CHAPTER 1
The Financial Reporting Environment
Solutions
Questions
Q1-
1PFinancialPinformationPisPaPmuchPbroaderPconceptPthanPsimplyPthePfinancialPstatementsPandPfoot
notesPtoPthePfinancialPstatements.PFinancialPinformationPincludesPitemsPsuchPasPthePPresident‘sPlet
terPtoPthePowners,Pmanagement‘sPdiscussionPandPanalysis,PthePauditors‘Preport,PthePmanagementPr
eportPandPpressPreleases.POfPcourse,PthePbasicPfinancialPstatementsPandPfootnotesParePincludedPinP
thePtermPfinancialPinformation.PThePbasicPfinancialPstatementsPare:PthePbalancePsheetP(alsoP referr
edPtoPasPthePstatementPofPfinancialPposition),PthePstatementPofPcomprehensivePincomeP(alsoPreferr
edPtoPasPthePstatementPofPnetPincomePandPthePstatementPofPcomprehensivePincome),PthePstatement
PofPcashPflows,PandPthePstatementPofPshareholders‘Pequity.PFinancialPinformationPisPnotPsynonym
ousPwithPthePtermPfinancialPstatementsPbecausePthePfinancialPstatementsParePaPsubsetPofPthePdiffer
entPtypesPofPfinancialPinformationPprovided.
Q1-
2PThePpurposePofPgeneratingPfinancialPstatementsPisPtoPprovidePusefulPinformationPtoPusersPtoPeva
luatePeconomicPentitiesPandPmakePefficientPresourcePallocationPdecisionsPbasedPonPthePrisksPandP
returnsPofPaPparticularPinvestment.PThePFinancialPAccountingPStandardsPBoardP(FASB)Pidentifie
sPinvestors,PlendersPandPotherPcreditorsPasPthePprimaryPusersPofPthePfinancialPstatements.PThePfina
ncialPstatementsParePthePculminationPofPthePfinancialPreportingPprocess.
Q1-
3PCapitalPisPaPscarcePresource.PInvestorsPandPcreditorsPhavePtoPmakePdecisionsPasPtoPhowPmuchPca
pitalPtoPinvestPinPanyPgivenPentity;Ptherefore,PtheyPdemandPrelevantPandPfaithfullyPrepresentativePi
nformationPaboutPthePeconomicPperformancePandPfinancialPpositionPofPaPcompany.PThisPinformat
ionPisPprovidedPinPthePfinancialPstatements.
Q1-
4PExternalPauditorsPensurePthatPthePmanagementPofPaPcompanyPhasPpreparedPfinancialPstatements
PinPaccordancePwithPGenerallyPAcceptedPAccountingPPrinciplesPandPfairlyPpresentPthePfinancialPp
ositionPandPeconomicPperformancePofPaPcompany.PInPaddition,PexternalPauditorsPmustPbePanPinde
pendentPpartyPandPcannotPbePemployeesPofPthePcompanyPtheyParePauditing.PExternalPauditorsPpro
videPaPsignificantPamountPofPcredibilityPtoPthePfinancialPstatements.
Q1-
5PDataPanalyticsPisPthePprocessPofPanalyzingPlargePdataPsetsPinPorderPtoPdrawPusefulPconclusions.P
ItPinvolvesPconvertingPrawPdataPintoPusefulPknowledge.PInPfinancialPreporting,PdataPanalyticsPcanP
bePusedPtoPimprovePthePqualityPofPestimatesPandPvaluations.
Q1-
6PStandardPsettersPcreatePaccountingPconcepts,Prules,PandPguidelinesPtoPensurePthatPfinancialPstate
mentsPaccuratelyPpresentPthePeconomicPperformancePandPfinancialPpositionPofPaPfirm.PThePstanda
rdsPencouragePtransparentPandPtruthfulPreporting.
