CHAPTER 1
The Financial Reporting Environment
Solutions
Questions
Q1-
1JFinancialJinformationJisJaJmuchJbroaderJconceptJthanJsimplyJtheJfinancialJstatementsJandJfootno
tesJtoJtheJfinancialJstatements.JFinancialJinformationJincludesJitemsJsuchJasJtheJPresident‘sJletterJtoJ
theJowners,Jmanagement‘sJdiscussionJandJanalysis,JtheJauditors‘Jreport,JtheJmanagementJreportJan
dJpressJreleases.JOfJcourse,JtheJbasicJfinancialJstatementsJandJfootnotesJareJincludedJinJtheJtermJfin
ancialJinformation.JTheJbasicJfinancialJstatementsJare:JtheJbalanceJsheetJ(alsoJ referredJtoJasJtheJsta
tementJofJfinancialJposition),JtheJstatementJofJcomprehensiveJincomeJ(alsoJreferredJtoJasJtheJstate
mentJofJnetJincomeJandJtheJstatementJofJcomprehensiveJincome),JtheJstatementJofJcashJflows,JandJ
theJstatementJofJshareholders‘Jequity.JFinancialJinformationJisJnotJsynonymousJwithJtheJtermJfina
ncialJstatementsJbecauseJtheJfinancialJstatementsJareJaJsubsetJofJtheJdifferentJtypesJofJfinancialJinf
ormationJprovided.
Q1-
2JTheJpurposeJofJgeneratingJfinancialJstatementsJisJtoJprovideJusefulJinformationJtoJusersJtoJevalua
teJeconomicJentitiesJandJmakeJefficientJresourceJallocationJdecisionsJbasedJonJtheJrisksJandJreturn
sJofJaJparticularJinvestment.JTheJFinancialJAccountingJStandardsJBoardJ(FASB)JidentifiesJinvesto
rs,JlendersJandJotherJcreditorsJasJtheJprimaryJusersJofJtheJfinancialJstatements.JTheJfinancialJstatem
entsJareJtheJculminationJofJtheJfinancialJreportingJprocess.
Q1-
3JCapitalJisJaJscarceJresource.JInvestorsJandJcreditorsJhaveJtoJmakeJdecisionsJasJtoJhowJmuchJcapita
lJtoJinvestJinJanyJgivenJentity;Jtherefore,JtheyJdemandJrelevantJandJfaithfullyJrepresentativeJinform
ationJaboutJtheJeconomicJperformanceJandJfinancialJpositionJofJaJcompany.JThisJinformationJisJpr
ovidedJinJtheJfinancialJstatements.
Q1-
4JExternalJauditorsJensureJthatJtheJmanagementJofJaJcompanyJhasJpreparedJfinancialJstatementsJin
JaccordanceJwithJGenerallyJAcceptedJAccountingJPrinciplesJandJfairlyJpresentJtheJfinancialJpositio
nJandJeconomicJperformanceJofJaJcompany.JInJaddition,JexternalJauditorsJmustJbeJanJindependentJ
partyJandJcannotJbeJemployeesJofJtheJcompanyJtheyJareJauditing.JExternalJauditorsJprovideJaJsigni
ficantJamountJofJcredibilityJtoJtheJfinancialJstatements.
Q1-
5JDataJanalyticsJisJtheJprocessJofJanalyzingJlargeJdataJsetsJinJorderJtoJdrawJusefulJconclusions.JItJi
nvolvesJconvertingJrawJdataJintoJusefulJknowledge.JInJfinancialJreporting,JdataJanalyticsJcanJbeJus
edJtoJimproveJtheJqualityJofJestimatesJandJvaluations.
Q1-
6JStandardJsettersJcreateJaccountingJconcepts,Jrules,JandJguidelinesJtoJensureJthatJfinancialJstateme
ntsJaccuratelyJpresentJtheJeconomicJperformanceJandJfinancialJpositionJofJaJfirm.JTheJstandardsJe
ncourageJtransparentJandJtruthfulJreporting.
