Solution Manual for Personal Finance, 14th Edition by E. Thomas Garman and Raymond E. Forgue

Solution Manual For Intermediate Accounting, 11th Edition by
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David Spiceland, Mark Nelson, Wayne Thomas, Jennifer
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,Chapter 1 Environment and Theoretical Structure of
Financial Accounting u




Question 1–1 u


Financial accounting is concerned with providing relevant financial information ab
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out various kinds of organizations to different types of external users. The primary focus
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of financial accounting is on the financial information provided by profit-
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oriented companies to their present and potential investors and creditors.
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Question 1–2 u


Resources are efficiently allocated if they are given to enterprises that will use them
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to provide goods and services desired by society and not to enterprises that will waste th
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em. The capital markets are the mechanism that fosters this efficient allocation of resour
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ces.

Question 1–3 u


Two extremely important variables that must be considered in any investment decis
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ion are the expected rate of return and the uncertainty or risk of that expected return.
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Question 1–4 u


In the long run, a company will be able to provide investors and creditors with a rate
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of return only if it can generate a profit. That is, it must be able to use the resources provi
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ded to it to generate cash receipts from selling a product or service that exceed the cash di
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sbursements necessary to provide that product or service. u u u u u u u




Question 1–5 u


The primary objective of financial accounting is to provide investors and creditors
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with information that will help them make investment and credit decisions.
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Question 1–6 u


Net operating cash flows are the difference between cash receipts and cash disburse
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ments during a period of time from transactions related to providing goods and services t
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o customers. Net operating cash flows may not be a good indicator of future cash flows b
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ecause, by ignoring uncompleted transactions, they may not match the accomplishments
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and sacrifices of the period.
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,Question 1–7 u


GAAP (generally accepted accounting principles) are a dynamic set of both broad a
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nd specific guidelines that a company should follow in measuring and reporting the info
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rmation in their financial statements and related notes. It is important that all companies
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follow GAAP so that investors can compare financial information across companies to
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make their resource allocation decisions.
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Question 1–8 u


In 1934, Congress created the SEC and gave it the job of setting accounting and rep
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orting standards for companies whose securities are publicly traded. The SEC has retain
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ed the power, but has relied on private sector bodies to create the standards. The current
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private sector body responsible for setting accounting standards is the FASB.
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Question 1–9 u


Auditors are independent, professional accountants who examine financial stateme
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nts to express an opinion. The opinion reflects the auditors‘ assessment of the statements
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' fairness, which is determined by the extent to which they are prepared in compliance wi
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th GAAP. The auditor adds credibility to the financial statements, which increases the c
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onfidence of capital market participants relying on that information.
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, Question 1–10 u


Key provisions included in the text are:
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 Creation of the Public Company Accounting Oversight Board
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 Regulate types of non-audit audit services u u u u u


 Require lead audit partner rotation every 5 year
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 Corporate executive accountability u u


 Addresses conflicts of interest for security analysts u u u u u u


 Internal control reporting and auditor opinion about controls
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Question 1–11 u


New accounting standards, or changes in standards, can have significant differentia
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l effects on companies, investors and creditors, and other interest groups by causing redi
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stribution of wealth. There also is the possibility that standards could harm the economy
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as a whole by causing companies to change their behavior.
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Question 1–12 u


The FASB undertakes a series of elaborate information gathering steps before issui
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ng an accounting standard to determine consensus as to the preferred method of accounti
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ng, as well as to anticipate adverse economic consequences.
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Question 1–13 u


The purpose of the conceptual framework is to guide the Board in developing accou
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nting standards by providing an underlying foundation and basic reasoning on which to
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consider merits of alternatives. The framework does not prescribe GAAP.
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