,1P-P2P SPOPLPUPTPIPOPNPSP MPAPNPUPAPLP FPOPRP IPNPTPEPRPMPEPDPIPAPTPEP APCPC
POPUPNPTPING P
Q1-
7PU.S.PcompaniesPlistedPonPU.S.PstockPexchangesPdoPnotPhavePthePoptionPtoPreportPunderPIFRS.P
However,PforeignPcompaniesPthatPtradePinPthePU.S.PexchangesPcanPreportPunderPIFRS.PThePSECP
permitsPthePusePofPIFRS-
basedPfinancialPstatementsPbyPinternationalPcompaniesPwithPsharesPtradingPonPU.S.PstockPexchan
ges.
Q1-
8PThePFASBPseeksPandPwelcomesPcommentsPfromPallPpartiesPinPthePfinancialPreportingPprocessPi
ncludingPmanagers,Pinvestors,Paccountants,Ppreparers,Pcreditors,Plenders,PfinancialPstatementPuse
rs,PgovernmentalPagencies,PfinancialPanalysts,PindustryPgroups,PandPauditors.PFASBPalsoPreceives
PfeedbackPfromPpublicProundtablePdiscussions,PpublicPmeetings,PthePFASAC,PthePPrivatePCompa
nyPCouncil,PandPEITF.
Q1-
9PYes,PthePpromulgationPofPfinancialPaccountingPstandardsPisPaPpoliticalPprocess.PThereParePsever
alPgroupsPthatPinfluencePthePstandardPsettingPprocess.PThePstandardPsettingPprocessPisPaPpoliticalP
processPthatPisPaffectedPbyPthePimpactPofPseveralPlobbyingPgroups.PThePgovernment,PthroughPtheP
SEC,PinfluencesPaccountingPstandards.PThePSECPhasPthePauthorityPtoPissuePaccountingPstandardsP
butPhasPassignedPthisPresponsibilityPtoPthePprivatePsector.PNonetheless,PthePSECPcanPexertPpressur
ePonPthePFASBPtoPissuePaccountingPstandardsPandPvetoPthePstandardsPpromulgatedPbyPthePFASB.P
AuditingPfirms,PthePcorporatePsector,Pcreditors,PfinancialPanalysts,PthePfinancialPcommunity,Pacco
untingPorganizations,PindustryPgroups,PandPinvestorsPcanPinfluencePthePFASBPbyPwrittenPcommen
tsPaboutPExposurePDraftsPandPparticipationPinPpublicPmeetingsPandPpublicProundtablesPregardingP
aPproposedPfinancialPreportingPstandard.
Q1-10PAPprinciples-
basedPstandardPisPconsistentPwithPaPtheoreticalPframework.PInPcontrast,PaPrules-
basedPstandardPdoesPnotPnecessarilyPrelyPonPaPconsistentPtheoreticalPframework.PRather,PitPcont
ainsPmorePspecificPandPprescriptivePrules.
Q1-
11PRecently,PthePFASBPhasPtakenPanPasset/liabilityPapproachPinPsettingPstandards.PWithPthisPappr
oach,PaPtransactionPisPrecordedPbasedPonPwhetherPanPassetPorPliabilityPisPcreated.PAnotherPtrendPh
asPbeenPthePmovementPtowardPthePusePofPfairPvaluePmeasurementsPasPanPalternativePtoPhistoricalP
cost.PFASBPhasPalsoPfocusedPonPthePpromulgationPofPprinciples-basedPstandardsPinsteadPofPrules-
basedPstandards.
BriefPExercisesPSolut
ionPtoPBE1-1
General-
purposePfinancialPstatementsPprovidePgeneralPfinancialPinformationPaboutPanPentityPthatPwillPbePu
sefulPtoPmanyPtypesPofPusers.PGeneral-
purposePfinancialPstatementsPprovidePinformationPtoPaPwidePspectrumPofPuserPgroups:Pinvestors,Pc
reditors,PfinancialPanalysts,Pcustomers,Pemployees,Pcompetitors,Psuppliers,Punions,PandPgovernme
ntPagencies.PMostPfinancialPinformationPinPgeneralPpurposePfinancialPstatementsPisPprovidedPtoPsa
tisfyPusersPwithPlimitedPabilityPorPauthorityPtoPobtainPadditionalPinformation,PwhichPincludesPinve
storsPandPcreditors.PThePFinancialPAccountingPStandardsPBoardP(FASB)PidentifiesPinvestors,Plen
©P2021PPearsonPEducation,PIn
c.
