SOLUTION MANUAL
Intermediate Accounting, 11th Edition
by David Spiceland, Mark Nelson,
ALL Chapters 1 - 21, & Appendix A
,TABLE OF CONTENTS
Chapter 1: Environment and Theoretical Structure of Financial Accounting
Chapter 2: Review of the Accounting Process
Chapter 3: The Balance Sheet and Financial Disclosures
Chapter 4: The Income Statement, Comprehensive Income, and the Statement of Cash Flows
Chapter 5: Time Value of Money Concepts
Chapter 6: Revenue Recognition
Chapter 7: Cash and Receivables
Chapter 8: Inventories: Measurement
Chapter 9: Inventories: Additional Issues
Chapter 10: Property, Plant, and Equipment and Intangible Assets: Acquisition
Chapter 11: Property, Plant, and Equipment and Intangible Assets: Utilization and Disposition
Chapter 12: Investments
Chapter 13: Current Liabilities and Contingencies
Chapter 14: Bonds and Long-Term Notes
Chapter 15: Leases
Chapter 16: Accounting for Income Taxes
Chapter 17: Pensions and Other Postretirement Benefits
Chapter 18: Shareholders’ Equity
Chapter 19: Share-Based Compensation and Earnings per Share
Chapter 20: Accounting Changes and Error Corrections
Chapter 21: The Statement of Cash Flows Revisited
Appendix
A: Derivatives
,Chapter 1 Environment and Theoretical Structure of
Financial Accounting
Question 1–1
Financial accounting is concerned with providing relevant financial
information about various kinds of organizations to different types of external
users. The primary focus of financial accounting is on the financial information
provided by profit- oriented companies to their present and potential investors
and creditors.
Question 1–2
Resources are efficiently allocated if they are given to enterprises that will
use them to provide goods and services desired by society and not to
enterprises that will waste them. The capital markets are the mechanism that
fosters this efficient allocation of resources.
Question 1–3
Two extremely important variables that must be considered in any
investment decision are the expected rate of return and the uncertainty or risk
of that expected return.
Question 1–4
In the long run, a company will be able to provide investors and creditors
with a rate of return only if it can generate a profit. That is, it must be able to
use the resources provided to it to generate cash receipts from selling a
product or service that exceed the cash disbursements necessary to provide
that product or service.
Question 1–5
The primary objective of financial accounting is to provide investors and
creditors with information that will help them make investment and credit
decisions.
Question 1–6
Net operating cash flows are the difference between cash receipts and
,cash disbursements during a period of time from transactions related to
providing goods and services to customers. Net operating cash flows may not
be a good indicator of future cash flows because, by ignoring uncompleted
transactions, they may not match the accomplishments and sacrifices of the
period.
,Question 1–7
GAAP (generally accepted accounting principles) are a dynamic set of
both broad and specific guidelines that a company should follow in measuring
and reporting the information in their financial statements and related notes.
It is important that all companies follow GAAP so that investors can compare
financial information across companies to make their resource allocation
decisions.
Question 1–8
In 1934, Congress created the SEC and gave it the job of setting
accounting and reporting standards for companies whose securities are
publicly traded. The SEC has retained the power, but has relied on private
sector bodies to create the standards. The current private sector body
responsible for setting accounting standards is the FASB.
Question 1–9
Auditors are independent, professional accountants who examine financial
statements to express an opinion. The opinion reflects the auditors‘
assessment of the statements' fairness, which is determined by the extent to
which they are prepared in compliance with GAAP. The auditor adds
credibility to the financial statements, which increases the confidence of
capital market participants relying on that information.
,Question 1–10
Key provisions included in the text are:
Creation of the Public Company Accounting Oversight Board
Regulate types of non-audit audit services
Require lead audit partner rotation every 5 year
Corporate executive accountability
Addresses conflicts of interest for security analysts
Internal control reporting and auditor opinion about controls
Question 1–11
New accounting standards, or changes in standards, can have significant
differential effects on companies, investors and creditors, and other interest
groups by causing redistribution of wealth. There also is the possibility that
standards could harm the economy as a whole by causing companies to
change their behavior.
Question 1–12
The FASB undertakes a series of elaborate information gathering steps
before issuing an accounting standard to determine consensus as to the
preferred method of accounting, as well as to anticipate adverse economic
consequences.