,1J-J2J SJOJLJUJTJIJOJNJSJ MJAJNJUJAJLJ FJOJRJ IJNJTJEJRJMJEJDJIJAJTJEJ AJCJCJOJUJNJTJ
ING J
Q1-
7JU.S.JcompaniesJlistedJonJU.S.JstockJexchangesJdoJnotJhaveJtheJoptionJtoJreportJunderJIFRS.JHo
wever,JforeignJcompaniesJthatJtradeJinJtheJU.S.JexchangesJcanJreportJunderJIFRS.JTheJSECJpermit
sJtheJuseJofJIFRS-
basedJfinancialJstatementsJbyJinternationalJcompaniesJwithJsharesJtradingJonJU.S.JstockJexchange
s.
Q1-
8JTheJFASBJseeksJandJwelcomesJcommentsJfromJallJpartiesJinJtheJfinancialJreportingJprocessJincl
udingJmanagers,Jinvestors,Jaccountants,Jpreparers,Jcreditors,Jlenders,JfinancialJstatementJusers,Jgo
vernmentalJagencies,JfinancialJanalysts,JindustryJgroups,JandJauditors.JFASBJalsoJreceivesJfeedba
ckJfromJpublicJroundtableJdiscussions,JpublicJmeetings,JtheJFASAC,JtheJPrivateJCompanyJCounci
l,JandJEITF.
Q1-
9JYes,JtheJpromulgationJofJfinancialJaccountingJstandardsJisJaJpoliticalJprocess.JThereJareJseveralJ
groupsJthatJinfluenceJtheJstandardJsettingJprocess.JTheJstandardJsettingJprocessJisJaJpoliticalJproces
sJthatJisJaffectedJbyJtheJimpactJofJseveralJlobbyingJgroups.JTheJgovernment,JthroughJtheJSEC,Jinflu
encesJaccountingJstandards.JTheJSECJhasJtheJauthorityJtoJissueJaccountingJstandardsJbutJhasJassign
edJthisJresponsibilityJtoJtheJprivateJsector.JNonetheless,JtheJSECJcanJexertJpressureJonJtheJFASBJto
JissueJaccountingJstandardsJandJvetoJtheJstandardsJpromulgatedJbyJtheJFASB.JAuditingJfirms,JtheJc
orporateJsector,Jcreditors,JfinancialJanalysts,JtheJfinancialJcommunity,JaccountingJorganizations,Ji
ndustryJgroups,JandJinvestorsJcanJinfluenceJtheJFASBJbyJwrittenJcommentsJaboutJExposureJDrafts
JandJparticipationJinJpublicJmeetingsJandJpublicJroundtablesJregardingJaJproposedJfinancialJreporti
ngJstandard.
Q1-10JAJprinciples-
basedJstandardJisJconsistentJwithJaJtheoreticalJframework.JInJcontrast,JaJrules-
basedJstandardJdoesJnotJnecessarilyJrelyJonJaJconsistentJtheoreticalJframework.JRather,JitJcontain
sJmoreJspecificJandJprescriptiveJrules.
Q1-
11JRecently,JtheJFASBJhasJtakenJanJasset/liabilityJapproachJinJsettingJstandards.JWithJthisJapproa
ch,JaJtransactionJisJrecordedJbasedJonJwhetherJanJassetJorJliabilityJisJcreated.JAnotherJtrendJhasJbee
nJtheJmovementJtowardJtheJuseJofJfairJvalueJmeasurementsJasJanJalternativeJtoJhistoricalJcost.JFAS
BJhasJalsoJfocusedJonJtheJpromulgationJofJprinciples-basedJstandardsJinsteadJofJrules-
basedJstandards.
BriefJExercisesJSoluti
onJtoJBE1-1
General-
purposeJfinancialJstatementsJprovideJgeneralJfinancialJinformationJaboutJanJentityJthatJwillJbeJusef
ulJtoJmanyJtypesJofJusers.JGeneral-
purposeJfinancialJstatementsJprovideJinformationJtoJaJwideJspectrumJofJuserJgroups:Jinvestors,Jcre
ditors,JfinancialJanalysts,Jcustomers,Jemployees,Jcompetitors,Jsuppliers,Junions,JandJgovernmentJa
gencies.JMostJfinancialJinformationJinJgeneralJpurposeJfinancialJstatementsJisJprovidedJtoJsatisfyJu
sersJwithJlimitedJabilityJorJauthorityJtoJobtainJadditionalJinformation,JwhichJincludesJinvestorsJandJ
creditors.JTheJFinancialJAccountingJStandardsJBoardJ(FASB)JidentifiesJinvestors,Jlenders,JandJoth
©J2021JPearsonJEducation,JInc.
