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 |authority |to |issue |accounting
|standards |but |has |assigned |this |responsibility |to |the |private |sector. |Nonetheless, |the |SEC |can |exert
|pressure |on |the |FASB |to |issue |accounting |standards |and |veto |the |standards |promulgated |by |the
|FASB. |Auditing |firms, |the |corporate |sector, |creditors, |financial |analysts, |the |financial |community,
|accounting |organizations, |industry |groups, |and |investors |can |influence |the |FASB |by |written
|comments |about |Exposure |Drafts |and |participation |in |public |meetings |and |public |roundtables
|regarding |a |proposed |financial |reporting |standard.
Q1-10 |A |principles-based |standard |is |consistent |with |a |theoretical |framework. |In |contrast, |a
|rules-based |standard |does |not |necessarily |rely |on |a |consistent |theoretical |framework. |Rather, |it
|contains |more |specific |and |prescriptive |rules.
Q1-11 |Recently, |the |FASB |has |taken |an |asset/liability |approach |in |setting |standards. |With |this
|approach, |a |transaction |is |recorded |based |on |whether |an |asset |or |liability |is |created. |Another |trend
|has |been |the |movement |toward |the |use |of |fair |value |measurements |as |an |alternative |to |historical
|cost. |FASB |has |also |focused |on |the |promulgation |of |principles-based |standards |instead |of |rules-
based |standards.
Brief |Exercises
Solution |to |BE1-1
|
General-purpose |financial |statements |provide |general |financial |information |about |an |entity |that
|will |be |useful |to |many |types |of |users. |General-purpose |financial |statements |provide |information |to
|a |wide |spectrum |of |user |groups: |investors, |creditors, |financial |analysts, |customers, |employees,
|competitors, |suppliers, |unions, |and |government |agencies. |Most |financial |information |in |general
|purpose |financial |statements |is |provided |to |satisfy |users |with |limited |ability |or |authority |to |obtain
|additional |information, |which |includes |investors |and |creditors. |The |Financial |Accounting
|Standards |Board |(FASB) |identifies |investors, |lenders, |and |other |creditors |as |the |primary |users |of
|the |financial |statements.
© |2021 |Pearson |Education, |Inc.
, C |H |A |P |T |E |R | 1 | T |H |E | F |I |N |A |N |C |I |A |L | R |E |P |O |R |T |I |N |G | E |N |V |I |R |O |N |M |E |N 1 |- |3 |
|T
Solution |to |BE1-2
Financial |accounting |is |the |process |of |identifying, |measuring, |and |communicating |financial
|information |about |an |economic |entity |to |various |user |groups |within |the |legal, |economic, |political,
|and |social |environment. |This |definition |contains |four |major |elements: |1. | Financial |information;
|2.Economic |entity; |3. |User |groups |and |4. |Legal, |economic, |political, |and |social |environment
Solution |to |BE1-3
Financial |Statement |Users
|and |Other |Parties Role
10. Are |shareholders |of |the |company.
| 10 |Equity |Investors
1. Are |banks |and |other |financial |institutions |that |lend
| 1 |Creditors |money |to |the |company.
5. | Use |financial |information |to |review |and |analyze
5 |Financial |Analysts
|
|reported |results |of |the |companies |they |cover |and
|make |investment |recommendations.
8 |Employees |and |Labor |Unions
|
8. Use |financial |information |during |negotiation |of
|new |labor |agreements |and |compensation |contracts.
2 |Suppliers |and |Customers
|
2. Use |financial |statements |to |determine |whether |to
7 |Government |Agencies
| |conduct |business |or |purchase |products |from |a
|company.
| 3 |Competitors 7. | Review |the |financial |statements |of |publicly |traded
|companies |for |a |variety |of |reasons |that |are |in |the
| 4 |External |Auditors
|public |interest.
| 6 |Internal |Auditors 3. Use |financial |information |to |determine |their |market
|position |relative |to |the |reporting |entity |and |to
| 11 |Regulatory |Bodies |attempt |to |identify |future |strategies |of |the |reporting
|entity.
9 |Professional |Organizations
|
4. Are |independent |of |the |company |and |responsible
|for |ensuring |that |management |prepares |and |issues
|financial |statements |that |comply |with |accounting
|standards |and |fairly |present |the |financial |position
|and |economic |performance |of |the |company.
6. | Are |employees |of |the |company |serving |in |an
|advisory |role |to |management. |They |provide
|information |to |management |regarding |the
|company‘s |operations |and |proper |functioning |of |its
|internal |controls.
11. Protect |investors |and |oversee |the |accounting |and
|auditing |standard |setting |processes.
9. Support |accounting |professionals |throughout |their
© |2021 |Pearson |Education, |Inc.
, 1 |- |4 | 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 |
careers |by|providing |training, |professional |skills
|development, |and |other |resources.
Solution |to |BE1-4
Financial |statement |users |and |why |each |would |use |the |financial |statements |are |summarized |below:
1. Equity |investors |- |Equity |investors |buy |stock |in |the |company, |that |is, |they |purchase |a
|percentage |of |the |company |itself. |The |financial |statements |help |them |make |investment
|decisions.
2. Creditors |- |Creditors |loan |money |to |the |company. |The |financial |statements |help |them |assess
|the |creditworthiness |of |the |company, |and |whether |principal |and |interest |will |be |repaid.
3. Competitors |- |Competitors |use |financial |statements |to |determine |their |market |position
|relative |to |the |reporting |entity.