, CPHPAPPPTPEPRP 1P TPHPEP FPIPNPAPNPCPIPAPLP RPEPPPOPRPTPIPNPGP EPNPVPIP 1P-P3P
RPOPNPMPEPNPT
ders,PandPotherPcreditorsPasPthePprimaryPusersPofPthePfinancialPstatements.
©P2021PPearsonPEducation,PIn
c.
, 1P-P4P SPOPLPUPTPIPOPNPSP MPAPNPUPAPLP FPOPRP IPNPTPEPRPMPEPDPIPAPTPEP APCPC
POPUPNPTPING P
SolutionPtoPBE1-2
FinancialPaccountingPisPthePprocessPofPidentifying,Pmeasuring,PandPcommunicatingPfinancialPinfo
rmationPaboutPanPeconomicPentityPtoPvariousPuserPgroupsPwithinPthePlegal,Peconomic,Ppolitical,Pa
ndPsocialPenvironment.PThisPdefinitionPcontainsPfourPmajorPelements:P1.P FinancialPinformation;P
2.EconomicPentity;P3.PUserPgroupsPandP4.PLegal,Peconomic,Ppolitical,PandPsocialPenvironment
SolutionPtoPBE1-3
FinancialPStatementPUsersP
andPOtherPParties Role
10. ArePshareholdersPofPthePcompany.
P 10PEquityPInvestors
1. ArePbanksPandPotherPfinancialPinstitutionsPthatPlen
P 1PCreditors dPmoneyPtoPthePcompany.
5.P UsePfinancialPinformationPtoPreviewPandPanalyze
5 FinancialPAnalysts
P P
PreportedPresultsPofPthePcompaniesPtheyPcoverPan
dPmakePinvestmentPrecommendations.
8 EmployeesPandPLaborPUnions
P P
8. UsePfinancialPinformationPduringPnegotiationPofPne
2 SuppliersPandPCustomers
P P
wPlaborPagreementsPandPcompensationPcontracts.
2. UsePfinancialPstatementsPtoPdeterminePwhetherPto
7 GovernmentPAgencies
P P PconductPbusinessPorPpurchasePproductsPfromPaPc
ompany.
P 3PCompetitors 7.P ReviewPthePfinancialPstatementsPofPpubliclyPtradedPc
ompaniesPforPaPvarietyPofPreasonsPthatParePinPthePpu
P 4PExternalPAuditors
blicPinterest.
P 6PInternalPAuditors 3. UsePfinancialPinformationPtoPdeterminePtheirPmarket
PpositionPrelativePtoPthePreportingPentityPandPtoPatte
P 11PRegulatoryPBodies mptPtoPidentifyPfuturePstrategiesPofPthePreportingPen
tity.
9 ProfessionalPOrganizations
P P
4. ArePindependentPofPthePcompanyPandPresponsible
PforPensuringPthatPmanagementPpreparesPandPissue
sPfinancialPstatementsPthatPcomplyPwithPaccounti
ngPstandardsPandPfairlyPpresentPthePfinancialPposit
ionPandPeconomicPperformancePofPthePcompany.
6.P ArePemployeesPofPthePcompanyPservingPinPanPadviso
ryProlePtoPmanagement.PTheyPprovidePinformationPt
oPmanagementPregardingPthePcompany‘sPoperationsP
andPproperPfunctioningPofPitsPinternalPcontrols.
11. ProtectPinvestorsPandPoverseePthePaccountingPand
PauditingPstandardPsettingPprocesses.
9. SupportPaccountingPprofessionalsPthroughoutPtheir
©P2021PPearsonPEducation,PIn
c.