, CJHJAJPJTJEJRJ 1J TJHJEJ FJIJNJAJNJCJIJAJLJ RJEJPJOJRJTJIJNJGJ EJNJVJIJRJOJNJMJ 1J-J3J
EJNJT
erJcreditorsJasJtheJprimaryJusersJofJtheJfinancialJstatements.
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, 1J-J4J SJOJLJUJTJIJOJNJSJ MJAJNJUJAJLJ FJOJRJ IJNJTJEJRJMJEJDJIJAJTJEJ AJCJCJOJUJNJTJ
ING J
SolutionJtoJBE1-2
FinancialJaccountingJisJtheJprocessJofJidentifying,Jmeasuring,JandJcommunicatingJfinancialJinfor
mationJaboutJanJeconomicJentityJtoJvariousJuserJgroupsJwithinJtheJlegal,Jeconomic,Jpolitical,JandJs
ocialJenvironment.JThisJdefinitionJcontainsJfourJmajorJelements:J1.J FinancialJinformation;J2.Econ
omicJentity;J3.JUserJgroupsJandJ4.JLegal,Jeconomic,Jpolitical,JandJsocialJenvironment
SolutionJtoJBE1-3
FinancialJStatementJUsersJ
andJOtherJParties Role
10. AreJshareholdersJofJtheJcompany.
J10JEquityJInvestors
1. AreJbanksJandJotherJfinancialJinstitutionsJthatJlendJ
1 Creditors
J J moneyJtoJtheJcompany.
5.J UseJfinancialJinformationJtoJreviewJandJanalyzeJr
5 FinancialJAnalysts
J J
eportedJresultsJofJtheJcompaniesJtheyJcoverJandJ
makeJinvestmentJrecommendations.
8 EmployeesJandJLaborJUnions
J J
8. UseJfinancialJinformationJduringJnegotiationJofJne
2 SuppliersJandJCustomers
J J
wJlaborJagreementsJandJcompensationJcontracts.
2. UseJfinancialJstatementsJtoJdetermineJwhetherJtoJ
7 GovernmentJAgencies
J J conductJbusinessJorJpurchaseJproductsJfromJaJco
mpany.
J 3JCompetitors 7.J ReviewJtheJfinancialJstatementsJofJpubliclyJtradedJco
mpaniesJforJaJvarietyJofJreasonsJthatJareJinJtheJpublicJ
4 ExternalJAuditors
J J
interest.
6 InternalJAuditors
J J 3. UseJfinancialJinformationJtoJdetermineJtheirJmarketJ
positionJrelativeJtoJtheJreportingJentityJandJtoJattem
J11JRegulatoryJBodies ptJtoJidentifyJfutureJstrategiesJofJtheJreportingJentity.
4. AreJindependentJofJtheJcompanyJandJresponsibleJf
9 ProfessionalJOrganizations
J J
orJensuringJthatJmanagementJpreparesJandJissuesJfi
nancialJstatementsJthatJcomplyJwithJaccountingJst
andardsJandJfairlyJpresentJtheJfinancialJpositionJan
dJeconomicJperformanceJofJtheJcompany.
6.J AreJemployeesJofJtheJcompanyJservingJinJanJadvisory
JroleJtoJmanagement.JTheyJprovideJinformationJtoJm
anagementJregardingJtheJcompany‘sJoperationsJandJp
roperJfunctioningJofJitsJinternalJcontrols.
11. ProtectJinvestorsJandJoverseeJtheJaccountingJandJ
auditingJstandardJsettingJprocesses.
9. SupportJaccountingJprofessionalsJthroughoutJtheir
©J2021JPearsonJEducation,JInc.
