully representative informati
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on about the economic performance and financial position of a company. This information is provi
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ded in the financial statements.
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Q1-
4 External auditors ensure that the management of a company has prepared financial statements in
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accordance with Generally Accepted Accounting Principles and fairly present the financial position
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and economic performance of a company. In addition, external auditors must be an independent pa
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rty and cannot be employees of the company they are auditing. External auditors provide a signific
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ant amount of credibility to the financial statements.
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Q1-
5 Data analytics is the process of analyzing large data sets in order to draw useful conclusions. It in
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volves converting raw data into useful knowledge. In financial reporting, data analytics can be used
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to improve the quality of estimates and valuations.
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Q1-
6 Standard setters create accounting concepts, rules, and guidelines to ensure that financial stateme
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nts accurately present the economic performance and financial position of a firm. The standards en
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courage transparent and truthful reporting. AJ AJ AJ AJ

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Q1-
7 U.S. companies listed on U.S. stock exchanges do not have the option to report under IFRS. How
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ever, foreign companies that trade in the U.S. exchanges can report under IFRS. The SEC permits th
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e use of IFRS-
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based financial statements by international companies with shares trading on U.S. stock exchanges
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.

Q1-
8 The FASB seeks and welcomes comments from all parties in the financial reporting process incl
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uding managers, investors, accountants, preparers, creditors, lenders, financial statement users, go
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vernmental agencies, financial analysts, industry groups, and auditors. FASB also receives feedbac
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k from public roundtable discussions, public meetings, the FASAC, the Private Company Council,
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and EITF.
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Q1-
9 Yes, the promulgation of financial accounting standards is a political process. There are several g
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roups that influence the standard setting process. The standard setting process is a political process
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that is affected by the impact of several lobbying groups. The government, through the SEC, influe
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nces accounting standards. The SEC has the authority to issue accounting standards but has assigne
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d this responsibility to the private sector. Nonetheless, the SEC can exert pressure on the FASB to i
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ssue accounting standards and veto the standards promulgated by the FASB. Auditing firms, the co
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rporate sector, creditors, financial analysts, the financial community, accounting organizations, in
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dustry groups, and investors can influence the FASB by written comments about Exposure Drafts a
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nd participation in public meetings and public roundtables regarding a proposed financial reportin
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g standard.
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Q1-10 A principles- AJ AJ




based standard is consistent with a theoretical framework. In contrast, a rules-
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based standard does not necessarily rely on a consistent theoretical framework. Rather, it contain
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s more specific and prescriptive rules.
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Q1-
11 Recently, the FASB has taken an asset/liability approach in setting standards. With this approac
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h, a transaction is recorded based on whether an asset or liability is created. Another trend has been
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the movement toward the use of fair value measurements as an alternative to historical cost. FASB
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has also focused on the promulgation of principles-based standards instead of rules-
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based standards. AJ




Brief Exercises Soluti AJ AJ




on to BE1-1 AJ AJ




General-
purpose financial statements provide general financial information about an entity that will be usef
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ul to many types of users. General-
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purpose financial statements provide information to a wide spectrum of user groups: investors, cred
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itors, financial analysts, customers, employees, competitors, suppliers, unions, and government ag
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encies. Most financial information in general purpose financial statements is provided to satisfy use
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rs with limited ability or authority to obtain additional information, which includes investors and cr
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editors. The Financial Accounting Standards Board (FASB) identifies investors, lenders, and other
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© 2021 Pearson Education, Inc.
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, C H AP T E R 1
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creditors as the primary users of the financial statements.
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© 2021 Pearson Education, Inc.
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Solution to BE1-2 AJ AJ




Financial accounting is the process of identifying, measuring, and communicating financial infor
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mation about an economic entity to various user groups within the legal, economic, political, and s
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ocial environment. This definition contains four major elements: 1. Financial information; 2.Econ
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omic entity; 3. User groups and 4. Legal, economic, political, and social environment
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Solution to BE1-3 AJ AJ




Financial Statement Users a AJ AJ AJ




nd Other Parties AJ AJ Role
10. Are shareholders of the company.
10 Equity Investors
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1. Are banks and other financial institutions that lend
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money to the company. AJ AJ AJ




5. Use financial information to review and analyze r
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AJ 5 Financial Analysts
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eported results of the companies they cover and m AJ AJ AJ AJ AJ AJ AJ AJ




ake investment recommendations. AJ AJ



AJ 8 Employees and Labor Unions
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8. Use financial information during negotiation of ne
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AJ 2 Suppliers and Customers
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w labor agreements and compensation contracts.
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2. Use financial statements to determine whether to c
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7 Government Agencies
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onduct business or purchase products from a com AJ AJ AJ AJ AJ AJ AJ




pany.
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7. Review the financial statements of publicly traded co
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mpanies for a variety of reasons that are in the public
4 External Auditors
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interest.
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3. Use financial information to determine their market p
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osition relative to the reporting entity and to attempt AJ AJ AJ AJ AJ AJ AJ AJ AJ




AJ 11 Regulatory Bodies
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4. Are independent of the company and responsible f
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9 Professional Organizations
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or ensuring that management prepares and issues fi
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nancial statements that comply with accounting st AJ AJ AJ AJ AJ AJ




andards and fairly present the financial position an AJ AJ AJ AJ AJ AJ AJ




d economic performance of the company.
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6. Are employees of the company serving in an advisor
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y role to management. They provide information to
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management regarding the company‘s operations and AJ AJ AJ AJ AJ




proper functioning of its internal controls.
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11. Protect investors and oversee the accounting and a AJ AJ AJ AJ AJ AJ AJ




uditing standard setting processes. AJ AJ AJ




9. Support accounting professionals throughout their AJ AJ AJ AJ




© 2021 Pearson Education, Inc.
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