SOLUTION MANUAL
All Chapters Included
INTERMEDIATE ACCOUNTING
3RD EDITION
,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
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
© 2021 Pearson Education, Inc.
, CHAPTER 1 T HE FIN ANC I AL REPO RT IN G EN V IR ON MENT 1-3
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.
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
© 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
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.
All Chapters Included
INTERMEDIATE ACCOUNTING
3RD EDITION
,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
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
© 2021 Pearson Education, Inc.
, CHAPTER 1 T HE FIN ANC I AL REPO RT IN G EN V IR ON MENT 1-3
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.
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
© 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
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.