Question 1–13
The purpose of the conceptual framework is to guide the Board in
developing accounting standards by providing an underlying foundation and
basic reasoning on which to consider merits of alternatives. The framework
does not prescribe GAAP.
,Question 1–14
Relevance and faithful representation are the primary qualitative
characteristics that make information decision-useful. Relevant information will
possess predictive and/or confirmatory value. Faithful representation is the
extent to which there is agreement between a measure or description and the
phenomenon it purports to represent.
Question 1–15
The components of relevant information are predictive value,
confirmatory value and materiality. The components of faithful representation
are completeness, neutrality, and freedom from error.
Question 1–16
The benefit from providing accounting information is increased decision
usefulness. If the information is relevant and possesses faithful representation,
it will improve the decisions made by investors and creditors. However, there
are costs to providing information that include costs to gather, process, and
disseminate that information. There also are costs to users in interpreting the
information as well as possible adverse economic consequences that could
result from disclosing information. Information should not be provided unless
the benefits exceed the costs.
Question 1–17
Information is material if it is deemed to have an effect on a decision
made by a user. The threshold for materiality will depend principally on the
relative dollar amount of the transaction being considered. One consequence
of materiality is that GAAP need not be followed in measuring and reporting a
transaction if that transaction is not material. The threshold for materiality has
been left to subjective judgment.
,Question 1–18
1. Assets are probable future economic benefits obtained or controlled by a
particular entity as a result of past transactions or events.
2. Liabilities are probable future sacrifices of economic benefits arising from
present obligations of a particular entity to transfer assets or provide
services to other entities in the future as a result of past transactions.
3. Equity is the residual interest in the assets of any entity that remains after
deducting its liabilities.
4. Investments by owners are increases in equity resulting from transfers of
resources, usually cash, to a company in exchange for ownership interest.
5. Distributions to owners are decreases in equity resulting from transfers to
owners.
6. Revenues are inflows of assets or settlements of liabilities from delivering
or producing goods, rendering services, or other activities that constitute
the entity‘s ongoing major or central operations.
7. Expenses are outflows or other using up of assets or incurrences of
liabilities during a period from delivering or producing goods, rendering
services, or other activities that constitute the entity‘s ongoing major or
central operations.
8. Gains are defined as increases in equity from peripheral or incidental
transactions of an entity.
9. Losses represent decreases in equity arising from peripheral or incidental
transactions of an entity.
10. Comprehensive income is defined as the change in equity of an entity
during a period from nonowner transactions.
Question 1–19
The four basic assumptions underlying GAAP are (1) the economic entity
assumption, (2) the going concern assumption, (3) the periodicity assumption,
and (4) the monetary unit assumption.
Question 1–20
The going concern assumption means that, in the absence of information
to the contrary, it is anticipated that a business entity will continue to operate
,indefinitely. This assumption is important to many broad and specific
accounting principles such as the historical cost principle.
, Question 1–21
The periodicity assumption relates to needs of external users to receive
timely financial information. This assumption requires that the economic life
of a company be divided into artificial periods for financial reporting.
Companies usually report to external users at least once a year.
Question 1–22
Four accounting practices, often referred to as principles, that guide
accounting practice are (1) revenue recognition, (2) expense recognition, (3)
mixed-attribute measurement (including historical cost), and (4) full disclosure.
Question 1–23
Two advantages to basing valuation on historical cost are (1) historical
cost provides important cash flow information since it represents the cash or
cash equivalent paid for an asset or received in exchange for the assumption
of a liability, and (2) historical cost valuation is the result of an exchange
transaction between two independent parties and the agreed upon exchange
value is, therefore, objective and possesses a high degree of verifiability.
Question 1–24
Companies recognize revenue when goods or services are transferred to
customers. However, no revenue is recognized if it isn‘t probable that the
seller will collect the amounts it‘s entitled to receive. The amount of revenue
recognized is the amount the company expects to be entitled to receive in
exchange for those goods or services. Revenue is recognized at a point in time
or over a period of time, depending on when goods or services are transferred
to customers. So, revenue for the sale of most goods is recognized upon
delivery, but revenue for services like renting apartments or lending money is
recognized over time as those services are provided.