The Financial Reporting Environment
Solutions
Questions
Q1-
1PFinancialPinformationPisPaPmuchPbroaderPconceptPthanPsimplyPthePfinancialPstatementsPandPfoot
notesPtoPthePfinancialPstatements.PFinancialPinformationPincludesPitemsPsuchPasPthePPresident‘sPlet
terPtoPthePowners,Pmanagement‘sPdiscussionPandPanalysis,PthePauditors‘Preport,PthePmanagementPr
eportPandPpressPreleases.POfPcourse,PthePbasicPfinancialPstatementsPandPfootnotesParePincludedPinP
thePtermPfinancialPinformation.PThePbasicPfinancialPstatementsPare:PthePbalancePsheetP(alsoP referr
edPtoPasPthePstatementPofPfinancialPposition),PthePstatementPofPcomprehensivePincomeP(alsoPreferr
edPtoPasPthePstatementPofPnetPincomePandPthePstatementPofPcomprehensivePincome),PthePstatement
PofPcashPflows,PandPthePstatementPofPshareholders‘Pequity.PFinancialPinformationPisPnotPsynonym
ousPwithPthePtermPfinancialPstatementsPbecausePthePfinancialPstatementsParePaPsubsetPofPthePdiffer
entPtypesPofPfinancialPinformationPprovided.
Q1-
2PThePpurposePofPgeneratingPfinancialPstatementsPisPtoPprovidePusefulPinformationPtoPusersPtoPeva
luatePeconomicPentitiesPandPmakePefficientPresourcePallocationPdecisionsPbasedPonPthePrisksPandP
returnsPofPaPparticularPinvestment.PThePFinancialPAccountingPStandardsPBoardP(FASB)Pidentifie
sPinvestors,PlendersPandPotherPcreditorsPasPthePprimaryPusersPofPthePfinancialPstatements.PThePfina
ncialPstatementsParePthePculminationPofPthePfinancialPreportingPprocess.
Q1-
3PCapitalPisPaPscarcePresource.PInvestorsPandPcreditorsPhavePtoPmakePdecisionsPasPtoPhowPmuchPca
pitalPtoPinvestPinPanyPgivenPentity;Ptherefore,PtheyPdemandPrelevantPandPfaithfullyPrepresentativePi
nformationPaboutPthePeconomicPperformancePandPfinancialPpositionPofPaPcompany.PThisPinformat
ionPisPprovidedPinPthePfinancialPstatements.
Q1-
4PExternalPauditorsPensurePthatPthePmanagementPofPaPcompanyPhasPpreparedPfinancialPstatements
PinPaccordancePwithPGenerallyPAcceptedPAccountingPPrinciplesPandPfairlyPpresentPthePfinancialPp
ositionPandPeconomicPperformancePofPaPcompany.PInPaddition,PexternalPauditorsPmustPbePanPinde
pendentPpartyPandPcannotPbePemployeesPofPthePcompanyPtheyParePauditing.PExternalPauditorsPpro
videPaPsignificantPamountPofPcredibilityPtoPthePfinancialPstatements.
Q1-
5PDataPanalyticsPisPthePprocessPofPanalyzingPlargePdataPsetsPinPorderPtoPdrawPusefulPconclusions.P
ItPinvolvesPconvertingPrawPdataPintoPusefulPknowledge.PInPfinancialPreporting,PdataPanalyticsPcanP
bePusedPtoPimprovePthePqualityPofPestimatesPandPvaluations.
Q1-
6PStandardPsettersPcreatePaccountingPconcepts,Prules,PandPguidelinesPtoPensurePthatPfinancialPstate
mentsPaccuratelyPpresentPthePeconomicPperformancePandPfinancialPpositionPofPaPfirm.PThePstanda
rdsPencouragePtransparentPandPtruthfulPreporting.