The Financial Reporting Environment
Solutions
Questions
Q1-
1JFinancialJinformationJisJaJmuchJbroaderJconceptJthanJsimplyJtheJfinancialJstatementsJandJfootno
tesJtoJtheJfinancialJstatements.JFinancialJinformationJincludesJitemsJsuchJasJtheJPresident‘sJletterJtoJ
theJowners,Jmanagement‘sJdiscussionJandJanalysis,JtheJauditors‘Jreport,JtheJmanagementJreportJan
dJpressJreleases.JOfJcourse,JtheJbasicJfinancialJstatementsJandJfootnotesJareJincludedJinJtheJtermJfin
ancialJinformation.JTheJbasicJfinancialJstatementsJare:JtheJbalanceJsheetJ(alsoJ referredJtoJasJtheJsta
tementJofJfinancialJposition),JtheJstatementJofJcomprehensiveJincomeJ(alsoJreferredJtoJasJtheJstate
mentJofJnetJincomeJandJtheJstatementJofJcomprehensiveJincome),JtheJstatementJofJcashJflows,JandJ
theJstatementJofJshareholders‘Jequity.JFinancialJinformationJisJnotJsynonymousJwithJtheJtermJfina
ncialJstatementsJbecauseJtheJfinancialJstatementsJareJaJsubsetJofJtheJdifferentJtypesJofJfinancialJinf
ormationJprovided.
Q1-
2JTheJpurposeJofJgeneratingJfinancialJstatementsJisJtoJprovideJusefulJinformationJtoJusersJtoJevalua
teJeconomicJentitiesJandJmakeJefficientJresourceJallocationJdecisionsJbasedJonJtheJrisksJandJreturn
sJofJaJparticularJinvestment.JTheJFinancialJAccountingJStandardsJBoardJ(FASB)JidentifiesJinvesto
rs,JlendersJandJotherJcreditorsJasJtheJprimaryJusersJofJtheJfinancialJstatements.JTheJfinancialJstatem
entsJareJtheJculminationJofJtheJfinancialJreportingJprocess.
Q1-
3JCapitalJisJaJscarceJresource.JInvestorsJandJcreditorsJhaveJtoJmakeJdecisionsJasJtoJhowJmuchJcapita
lJtoJinvestJinJanyJgivenJentity;Jtherefore,JtheyJdemandJrelevantJandJfaithfullyJrepresentativeJinform
ationJaboutJtheJeconomicJperformanceJandJfinancialJpositionJofJaJcompany.JThisJinformationJisJpr
ovidedJinJtheJfinancialJstatements.
Q1-
4JExternalJauditorsJensureJthatJtheJmanagementJofJaJcompanyJhasJpreparedJfinancialJstatementsJin
JaccordanceJwithJGenerallyJAcceptedJAccountingJPrinciplesJandJfairlyJpresentJtheJfinancialJpositio
nJandJeconomicJperformanceJofJaJcompany.JInJaddition,JexternalJauditorsJmustJbeJanJindependentJ
partyJandJcannotJbeJemployeesJofJtheJcompanyJtheyJareJauditing.JExternalJauditorsJprovideJaJsigni
ficantJamountJofJcredibilityJtoJtheJfinancialJstatements.
Q1-
5JDataJanalyticsJisJtheJprocessJofJanalyzingJlargeJdataJsetsJinJorderJtoJdrawJusefulJconclusions.JItJi
nvolvesJconvertingJrawJdataJintoJusefulJknowledge.JInJfinancialJreporting,JdataJanalyticsJcanJbeJus
edJtoJimproveJtheJqualityJofJestimatesJandJvaluations.
Q1-
6JStandardJsettersJcreateJaccountingJconcepts,Jrules,JandJguidelinesJtoJensureJthatJfinancialJstateme
ntsJaccuratelyJpresentJtheJeconomicJperformanceJandJfinancialJpositionJofJaJfirm.JTheJstandardsJe
ncourageJtransparentJandJtruthfulJreporting.
