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

TheFinancialReportingEnvironment B
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Questions

Q1-1 Financial information is a much broader concept than simply the
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financial statements and footnotes to the financial statements. Financial information
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includes items such as the President‘s letter to the owners, management‘s discussion
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and analysis, the auditors‘ report, the management report and press releases. Of
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course, the basic financial statements and footnotes are included in the term
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financial information. The basic financial statements are: the balance sheet (also
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referred to as the statement of B H B H B H B H B H




financial position), the statement of comprehensive income (also referred to
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as the statement of net income and the statement of comprehensive
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income), the statement of cash flows, and the statement of shareholders‘
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equity. Financial information is not synonymous with the term financial
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statements because the financial statements are a subset of the different
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types of financial information provided.
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Q1-2 The purpose of generating financial statements is to provide useful
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information to users to evaluate economic entities and make efficient resource
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allocation decisions based on the risks and returns of a particular investment.
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The Financial Accounting Standards Board (FASB) identifies investors, lenders
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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
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as to how much capital to invest in any given entity; therefore, they demand
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relevant and faithfully representative information about the economic performance
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and financial position of a company. This information is provided in the
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financial statements.
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Q1-4 External auditors ensure that the management of a company has prepared
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financial statements in accordance with Generally Accepted Accounting Principles
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and fairly present the financial position and economic performance of a company.
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In addition, external auditors must be an independent party and cannot be
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employees of the company they are auditing. External auditors provide a
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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
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useful conclusions. It involves converting raw data into useful knowledge. In
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financial
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reporting, data analytics can be used to improve the quality of estimates and valuations. B H B H B H B H B H B H B H B H B H B H B H B H B H




Q1-6 Standard setters create accounting concepts, rules, and guidelines to ensure
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,B H that financial statements accurately present the economic performance and financial
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B H position of a firm. The standards encourage transparent and truthful reporting.
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Q1-7 U.S. companies listed on U.S. stock exchanges do not have the option to
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report under IFRS. However, foreign companies that trade in the U.S.
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exchanges can report under IFRS. The SEC permits the use of IFRS-based
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financial statements by international companies with shares trading on U.S. stock
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exchanges.
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Q1-8 The FASB seeks and welcomes comments from all parties in the
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Bfinancial reporting process including managers, investors, accountants, preparers,
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creditors, lenders, financial statement users, governmental agencies, financial analysts,
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industry groups, and auditors. FASB also receives feedback from public roundtable
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discussions, public meetings, the FASAC, the Private Company Council, and EITF.
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Q1-9 Yes, the promulgation of financial accounting standards is a political process.
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There are several groups that influence the standard setting process. The standard
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setting process is a political process that is affected by the impact of several
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lobbying groups. The government, through the SEC, influences accounting
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standards. The SEC has the authority to issue accounting standards but has assigned
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this responsibility to the private sector. Nonetheless, the SEC can exert pressure on
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the FASB to issue accounting standards and veto the standards promulgated
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Bby the FASB. Auditing firms, the corporate sector, creditors, financial analysts,
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the financial community, accounting organizations, industry groups, and investors
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can influence the FASB by written comments about Exposure Drafts and
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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
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contrast, a rules-based standard does not necessarily rely on a consistent
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Btheoretical framework. Rather, it contains more specific and prescriptive rules.
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Q1-11 Recently, the FASB has taken an asset/liability approach in setting
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standards. With this approach, a transaction is recorded based on whether an
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asset or liability is created. Another trend has been the movement toward the
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use of fair value measurements as an alternative to historical cost. FASB has
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also focused on the promulgation of principles-based standards instead of rules-
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based standards. B H




Brief Exercises B H




Solution to BE1-1
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General-purpose financial statements provide general financial information about an B H B H B H B H B H B H B H B H




entity that will be useful to many types of users. General-purpose financial
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statements provide information to a wide spectrum of user groups: investors,
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creditors, financial analysts, customers, employees, competitors, suppliers, unions, and
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government agencies. Most financial information in general purpose financial
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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
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Accounting Standards Board (FASB) identifies investors, lenders, and other
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Bcreditors as the primary users of the financial statements.
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