INTERNATIONAL FINANCIAL REPORTING AND ANALYSIS, 5TH EDITION
ALEXANDER, BRITTON, JORISSEN
Solutions to the Exercises
Answers marked can also be found on the Student side of the website.
Chapter 1
1 Obviously the scope here is almost endless. Here are three
interesting definitions from the USA which students are not
very likely to come across (extracted from A.R. Belkaoui
(1992) Accounting Theory, 3rd edn, Academic Press,
London). The Committee on Terminology of the American
Institute of Certified Public Accounting defined accounting
as follows:
Accounting is the art of recording, classifying, and
summarizing in a significant manner and in terms of
money, transactions and events which are, in part at
least, of a financial character, and interpreting the
results thereof. 1
The scope of accounting from this definition appears
limited. A broader perspective was offered, by the following
definition of accounting as:
The process of identifying, measuring, and communicating
economic information to permit informed judgements and
decisions by users of the information. 2
More recently, accounting has been defined with reference
to the concept of quantitative information:
Accounting is a service activity. Its function is to
provide quantitative information, primarily financial in
nature about economic entities that is intended to be
useful in making economic decisions, in making
resolved choices among alternative courses of
action. 3
1
‘Review and resume’, Accounting Terminology Bulletin No.1, American Institute of Certified
Public
Accounts, New York, 1953, paragraph 5.
2
American Accounting Association, A Statement of Basic Accounting Theory, American
Accounting
Association, Evanston, IL, 1966, p.1.
3
financial statements of business enterprises’, American Institute of Certified Public
Accountants, New York, 1970, paragraph 40.
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,INTERNATIONAL FINANCIAL REPORTING AND ANALYSIS, 5TH EDITION
ALEXANDER, BRITTON, JORISSEN
2 Accounting information is usually mainly past information,
but user decisions are by definition future directed.
Consider:
■ relevance v. reliability
■ objectivity v. usefulness
■ producer convenience v. user needs.
3 Perhaps it all depends on what ‘reasonably’ means. The
needs of different users are certainly different (illustration
required), but greater relevance from multiple reports
would need to be set against:
(a) costs of preparation
(b) danger of confusion and the difficulties of user
education.
4–6 We suggest that these three questions are treated as a set.
There is scope for wide differences of view and
considerable debate. We suspect that objectivity and
prudence are likely to come higher up the ‘importance’
scale than they are up the ‘useful’ scale. This would lead to
discussion of whether the user or the producer matters
more!
7 It is really much less objective than people often claim.
Examples of ‘unobjectivity’ include:
■ problem of determining purchase cost
■ overhead allocation
■ depreciation calculation
■ provisions and their estimation
■ prudence (a subjective bias by definition).
8 Completeness requires the inclusion of all relevant
contents. The monetary measurement convention requires
that which is not measurable be not recorded, even if it is
clearly relevant. Discuss conflict.
9 The basic issue is matching (which says capitalize) v.
prudence (which says write off as expense at once).
Relevance, usefulness, etc. should again be brought out.
10 The more obvious conventions seem to be:
■ monetary measurement
■ historical cost
■ prudence (i.e. lower of cost and NRV)
■ realization (profits not realized until ‘sold’).
11 Historical cost accounts are certainly not very objective
(see question 7). Analytically, they are not very useful - out
of date, stewardship rather than forward-looking decision
making etc. But people do accept them and use them,
better the devil you know … etc.,
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,INTERNATIONAL FINANCIAL REPORTING AND ANALYSIS, 5TH EDITION
ALEXANDER, BRITTON, JORISSEN
12 How prudent is prudent? (Again, this is a relative, not an
absolute, term.) The normal accounting practice of revenue
recognition is not the most prudent possible. Stating
debtors at cost (i.e. not recognizing any profits until cash
receipts are in) would be both feasible and more prudent
than normal practice. Perhaps the normal practice
suggests that accountants are ‘reasonably’ prudent
(whatever ‘reasonably’ means!).
13–15 We suggest treating these three questions as a set. See
discussion in the text. The whole process is subjective in
principle and often arbitrary in practice (e.g. the date the
invoice happened to get typed); the answer to question 15
is surely ‘no’.
16 This is about the balance sheet equation: resources equals
claims. Revenue recognition increases claims (i.e. profits)
and therefore increases resources; for example, inventory
at cost may be replaced by debtors at selling price.
17 (a) (i) Receipts €90 Payments €42 Surplus €48
(ii) Revenue €60 Expenses €36 Surplus €24
(b) Receipts and payments basis is easier, more
objective and makes fewer, possibly risky,
assumptions about the future. Revenue and expense
basis follows matching convention, is more realistic
and is a better measure of economic progress.
Discussion required. Difficulties are the treatment of
subscriptions still unreceived for 20X8 and the
corresponding 60% expense.
Chapter 2
1 You will notice that the answer to this question will be
influenced to a large extent by the national background of
the student. In the Anglo-Saxon world students will more
easily argue that accounting is, in essence, economics
based. In those countries, accounting standards are rather
broad and derived from general principles. These
principles are often derived from economic valuation
concepts. Students living under a codified law system and
in countries with a creditor orientation will argue more often
that accounting is law based. If we consider IAS we might
argue that IAS is economics based (e.g. substance over
form).
2 The answer to this question is strongly influenced by the
items put forward in the section ‘national differences will
they still play a role in the future?’ in Chapter 2. As large
companies become more global and seek multi-listings,
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, INTERNATIONAL FINANCIAL REPORTING AND ANALYSIS, 5TH EDITION
ALEXANDER, BRITTON, JORISSEN
they will be strongly in favour of harmonization and even
uniformity. For small local firms the national environment
will remain an important factor shaping their financial
reporting practices.
3 Check for your own country:
■ elements of the accounting environment
■ the major sources of finance
■ whether there is an active and important stock
exchange
■ is the legal system in your country more inspired by
the common law system or the code law system. Did
these systems ‘originate’ in your country or were they
‘exported’ to your country?
■ the relation between accounting and taxation. Is
taxable income in your country to a large extent
determined by accounting income?
■ elements of the accounting system
■ sources of accounting regulation
■ development of the accounting profession.
The importance of the different elements related to the
accounting environment will differ in each country. Try to
appraise the importance of these elements in your own
country. If you list the important elements, you will be able
to understand better your own national accounting
standards and national reporting practices.
4 The cultural values that depict a country lie between the
following extremes:
■ individualism/collectivism
■ large v. small power distance
■ strong v. weak uncertainty
■ masculinity v. femininity.
Appraise where your country is situated with regard to
those four constructs. Make use of the explanations of the
constructs given on page 26.
5 Changes in the accounting system could point to:
■ changes in the standard-setting process, e.g. more
input from the private sector or vice versa
■ an evolution in the contents of the national GAAP
(e.g. a move towards substance instead of legal
form)
■ changes in the organization of the accounting.
These changes could be driven by several possible forces.
For example:
■ changes in the national accounting environment.
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