Solution manual for intermediate accounting 3rd
edition elizabeth a gordon jana s raedy alexander
j sannella
CHAPTER 1 a q
The Financial Reporting Environment Solutio aq aq aq aq
ns
Questions
Q1-
1 Financial information is a much broader concept than simply the financial statements and footnote
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s to the financial statements. Financial information includes items such as the President‘s letter to the
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owners, management‘s discussion and analysis, the auditors‘ report, the management report and pre
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ss releases. Of course, the basic financial statements and footnotes are included in the term financial
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information. The basic financial statements are: the balance sheet (also referred to as the statement
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of financial position), the statement of comprehensive income (also referred to as the statement of n
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et income and the statement of comprehensive income), the statement of cash flows, and the stateme
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nt of shareholders‘ equity. Financial information is not synonymous with the term financial stateme
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nts because the financial statements are a subset of the different types of financial information provi
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
ded.
Q1-
2 The purpose of generating financial statements is to provide useful information to users to evaluate
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economic entities and make efficient resource allocation decisions based on the risks and returns of
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a particular investment. The Financial Accounting Standards Board (FASB) identifies investors, le
aq aq aq aq aq aq aq aq aq aq aq
nders and other creditors as the primary users of the financial statements. The financial statements a
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
re 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 t
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o invest in any given entity; therefore, they demand relevant and faithfully representative informatio
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n about the economic performance and financial position of a company. This information is provide
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d in the financial statements.
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Q1-
4 External auditors ensure that the management of a company has prepared financial statements in a
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ccordance with Generally Accepted Accounting Principles and fairly present the financial position a
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nd economic performance of a company. In addition, external auditors must be an independent party
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,and cannot be employees of the company they are auditing. External auditors provide a significant
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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 inv
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
olves converting raw data into useful knowledge. In financial reporting, data analytics can be used to
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq a
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 statemen
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ts accurately present the economic performance and financial position of a firm. The standards enco
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urage transparent and truthful reporting.
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,
, 1-2 aq aq a q S O L UT I O N S M A N U A L F O R
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Q1-
7 U.S. companies listed on U.S. stock exchanges do not have the option to report under IFRS. Howe
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ver, foreign companies that trade in the U.S. exchanges can report under IFRS. The SEC permits the
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use of IFRS- aq aq
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 inclu
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ding managers, investors, accountants, preparers, creditors, lenders, financial statement users, gove
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rnmentalagencies, financial analysts, industrygroups, and auditors. FASB also receives feedback fr
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om public roundtable discussions, public meetings, the FASAC, the Private Company Council, and
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EITF.
q
Q1-
9 Yes, the promulgation of financial accounting standards is a political process. There are several gr
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oups that influence the standard setting process. The standard setting process is a political process th
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
at is affected by the impact of several lobbying groups. The government, throughthe SEC, influence
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
s accounting standards. The SEC has the authorityto issue accounting standards but has assigned this
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
responsibility to the private sector. Nonetheless, the SEC can exert pressure on the FASB to issue ac
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
counting standards and veto the standards promulgated by the FASB. Auditing firms, the corporate
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sector, creditors, financial analysts, the financial community, accounting organizations, industrygr
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oups, and investors can influence the FASB by written comments about Exposure Drafts and partici
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pation in public meetings and public roundtables regarding a proposed financial reporting standard.
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Q1-10 A principles- aq aq
based standard is consistent with a theoretical framework. In contrast, a rules-
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based standard does not necessarilyrely on a consistent theoretical framework. Rather, it contains
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more specific and prescriptive rules. aq aq aq aq
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 t
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he movement toward the use of fair value measurements as an alternative to historical cost. FASB h
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
as also focused on the promulgation of principles-based standards instead of rules-based standards.