,1P-P2P SPOPLPUPTPIPOPNPSP MPAPNPUPAPLP FPOPRP IPNPTPEPRPMPEPDPIPAPTPEP APCPC
POPUPNPTPING P
Q1-
7PU.S.PcompaniesPlistedPonPU.S.PstockPexchangesPdoPnotPhavePthePoptionPtoPreportPunderPIFRS.P
However,PforeignPcompaniesPthatPtradePinPthePU.S.PexchangesPcanPreportPunderPIFRS.PThePSECP
permitsPthePusePofPIFRS-
basedPfinancialPstatementsPbyPinternationalPcompaniesPwithPsharesPtradingPonPU.S.PstockPexchan
ges.
Q1-
8PThePFASBPseeksPandPwelcomesPcommentsPfromPallPpartiesPinPthePfinancialPreportingPprocessPi
ncludingPmanagers,Pinvestors,Paccountants,Ppreparers,Pcreditors,Plenders,PfinancialPstatementPuse
rs,PgovernmentalPagencies,PfinancialPanalysts,PindustryPgroups,PandPauditors.PFASBPalsoPreceives
PfeedbackPfromPpublicProundtablePdiscussions,PpublicPmeetings,PthePFASAC,PthePPrivatePCompa
nyPCouncil,PandPEITF.
Q1-
9PYes,PthePpromulgationPofPfinancialPaccountingPstandardsPisPaPpoliticalPprocess.PThereParePsever
alPgroupsPthatPinfluencePthePstandardPsettingPprocess.PThePstandardPsettingPprocessPisPaPpoliticalP
processPthatPisPaffectedPbyPthePimpactPofPseveralPlobbyingPgroups.PThePgovernment,PthroughPtheP
SEC,PinfluencesPaccountingPstandards.PThePSECPhasPthePauthorityPtoPissuePaccountingPstandardsP
butPhasPassignedPthisPresponsibilityPtoPthePprivatePsector.PNonetheless,PthePSECPcanPexertPpressur
ePonPthePFASBPtoPissuePaccountingPstandardsPandPvetoPthePstandardsPpromulgatedPbyPthePFASB.P
AuditingPfirms,PthePcorporatePsector,Pcreditors,PfinancialPanalysts,PthePfinancialPcommunity,Pacco
untingPorganizations,PindustryPgroups,PandPinvestorsPcanPinfluencePthePFASBPbyPwrittenPcommen
tsPaboutPExposurePDraftsPandPparticipationPinPpublicPmeetingsPandPpublicProundtablesPregardingP
aPproposedPfinancialPreportingPstandard.
Q1-10PAPprinciples-
basedPstandardPisPconsistentPwithPaPtheoreticalPframework.PInPcontrast,PaPrules-
basedPstandardPdoesPnotPnecessarilyPrelyPonPaPconsistentPtheoreticalPframework.PRather,PitPcont
ainsPmorePspecificPandPprescriptivePrules.
Q1-
11PRecently,PthePFASBPhasPtakenPanPasset/liabilityPapproachPinPsettingPstandards.PWithPthisPappr
oach,PaPtransactionPisPrecordedPbasedPonPwhetherPanPassetPorPliabilityPisPcreated.PAnotherPtrendPh
asPbeenPthePmovementPtowardPthePusePofPfairPvaluePmeasurementsPasPanPalternativePtoPhistoricalP
cost.PFASBPhasPalsoPfocusedPonPthePpromulgationPofPprinciples-basedPstandardsPinsteadPofPrules-
basedPstandards.
BriefPExercisesPSolut
ionPtoPBE1-1
General-
purposePfinancialPstatementsPprovidePgeneralPfinancialPinformationPaboutPanPentityPthatPwillPbePu
sefulPtoPmanyPtypesPofPusers.PGeneral-
purposePfinancialPstatementsPprovidePinformationPtoPaPwidePspectrumPofPuserPgroups:Pinvestors,Pc
reditors,PfinancialPanalysts,Pcustomers,Pemployees,Pcompetitors,Psuppliers,Punions,PandPgovernme
ntPagencies.PMostPfinancialPinformationPinPgeneralPpurposePfinancialPstatementsPisPprovidedPtoPsa
tisfyPusersPwithPlimitedPabilityPorPauthorityPtoPobtainPadditionalPinformation,PwhichPincludesPinve
storsPandPcreditors.PThePFinancialPAccountingPStandardsPBoardP(FASB)PidentifiesPinvestors,Plen
©P2021PPearsonPEducation,PIn
c.