,1J-J2J SJOJLJUJTJIJOJNJSJ MJAJNJUJAJLJ FJOJRJ IJNJTJEJRJMJEJDJIJAJTJEJ AJCJCJOJUJNJTJ
ING J
Q1-
7JU.S.JcompaniesJlistedJonJU.S.JstockJexchangesJdoJnotJhaveJtheJoptionJtoJreportJunderJIFRS.JHo
wever,JforeignJcompaniesJthatJtradeJinJtheJU.S.JexchangesJcanJreportJunderJIFRS.JTheJSECJpermit
sJtheJuseJofJIFRS-
basedJfinancialJstatementsJbyJinternationalJcompaniesJwithJsharesJtradingJonJU.S.JstockJexchange
s.
Q1-
8JTheJFASBJseeksJandJwelcomesJcommentsJfromJallJpartiesJinJtheJfinancialJreportingJprocessJincl
udingJmanagers,Jinvestors,Jaccountants,Jpreparers,Jcreditors,Jlenders,JfinancialJstatementJusers,Jgo
vernmentalJagencies,JfinancialJanalysts,JindustryJgroups,JandJauditors.JFASBJalsoJreceivesJfeedba
ckJfromJpublicJroundtableJdiscussions,JpublicJmeetings,JtheJFASAC,JtheJPrivateJCompanyJCounci
l,JandJEITF.
Q1-
9JYes,JtheJpromulgationJofJfinancialJaccountingJstandardsJisJaJpoliticalJprocess.JThereJareJseveralJ
groupsJthatJinfluenceJtheJstandardJsettingJprocess.JTheJstandardJsettingJprocessJisJaJpoliticalJproces
sJthatJisJaffectedJbyJtheJimpactJofJseveralJlobbyingJgroups.JTheJgovernment,JthroughJtheJSEC,Jinflu
encesJaccountingJstandards.JTheJSECJhasJtheJauthorityJtoJissueJaccountingJstandardsJbutJhasJassign
edJthisJresponsibilityJtoJtheJprivateJsector.JNonetheless,JtheJSECJcanJexertJpressureJonJtheJFASBJto
JissueJaccountingJstandardsJandJvetoJtheJstandardsJpromulgatedJbyJtheJFASB.JAuditingJfirms,JtheJc
orporateJsector,Jcreditors,JfinancialJanalysts,JtheJfinancialJcommunity,JaccountingJorganizations,Ji
ndustryJgroups,JandJinvestorsJcanJinfluenceJtheJFASBJbyJwrittenJcommentsJaboutJExposureJDrafts
JandJparticipationJinJpublicJmeetingsJandJpublicJroundtablesJregardingJaJproposedJfinancialJreporti
ngJstandard.
Q1-10JAJprinciples-
basedJstandardJisJconsistentJwithJaJtheoreticalJframework.JInJcontrast,JaJrules-
basedJstandardJdoesJnotJnecessarilyJrelyJonJaJconsistentJtheoreticalJframework.JRather,JitJcontain
sJmoreJspecificJandJprescriptiveJrules.
Q1-
11JRecently,JtheJFASBJhasJtakenJanJasset/liabilityJapproachJinJsettingJstandards.JWithJthisJapproa
ch,JaJtransactionJisJrecordedJbasedJonJwhetherJanJassetJorJliabilityJisJcreated.JAnotherJtrendJhasJbee
nJtheJmovementJtowardJtheJuseJofJfairJvalueJmeasurementsJasJanJalternativeJtoJhistoricalJcost.JFAS
BJhasJalsoJfocusedJonJtheJpromulgationJofJprinciples-basedJstandardsJinsteadJofJrules-
basedJstandards.
BriefJExercisesJSoluti
onJtoJBE1-1
General-
purposeJfinancialJstatementsJprovideJgeneralJfinancialJinformationJaboutJanJentityJthatJwillJbeJusef
ulJtoJmanyJtypesJofJusers.JGeneral-
purposeJfinancialJstatementsJprovideJinformationJtoJaJwideJspectrumJofJuserJgroups:Jinvestors,Jcre
ditors,JfinancialJanalysts,Jcustomers,Jemployees,Jcompetitors,Jsuppliers,Junions,JandJgovernmentJa
gencies.JMostJfinancialJinformationJinJgeneralJpurposeJfinancialJstatementsJisJprovidedJtoJsatisfyJu
sersJwithJlimitedJabilityJorJauthorityJtoJobtainJadditionalJinformation,JwhichJincludesJinvestorsJandJ
creditors.JTheJFinancialJAccountingJStandardsJBoardJ(FASB)JidentifiesJinvestors,Jlenders,JandJoth
©J2021JPearsonJEducation,JInc.