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Brief Exercises Soluti aq aq
on to BE1-1 aq aq
General-
purpose financial statements provide general financial information about an entity that will be usefu
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l to many types of users. General-
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purpose financial statements provide information to a wide spectrum of user groups: investors, credi
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tors, financial analysts, customers, employees, competitors, suppliers, unions, and government age
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ncies. Most financial information in general purpose financial statements is provided to satisfy users
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with limited ability or authority to obtain additional information, which includes investors and credit
aq aq aq aq aq aq aq aq aq aq aq aq aq
ors. The Financial Accounting Standards Board (FASB) identifies investors, lenders, and other cred
aq aq aq aq aq aq aq aq aq aq aq aq
itors as the primary users of the financial statements.
aq aq aq aq aq aq aq aq
© 2021 Pearson Education, Inc.
aq aq aq aq
edition elizabeth a gordon jana s raedy alexander
j sannella
CHAPTER 1 a q
The Financial Reporting Environment Solutio aq aq aq aq
ns
Questions
Q1-
1 Financial information is a much broader concept than simply the financial statements and footnote
aq aq aq aq aq aq aq aq aq aq aq aq aq aq
s to the financial statements. Financial information includes items such as the President‘s letter to the
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
owners, management‘s discussion and analysis, the auditors‘ report, the management report and pre
aq aq aq aq aq aq aq aq aq aq aq aq
ss releases. Of course, the basic financial statements and footnotes are included in the term financial
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
information. The basic financial statements are: the balance sheet (also referred to as the statement
aq aq aq aq aq aq aq aq aq a q aq aq aq aq aq
of financial position), the statement of comprehensive income (also referred to as the statement of n
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
et income and the statement of comprehensive income), the statement of cash flows, and the stateme
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
nt of shareholders‘ equity. Financial information is not synonymous with the term financial stateme
aq aq aq aq aq aq aq aq aq aq aq aq aq
nts because the financial statements are a subset of the different types of financial information provi
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
ded.
Q1-
2 The purpose of generating financial statements is to provide useful information to users to evaluate
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
economic entities and make efficient resource allocation decisions based on the risks and returns of
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
a particular investment. The Financial Accounting Standards Board (FASB) identifies investors, le
aq aq aq aq aq aq aq aq aq aq aq
nders and other creditors as the primary users of the financial statements. The financial statements a
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
re the culmination of the financial reporting process.
aq aq aq aq aq aq aq
Q1-
3 Capital is a scarce resource. Investors and creditors have to make decisions as to how much capital t
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
o invest in any given entity; therefore, they demand relevant and faithfully representative informatio
aq aq aq aq aq aq aq aq aq aq aq aq aq
n about the economic performance and financial position of a company. This information is provide
aq aq aq aq aq aq aq aq aq aq aq aq aq aq
d in the financial statements.
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Q1-
4 External auditors ensure that the management of a company has prepared financial statements in a
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
ccordance with Generally Accepted Accounting Principles and fairly present the financial position a
aq aq aq aq aq aq aq aq aq aq aq aq
nd economic performance of a company. In addition, external auditors must be an independent party
aq aq aq aq aq aq aq aq aq aq aq aq aq aq
,and cannot be employees of the company they are auditing. External auditors provide a significant
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
amount of credibility to the financial statements.
aq aq aq aq aq aq
Q1-
5 Data analytics is the process of analyzing large data sets in order to draw useful conclusions. It inv
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
olves converting raw data into useful knowledge. In financial reporting, data analytics can be used to
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq a
improve the quality of estimates and valuations.
q aq aq aq aq aq aq
Q1-
6 Standard setters create accounting concepts, rules, and guidelines to ensure that financial statemen
aq aq aq aq aq aq aq aq aq aq aq aq aq
ts accurately present the economic performance and financial position of a firm. The standards enco
aq aq aq aq aq aq aq aq aq aq aq aq aq aq
urage transparent and truthful reporting.
