Solution manual for intermediate accounting 3rd edition elizabeth a gordon jana s raedy alexander j sannella_compressed

CHAPTER 1 m




The Financial Reporting Environment m m m




Solutions
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Questions

Q1-1 Financial information is a much broader concept than simply the financial statements and
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footnotes to the financial statements. Financial information includes items such as the President‘s
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letter to the owners, management‘s discussion and analysis, the auditors‘ report, the management
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report and press releases. Of course, the basic financial statements and footnotes are included in the
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term financial information. The basic financial statements are: the balance sheet (also referred to
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as the statement of financial position), the statement of comprehensive income (also referred to as
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the statement of net income and the statement of comprehensive income), the statement of cash
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flows, and the statement of shareholders‘ equity. Financial information is not synonymous with the
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term financial statements because the financial statements are a subset of the different types of
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financial information provided.
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Q1-2 The purpose of generating financial statements is to provide useful information to users to
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evaluate economic entities and make efficient resource allocation decisions based on the risks and
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returns of a particular investment. The Financial Accounting Standards Board (FASB) identifies
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investors, lenders and other creditors as the primary users of the financial statements. The financial
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statements 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
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capital to invest in any given entity; therefore, they demand relevant and faithfully representative
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information about the economic performance and financial position of a company. This
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information is provided in the financial statements.
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Q1-4 External auditors ensure that the management of a company has prepared financial
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statements in accordance with Generally Accepted Accounting Principles and fairly present the
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financial position and economic performance of a company. In addition, external auditors must be
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an independent party and cannot be employees of the company they are auditing. External auditors
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provide a significant 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.
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It involves converting raw data into useful knowledge. In financial reporting, data analytics can be
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used 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
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statements accurately present the economic performance and financial position of a firm. The
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standards encourage transparent and truthful reporting.
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,1 -2m m m SO L UT IO N S M A N U A L FO 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.
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However, foreign companies that trade in the U.S. exchanges can report under IFRS. The SEC
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permits the use of IFRS-based financial statements by international companies with shares trading
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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
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including managers, investors, accountants, preparers, creditors, lenders, financial statement
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users, governmental agencies, financial analysts, industry groups, and auditors. FASB also receives
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feedback from public roundtable discussions, public meetings, the FASAC, the Private Company
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Council, and EITF.
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Q1-9 Yes, the promulgation of financial accounting standards is a political process. There are
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several groups that influence the standard setting process. The standard setting process is a political
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process that is affected by the impact of several lobbying groups. The government, through the
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SEC, influences accounting standards. The SEC has the authority to issue accounting standards but
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has assigned this responsibility to the private sector. Nonetheless, the SEC can exert pressure on the
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FASB to issue accounting standards and veto the standards promulgated by the FASB. Auditing
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firms, the corporate sector, creditors, financial analysts, the financial community, accounting
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organizations, industry groups, and investors can influence the FASB by written comments about
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Exposure Drafts and participation in public meetings and public roundtables regarding a proposed
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financial reporting standard.
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Q1-10 A principles-based standard is consistent with a theoretical framework. In contrast, a
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rules-based standard does not necessarily rely on a consistent theoretical framework. Rather, it
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contains 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
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approach, a transaction is recorded based on whether an asset or liability is created. Another trend
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has been the movement toward the use of fair value measurements as an alternative to historical
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cost. FASB has also focused on the promulgation of principles-based standards instead of rules-
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based standards. m




Brief Exercises m




m Solution to BE1-1 m m




General-purpose financial statements provide general financial information about an entity that m m m m m m m m m m




will be useful to many types of users. General-purpose financial statements provide information to
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a wide spectrum of user groups: investors, creditors, financial analysts, customers, employees,
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competitors, suppliers, unions, and government agencies. Most financial information in general
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purpose financial statements is provided to satisfy users with limited ability or authority to obtain
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additional information, which includes investors and creditors. The Financial Accounting
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Standards Board (FASB) identifies investors, lenders, and other creditors as the primary users of
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the financial statements.
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© 2021 Pearson Education, Inc.
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, C H AP TE R 1
m m m m m m m m THE m m m FIN AN C I AL RE PO RT IN G EN V IR ON MENT
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Solution to BE1-2 m m




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




Financial Statement Users m m




and Other Parties
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m 10 Equity Investors
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10. Are shareholders of the company. m m m m




1. Are banks and other financial institutions that lend
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m 1 Creditors
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money to the company.
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5. Use financial information to review and analyze
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m 5 Financial Analysts
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reported results of the companies they cover and
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make investment recommendations.
8 Employees and Labor Unions
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8. Use financial information during negotiation of
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m 2 Suppliers and Customers
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new labor agreements and compensation contracts.
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2. Use financial statements to determine whether to
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m 7 Government Agencies
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company. m




m 3 Competitors
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7. Review the financial statements of publicly traded
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companies for a variety of reasons that are in the
4 External Auditors
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public interest.
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m 6 Internal Auditors
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3. Use financial information to determine their market
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position relative to the reporting entity and to
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m 11 Regulatory Bodies
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entity. m




m 9 Professional Organizations
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4. Are independent of the company and responsible
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for ensuring that management prepares and issues
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financial statements that comply with accounting
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standards and fairly present the financial position
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and economic performance of the company.
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6. Are employees of the company serving in an
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advisory role to management. They provide
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information to management regarding the
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company‘s operations and proper functioning of its
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internal controls.
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11. Protect investors and oversee the accounting and m m m m m m




auditing standard setting processes.
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9. Support accounting professionals throughout their m m m m




© 2021 Pearson Education, Inc.
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, 1 -4
m m m SO L UT IO N S M A N U A L FO R
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careers by providing training, professional skills
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development, and other resources.
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Solution to BE1-4 m m




Financial statement users and why each would use the financial statements are summarized below:
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1. Equity investors - Equity investors buy stock in the company, that is, they purchase a
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percentage of the company itself. The financial statements help them make investment
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decisions.
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2. Creditors - Creditors loan money to the company. The financial statements help them assess the
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creditworthiness of the company, and whether principal and interest will be repaid.
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3. Competitors - Competitors use financial statements to determine their market position
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relative to the reporting entity.
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© 2021 Pearson Education, Inc.
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