, CJHJAJPJTJEJRJ 1J TJHJEJ FJIJNJAJNJCJIJAJLJ RJEJPJOJRJTJIJNJGJ EJNJVJIJRJOJNJMJ 1J-J3J
EJNJT
erJcreditorsJasJtheJprimaryJusersJofJtheJfinancialJstatements.
©J2021JPearsonJEducation,JInc.
, 1J-J4J SJOJLJUJTJIJOJNJSJ MJAJNJUJAJLJ FJOJRJ IJNJTJEJRJMJEJDJIJAJTJEJ AJCJCJOJUJNJTJ
ING J
SolutionJtoJBE1-2
FinancialJaccountingJisJtheJprocessJofJidentifying,Jmeasuring,JandJcommunicatingJfinancialJinfor
mationJaboutJanJeconomicJentityJtoJvariousJuserJgroupsJwithinJtheJlegal,Jeconomic,Jpolitical,JandJs
ocialJenvironment.JThisJdefinitionJcontainsJfourJmajorJelements:J1.J FinancialJinformation;J2.Econ
omicJentity;J3.JUserJgroupsJandJ4.JLegal,Jeconomic,Jpolitical,JandJsocialJenvironment
SolutionJtoJBE1-3
FinancialJStatementJUsersJ
andJOtherJParties Role
10. AreJshareholdersJofJtheJcompany.
J10JEquityJInvestors
1. AreJbanksJandJotherJfinancialJinstitutionsJthatJlendJ
1 Creditors
J J moneyJtoJtheJcompany.
5.J UseJfinancialJinformationJtoJreviewJandJanalyzeJr
5 FinancialJAnalysts
J J
eportedJresultsJofJtheJcompaniesJtheyJcoverJandJ
makeJinvestmentJrecommendations.
8 EmployeesJandJLaborJUnions
J J
8. UseJfinancialJinformationJduringJnegotiationJofJne
2 SuppliersJandJCustomers
J J
wJlaborJagreementsJandJcompensationJcontracts.
2. UseJfinancialJstatementsJtoJdetermineJwhetherJtoJ
7 GovernmentJAgencies
J J conductJbusinessJorJpurchaseJproductsJfromJaJco
mpany.
J 3JCompetitors 7.J ReviewJtheJfinancialJstatementsJofJpubliclyJtradedJco
mpaniesJforJaJvarietyJofJreasonsJthatJareJinJtheJpublicJ
4 ExternalJAuditors
J J
interest.
6 InternalJAuditors
J J 3. UseJfinancialJinformationJtoJdetermineJtheirJmarketJ
positionJrelativeJtoJtheJreportingJentityJandJtoJattem
J11JRegulatoryJBodies ptJtoJidentifyJfutureJstrategiesJofJtheJreportingJentity.
4. AreJindependentJofJtheJcompanyJandJresponsibleJf
9 ProfessionalJOrganizations
J J
orJensuringJthatJmanagementJpreparesJandJissuesJfi
nancialJstatementsJthatJcomplyJwithJaccountingJst
andardsJandJfairlyJpresentJtheJfinancialJpositionJan
dJeconomicJperformanceJofJtheJcompany.
6.J AreJemployeesJofJtheJcompanyJservingJinJanJadvisory
JroleJtoJmanagement.JTheyJprovideJinformationJtoJm
anagementJregardingJtheJcompany‘sJoperationsJandJp
roperJfunctioningJofJitsJinternalJcontrols.
11. ProtectJinvestorsJandJoverseeJtheJaccountingJandJ
auditingJstandardJsettingJprocesses.
9. SupportJaccountingJprofessionalsJthroughoutJtheir
©J2021JPearsonJEducation,JInc.