aq aq aq aq
,
, 1-2 aq aq a q S O L UT I O N S M A N U A L F O R
aq aq aq aq aq aq aq aq a q aq aq aq aq aq a q aq aq a q I N T E R M E D I A T E A C C O U N T ING
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Q1-
7 U.S. companies listed on U.S. stock exchanges do not have the option to report under IFRS. Howe
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
ver, foreign companies that trade in the U.S. exchanges can report under IFRS. The SEC permits the
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
use of IFRS- aq aq
based financial statements by international companies with shares trading on U.S. stock exchanges.
aq aq aq aq aq aq aq aq aq aq aq aq
Q1-
8 The FASB seeks and welcomes comments from all parties in the financial reporting process inclu
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ding managers, investors, accountants, preparers, creditors, lenders, financial statement users, gove
aq aq aq aq aq aq aq aq aq aq
rnmentalagencies, financial analysts, industrygroups, and auditors. FASB also receives feedback fr
aq aq aq aq aq aq aq aq aq aq aq aq
om public roundtable discussions, public meetings, the FASAC, the Private Company Council, and
aq aq aq aq aq aq aq aq aq aq aq aq a
EITF.
q
Q1-
9 Yes, the promulgation of financial accounting standards is a political process. There are several gr
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
oups that influence the standard setting process. The standard setting process is a political process th
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
at is affected by the impact of several lobbying groups. The government, throughthe SEC, influence
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
s accounting standards. The SEC has the authorityto issue accounting standards but has assigned this
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
responsibility to the private sector. Nonetheless, the SEC can exert pressure on the FASB to issue ac
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
counting standards and veto the standards promulgated by the FASB. Auditing firms, the corporate
aq aq aq aq aq aq aq aq aq aq aq aq aq aq
sector, creditors, financial analysts, the financial community, accounting organizations, industrygr
aq aq aq aq aq aq aq aq aq aq
oups, and investors can influence the FASB by written comments about Exposure Drafts and partici
aq aq aq aq aq aq aq aq aq aq aq aq aq aq
pation in public meetings and public roundtables regarding a proposed financial reporting standard.
aq aq aq aq aq aq aq aq aq aq aq aq
Q1-10 A principles- aq aq
based standard is consistent with a theoretical framework. In contrast, a rules-
aq aq aq aq aq aq aq aq aq aq aq
based standard does not necessarilyrely on a consistent theoretical framework. Rather, it contains
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more specific and prescriptive rules. aq aq aq aq
Q1-
11 Recently, the FASB has taken an asset/liability approach in setting standards. With this approac
aq aq aq aq aq aq aq aq aq aq aq aq aq aq
h, a transaction is recorded based on whether an asset or liability is created. Another trend has been t
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
he movement toward the use of fair value measurements as an alternative to historical cost. FASB h
aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq aq
as also focused on the promulgation of principles-based standards instead of rules-based standards.
aq aq aq aq aq aq aq aq aq aq aq aq
Brief Exercises Soluti aq aq
on to BE1-1 aq aq
General-
purpose financial statements provide general financial information about an entity that will be usefu
aq aq aq aq aq aq aq aq aq aq aq aq aq
l to many types of users. General-
aq aq aq aq aq aq
purpose financial statements provide information to a wide spectrum of user groups: investors, credi
aq aq aq aq aq aq aq aq aq aq aq aq aq
tors, financial analysts, customers, employees, competitors, suppliers, unions, and government age
aq aq aq aq aq aq aq aq aq aq
ncies. Most financial information in general purpose financial statements is provided to satisfy users
aq aq aq aq aq aq aq aq aq aq aq aq aq aq
with limited ability or authority to obtain additional information, which includes investors and credit
aq aq aq aq aq aq aq aq aq aq aq aq aq
ors. The Financial Accounting Standards Board (FASB) identifies investors, lenders, and other cred
aq aq aq aq aq aq aq aq aq aq aq aq
itors as the primary users of the financial statements.
aq aq aq aq aq aq aq aq
© 2021 Pearson Education, Inc.
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