The Financial Reporting Environment
Solutions
CHAPTER 1
Questions
Q1-1 uFinancial uinformation uis ua umuch ubroader uconcept uthan usimply uthe ufinancial
ustatements uand ufootnotes uto uthe ufinancial ustatements. uFinancial uinformation uincludes uitems
usuch uas uthe uPresident‘s uletter uto uthe uowners, umanagement‘s udiscussion uand uanalysis, uthe
uauditors‘ ureport, uthe umanagement ureport uand upress ureleases. uOf ucourse, uthe ubasic ufinancial
ustatements uand ufootnotes uare uincluded uin uthe uterm ufinancial uinformation. uThe ubasic
ufinancial ustatements uare: uthe ubalance usheet u(also u referred uto uas uthe ustatement uof ufinancial
uposition), uthe ustatement uof ucomprehensive uincome u(also ureferred uto uas uthe ustatement uof
unet uincome uand uthe ustatement uof ucomprehensive uincome), uthe ustatement uof ucash uflows,
uand uthe ustatement uof ushareholders‘ uequity. uFinancial uinformation uis unot usynonymous uwith
uthe uterm ufinancial ustatements ubecause uthe ufinancial ustatements uare ua usubset uof uthe
udifferent utypes uof ufinancial uinformation uprovided.
Q1-2 uThe upurpose uof ugenerating ufinancial ustatements uis uto uprovide uuseful uinformation uto
uusers uto uevaluate ueconomic uentities uand umake uefficient uresource uallocation udecisions
ubased uon uthe urisks uand ureturns uof ua uparticular uinvestment. uThe uFinancial uAccounting
uStandards uBoard u(FASB) uidentifies uinvestors, ulenders uand uother ucreditors uas uthe uprimary
uusers uof uthe ufinancial ustatements. uThe ufinancial ustatements uare uthe uculmination uof uthe
ufinancial ureporting uprocess.
Q1-3 uCapital uis ua uscarce uresource. uInvestors uand ucreditors uhave uto umake udecisions uas uto
uhow umuch ucapital uto uinvest uin uany ugiven uentity; utherefore, uthey udemand urelevant uand
ufaithfully urepresentative uinformation uabout uthe ueconomic uperformance uand ufinancial
uposition uof ua ucompany. uThis uinformation uis uprovided uin uthe ufinancial ustatements.
Q1-4 uExternal uauditors uensure uthat uthe umanagement uof ua ucompany uhas uprepared ufinancial
ustatements uin uaccordance uwith uGenerally uAccepted uAccounting uPrinciples uand ufairly
upresent uthe ufinancial uposition uand ueconomic uperformance uof ua ucompany. uIn uaddition,
uexternal uauditors umust ube uan uindependent uparty uand ucannot ube uemployees uof uthe
ucompany uthey uare uauditing. uExternal uauditors uprovide ua usignificant uamount uof ucredibility
uto uthe ufinancial ustatements.
Q1-5 uData uanalytics uis uthe uprocess uof uanalyzing ularge udata usets uin uorder uto udraw uuseful
uconclusions. uIt uinvolves uconverting uraw udata uinto uuseful uknowledge. uIn ufinancial
ureporting, udata uanalytics ucan ube uused uto uimprove uthe uquality uof uestimates uand uvaluations.
Q1-6 uStandard usetters ucreate uaccounting uconcepts, urules, uand uguidelines uto uensure uthat
ufinancial ustatements uaccurately upresent uthe ueconomic uperformance uand ufinancial uposition
uof ua ufirm. uThe ustandards uencourage utransparent uand utruthful ureporting.
,1-2 S O L U T I O N S M A N U A L F O R I N T E R M E D I A T E A C C O U N T ING
Q1-7 uU.S. ucompanies ulisted uon uU.S. ustock uexchanges udo unot uhave uthe uoption uto ureport
uunder uIFRS. uHowever, uforeign ucompanies uthat utrade uin uthe uU.S. uexchanges ucan ureport
uunder uIFRS. uThe uSEC upermits uthe uuse uof uIFRS-based ufinancial ustatements uby
uinternational ucompanies uwith ushares utrading uon uU.S. ustock uexchanges.
Q1-8 uThe uFASB useeks uand uwelcomes ucomments ufrom uall uparties uin uthe ufinancial
ureporting uprocess uincluding umanagers, uinvestors, uaccountants, upreparers, ucreditors, ulenders,
ufinancial ustatement uusers, ugovernmental uagencies, ufinancial uanalysts, uindustry ugroups, uand
uauditors. uFASB ualso ureceives ufeedback ufrom upublic uroundtable udiscussions, upublic
umeetings, uthe uFASAC, uthe uPrivate uCompany uCouncil, uand uEITF.
Q1-9 uYes, uthe upromulgation uof ufinancial uaccounting ustandards uis ua upolitical uprocess.
uThere uare useveral ugroups uthat uinfluence uthe ustandard usetting uprocess. uThe ustandard usetting
uprocess uis ua upolitical uprocess uthat uis uaffected uby uthe uimpact uof useveral ulobbying ugroups.
uThe ugovernment, uthrough uthe uSEC, uinfluences uaccounting ustandards. uThe uSEC uhas uthe
uauthority uto uissue uaccounting ustandards ubut uhas uassigned uthis uresponsibility uto uthe uprivate
usector. uNonetheless, uthe uSEC ucan uexert upressure uon uthe uFASB uto uissue uaccounting
ustandards uand uveto uthe ustandards upromulgated uby uthe uFASB. uAuditing ufirms, uthe
ucorporate usector, ucreditors, ufinancial uanalysts, uthe ufinancial ucommunity, uaccounting
uorganizations, uindustry ugroups, uand uinvestors ucan uinfluence uthe uFASB uby uwritten
ucomments uabout uExposure uDrafts uand uparticipation uin upublic umeetings uand upublic
uroundtables uregarding ua uproposed ufinancial ureporting ustandard.
