The Financial Reporting Environment
-- -- -- --
Solutions
CHAPTER 1 --
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.
-- -- -- --
Solutions
CHAPTER 1 --
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.