, CPHPAPPPTPEPRP 1P TPHPEP FPIPNPAPNPCPIPAPLP RPEPPPOPRPTPIPNPGP EPNPVPIP 1P-P3P
RPOPNPMPEPNPT
ders,PandPotherPcreditorsPasPthePprimaryPusersPofPthePfinancialPstatements.
©P2021PPearsonPEducation,PIn
c.
, 1P-P4P SPOPLPUPTPIPOPNPSP MPAPNPUPAPLP FPOPRP IPNPTPEPRPMPEPDPIPAPTPEP APCPC
POPUPNPTPING P
SolutionPtoPBE1-2
FinancialPaccountingPisPthePprocessPofPidentifying,Pmeasuring,PandPcommunicatingPfinancialPinfo
rmationPaboutPanPeconomicPentityPtoPvariousPuserPgroupsPwithinPthePlegal,Peconomic,Ppolitical,Pa
ndPsocialPenvironment.PThisPdefinitionPcontainsPfourPmajorPelements:P1.P FinancialPinformation;P
2.EconomicPentity;P3.PUserPgroupsPandP4.PLegal,Peconomic,Ppolitical,PandPsocialPenvironment
SolutionPtoPBE1-3
FinancialPStatementPUsersP
andPOtherPParties Role
10. ArePshareholdersPofPthePcompany.
P 10PEquityPInvestors
1. ArePbanksPandPotherPfinancialPinstitutionsPthatPlen
P 1PCreditors dPmoneyPtoPthePcompany.
5.P UsePfinancialPinformationPtoPreviewPandPanalyze
5 FinancialPAnalysts
P P
PreportedPresultsPofPthePcompaniesPtheyPcoverPan
dPmakePinvestmentPrecommendations.
8 EmployeesPandPLaborPUnions
P P
8. UsePfinancialPinformationPduringPnegotiationPofPne
2 SuppliersPandPCustomers
P P
wPlaborPagreementsPandPcompensationPcontracts.
2. UsePfinancialPstatementsPtoPdeterminePwhetherPto
7 GovernmentPAgencies
P P PconductPbusinessPorPpurchasePproductsPfromPaPc
ompany.
P 3PCompetitors 7.P ReviewPthePfinancialPstatementsPofPpubliclyPtradedPc
ompaniesPforPaPvarietyPofPreasonsPthatParePinPthePpu
P 4PExternalPAuditors
blicPinterest.
P 6PInternalPAuditors 3. UsePfinancialPinformationPtoPdeterminePtheirPmarket
PpositionPrelativePtoPthePreportingPentityPandPtoPatte
P 11PRegulatoryPBodies mptPtoPidentifyPfuturePstrategiesPofPthePreportingPen
tity.
9 ProfessionalPOrganizations
P P
4. ArePindependentPofPthePcompanyPandPresponsible
PforPensuringPthatPmanagementPpreparesPandPissue
sPfinancialPstatementsPthatPcomplyPwithPaccounti
ngPstandardsPandPfairlyPpresentPthePfinancialPposit
ionPandPeconomicPperformancePofPthePcompany.
6.P ArePemployeesPofPthePcompanyPservingPinPanPadviso
ryProlePtoPmanagement.PTheyPprovidePinformationPt
oPmanagementPregardingPthePcompany‘sPoperationsP
andPproperPfunctioningPofPitsPinternalPcontrols.
11. ProtectPinvestorsPandPoverseePthePaccountingPand
PauditingPstandardPsettingPprocesses.
9. SupportPaccountingPprofessionalsPthroughoutPtheir
©P2021PPearsonPEducation,PIn
c.