© |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 |authority |to |issue |accounting
|standards |but |has |assigned |this |responsibility |to |the |private |sector. |Nonetheless, |the |SEC |can |exert
|pressure |on |the |FASB |to |issue |accounting |standards |and |veto |the |standards |promulgated |by |the
|FASB. |Auditing |firms, |the |corporate |sector, |creditors, |financial |analysts, |the |financial |community,
|accounting |organizations, |industry |groups, |and |investors |can |influence |the |FASB |by |written
|comments |about |Exposure |Drafts |and |participation |in |public |meetings |and |public |roundtables
|regarding |a |proposed |financial |reporting |standard.
Q1-10 |A |principles-based |standard |is |consistent |with |a |theoretical |framework. |In |contrast, |a
|rules-based |standard |does |not |necessarily |rely |on |a |consistent |theoretical |framework. |Rather, |it
|contains |more |specific |and |prescriptive |rules.
Q1-11 |Recently, |the |FASB |has |taken |an |asset/liability |approach |in |setting |standards. |With |this
|approach, |a |transaction |is |recorded |based |on |whether |an |asset |or |liability |is |created. |Another |trend
|has |been |the |movement |toward |the |use |of |fair |value |measurements |as |an |alternative |to |historical
|cost. |FASB |has |also |focused |on |the |promulgation |of |principles-based |standards |instead |of |rules-
based |standards.
Brief |Exercises
Solution |to |BE1-1
|
General-purpose |financial |statements |provide |general |financial |information |about |an |entity |that
|will |be |useful |to |many |types |of |users. |General-purpose |financial |statements |provide |information |to
|a |wide |spectrum |of |user |groups: |investors, |creditors, |financial |analysts, |customers, |employees,
|competitors, |suppliers, |unions, |and |government |agencies. |Most |financial |information |in |general
|purpose |financial |statements |is |provided |to |satisfy |users |with |limited |ability |or |authority |to |obtain
|additional |information, |which |includes |investors |and |creditors. |The |Financial |Accounting
|Standards |Board |(FASB) |identifies |investors, |lenders, |and |other |creditors |as |the |primary |users |of
|the |financial |statements.
© |2021 |Pearson |Education, |Inc.
, C |H |A |P |T |E |R | 1 | T |H |E | F |I |N |A |N |C |I |A |L | R |E |P |O |R |T |I |N |G | E |N |V |I |R |O |N |M |E |N 1 |- |3 |
|T
Solution |to |BE1-2
Financial |accounting |is |the |process |of |identifying, |measuring, |and |communicating |financial
|information |about |an |economic |entity |to |various |user |groups |within |the |legal, |economic, |political,
|and |social |environment. |This |definition |contains |four |major |elements: |1. | Financial |information;
|2.Economic |entity; |3. |User |groups |and |4. |Legal, |economic, |political, |and |social |environment
Solution |to |BE1-3
Financial |Statement |Users
|and |Other |Parties Role
10. Are |shareholders |of |the |company.
| 10 |Equity |Investors
1. Are |banks |and |other |financial |institutions |that |lend
| 1 |Creditors |money |to |the |company.
5. | Use |financial |information |to |review |and |analyze
5 |Financial |Analysts
|
|reported |results |of |the |companies |they |cover |and
|make |investment |recommendations.
8 |Employees |and |Labor |Unions
|
8. Use |financial |information |during |negotiation |of
|new |labor |agreements |and |compensation |contracts.
2 |Suppliers |and |Customers
|
2. Use |financial |statements |to |determine |whether |to
7 |Government |Agencies
| |conduct |business |or |purchase |products |from |a
|company.
| 3 |Competitors 7. | Review |the |financial |statements |of |publicly |traded
|companies |for |a |variety |of |reasons |that |are |in |the
| 4 |External |Auditors
|public |interest.
| 6 |Internal |Auditors 3. Use |financial |information |to |determine |their |market
|position |relative |to |the |reporting |entity |and |to
| 11 |Regulatory |Bodies |attempt |to |identify |future |strategies |of |the |reporting
|entity.
9 |Professional |Organizations
|
4. Are |independent |of |the |company |and |responsible
|for |ensuring |that |management |prepares |and |issues
|financial |statements |that |comply |with |accounting
|standards |and |fairly |present |the |financial |position
|and |economic |performance |of |the |company.
6. | Are |employees |of |the |company |serving |in |an
|advisory |role |to |management. |They |provide
|information |to |management |regarding |the
|company‘s |operations |and |proper |functioning |of |its
|internal |controls.
11. Protect |investors |and |oversee |the |accounting |and
|auditing |standard |setting |processes.
9. Support |accounting |professionals |throughout |their
© |2021 |Pearson |Education, |Inc.
, 1 |- |4 | 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 |
careers |by|providing |training, |professional |skills
|development, |and |other |resources.
Solution |to |BE1-4
Financial |statement |users |and |why |each |would |use |the |financial |statements |are |summarized |below:
1. Equity |investors |- |Equity |investors |buy |stock |in |the |company, |that |is, |they |purchase |a
|percentage |of |the |company |itself. |The |financial |statements |help |them |make |investment
|decisions.
2. Creditors |- |Creditors |loan |money |to |the |company. |The |financial |statements |help |them |assess
|the |creditworthiness |of |the |company, |and |whether |principal |and |interest |will |be |repaid.
3. Competitors |- |Competitors |use |financial |statements |to |determine |their |market |position
|relative |to |the |reporting |entity.
© |2021 |Pearson |Education, |Inc.