Q1-10 uA uprinciples-based ustandard uis uconsistent uwith ua utheoretical uframework. uIn
ucontrast, ua urules-based ustandard udoes unot unecessarily urely uon ua uconsistent utheoretical
uframework. uRather, uit ucontains umore uspecific uand uprescriptive urules.
Q1-11 uRecently, uthe uFASB uhas utaken uan uasset/liability uapproach uin usetting ustandards.
uWith uthis uapproach, ua utransaction uis urecorded ubased uon uwhether uan uasset uor uliability uis
ucreated. uAnother utrend uhas ubeen uthe umovement utoward uthe uuse uof ufair uvalue
umeasurements uas uan ualternative uto uhistorical ucost. uFASB uhas ualso ufocused uon uthe
upromulgation uof uprinciples-based ustandards uinstead uof urules-based ustandards.
Brief uExercises
uSolution uto uBE1-1
General-purpose ufinancial ustatements uprovide ugeneral ufinancial uinformation uabout uan uentity
uthat uwill ube uuseful uto umany utypes uof uusers. uGeneral-purpose ufinancial ustatements uprovide
uinformation uto ua uwide uspectrum uof uuser ugroups: uinvestors, ucreditors, ufinancial uanalysts,
ucustomers, uemployees, ucompetitors, usuppliers, uunions, uand ugovernment uagencies. uMost
ufinancial uinformation uin ugeneral upurpose ufinancial ustatements uis uprovided uto usatisfy uusers
uwith ulimited uability uor uauthority uto uobtain uadditional uinformation, uwhich uincludes uinvestors
uand ucreditors. uThe uFinancial uAccounting uStandards uBoard u(FASB) uidentifies uinvestors,
ulenders, uand uother ucreditors uas uthe uprimary uusers uof uthe ufinancial ustatements.
© 2021 Pearson Education, Inc.
, CH APTER 1 THE FIN ANC IAL RE PO RT IN G EN V IR ON MENT 1-3
Solution uto uBE1-2
Financial uaccounting uis uthe uprocess uof uidentifying, umeasuring, uand ucommunicating
ufinancial uinformation uabout uan ueconomic uentity uto uvarious uuser ugroups uwithin uthe ulegal,
ueconomic, upolitical, uand usocial uenvironment. uThis udefinition ucontains ufour umajor uelements:
u1. u Financial uinformation; u2.Economic uentity; u3. uUser ugroups uand u4. uLegal, ueconomic,
upolitical, uand usocial uenvironment
Solution uto uBE1-3
Financial uStatement uUsers
uand uOther uParties Role
10. Are ushareholders uof uthe ucompany.
u10 uEquity uInvestors
1. Are ubanks uand uother ufinancial uinstitutions uthat
u1 uCreditors ulend umoney uto uthe ucompany.
5. u Use ufinancial uinformation uto ureview uand
u5 uFinancial uAnalysts uanalyze ureported uresults uof uthe ucompanies
uthey ucover uand umake uinvestment
u8 uEmployees uand uLabor
urecommendations.
uUnions
8. Use ufinancial uinformation uduring unegotiation uof
u2 uSuppliers uand uCustomers unew ulabor uagreements uand ucompensation
ucontracts.
u7 uGovernment uAgencies 2. Use ufinancial ustatements uto udetermine uwhether
uto uconduct ubusiness uor upurchase uproducts
u3 uCompetitors ufrom ua ucompany.
7. u Review uthe ufinancial ustatements uof upublicly
u4 uExternal uAuditors
utraded ucompanies ufor ua uvariety uof ureasons uthat
uare uin uthe upublic uinterest.
u6 uInternal uAuditors
3. Use ufinancial uinformation uto udetermine utheir
u11 uRegulatory uBodies umarket uposition urelative uto uthe ureporting uentity
uand uto uattempt uto uidentify ufuture ustrategies uof
u9 uProfessional uOrganizations uthe ureporting uentity.
4. Are uindependent uof uthe ucompany uand
uresponsible ufor uensuring uthat umanagement
uprepares uand uissues ufinancial ustatements uthat
ucomply uwith uaccounting ustandards uand ufairly
upresent uthe ufinancial uposition uand ueconomic
uperformance uof uthe ucompany.
6. u Are uemployees uof uthe ucompany userving uin uan
uadvisory urole uto umanagement. uThey uprovide
uinformation uto umanagement uregarding uthe
ucompany‘s uoperations uand uproper ufunctioning uof
uits uinternal ucontrols.
11. Protect uinvestors uand uoversee uthe uaccounting
uand uauditing ustandard usetting uprocesses.
© 2021 Pearson Education, Inc.
, 1-4 S O L U T I O N S M A N U A L F O R I N T E R M E D I A T E A C C O U N T ING
9. Support uaccounting
uprofessionals uthroughout
utheir
© 2021 Pearson Education, Inc.
