CHAPTER 1 8
The Financial Reporting Environment Soluti
8 8 8 8
ons
Questions
Q1-
18Financial8information8is8a8much8broader8concept8than8simply8the8financial8statements8and8fo
otnotes8to8the8financial8statements.8Financial8information8includes8items8such8as8the8President‘
s8letter8to8the8owners,8management‘s8discussion8and8analysis,8the8auditors‘8report,8the8manage
ment8report8and8press8releases.8Of8course,8the8basic8financial8statements8and8footnotes8are8incl
uded8in8the8term8financial8information.8The8basic8financial8statements8are:8the8balance8sheet8(a
lso8 referred8to8as8the8statement8of8financial8position),8the8statement8of8comprehensive8income8
(also8referred8to8as8the8statement8of8net8income8and8the8statement8of8comprehensive8income),8
the8statement8of8cash8flows,8and8the8statement8of8shareholders‘8equity.8Financial8information8i
s8not8synonymous8with8the8term8financial8statements8because8the8financial8statements8are8a8su
bset8of8the8different8types8of8financial8information8provided.
Q1-
28The8purpose8of8generating8financial8statements8is8to8provide8useful8information8to8users8to8e
valuate8economic8entities8and8make8efficient8resource8allocation8decisions8based8on8the8risks8
and8returns8of8a8particular8investment.8The8Financial8Accounting8Standards8Board8(FASB)8ide
ntifies8investors,8lenders8and8other8creditors8as8the8primary8users8of8the8financial8statements.8
The8financial8statements8are8the8culmination8of8the8financial8reporting8process.
Q1-
38Capital8is8a8scarce8resource.8Investors8and8creditors8have8to8make8decisions8as8to8how8much8
capital8to8invest8in8any8given8entity;8therefore,8they8demand8relevant8and8faithfully8representati
ve8information8about8the8economic8performance8and8financial8position8of8a8company.8This8inf
ormation8is8provided8in8the8financial8statements.
Q1-
48External8auditors8ensure8that8the8management8of8a8company8has8prepared8financial8statemen
ts8in8accordance8with8Generally8Accepted8Accounting8Principles8and8fairly8present8the8financi
al8position8and8economic8performance8of8a8company.8In8addition,8external8auditors8must8be8an
8independent8party8and8cannot8be8employees8of8the8company8they8are8auditing.8External8audit
ors8provide8a8significant8amount8of8credibility8to8the8financial8statements.
Q1-
58Data8analytics8is8the8process8of8analyzing8large8data8sets8in8order8to8draw8useful8conclusion
s.8It8involves8converting8raw8data8into8useful8knowledge.8In8financial8reporting,8data8analytics8
can8be8used8to8improve8the8quality8of8estimates8and8valuations.
Q1-
68Standard8setters8create8accounting8concepts,8rules,8and8guidelines8to8ensure8that8financial8sta
tements8accurately8present8the8economic8performance8and8financial8position8of8a8firm.8The8sta
ndards8encourage8transparent8and8truthful8reporting.
,18-828 S8O8L8U8T8I8O8N8S8 M8A8N8U8A8L8 F8O8R8 I8N8T8E8R8M8E8D8I8A8T8E8 A
8C8C8O8U8N8T8ING8
Q1-
78U.S.8companies8listed8on8U.S.8stock8exchanges8do8not8have8the8option8to8report8under8IFRS
.8However,8foreign8companies8that8trade8in8the8U.S.8exchanges8can8report8under8IFRS.8The8SE
C8permits8the8use8of8IFRS-
based8financial8statements8by8international8companies8with8shares8trading8on8U.S.8stock8excha
nges.
Q1-
88The8FASB8seeks8and8welcomes8comments8from8all8parties8in8the8financial8reporting8process
8including8managers,8investors,8accountants,8preparers,8creditors,8lenders,8financial8statement8u
sers,8governmental8agencies,8financial8analysts,8industry8groups,8and8auditors.8FASB8also8recei
ves8feedback8from8public8roundtable8discussions,8public8meetings,8the8FASAC,8the8Private8C
ompany8Council,8and8EITF.
Q1-
98Yes,8the8promulgation8of8financial8accounting8standards8is8a8political8process.8There8are8sev
eral8groups8that8influence8the8standard8setting8process.8The8standard8setting8process8is8a8politi
cal8process8that8is8affected8by8the8impact8of8several8lobbying8groups.8The8government,8throug
h8the8SEC,8influences8accounting8standards.8The8SEC8has8the8authority8to8issue8accounting8sta
ndards8but8has8assigned8this8responsibility8to8the8private8sector.8Nonetheless,8the8SEC8can8exe
rt8pressure8on8the8FASB8to8issue8accounting8standards8and8veto8the8standards8promulgated8by8
the8FASB.8Auditing8firms,8the8corporate8sector,8creditors,8financial8analysts,8the8financial8com
munity,8accounting8organizations,8industry8groups,8and8investors8can8influence8the8FASB8by8
written8comments8about8Exposure8Drafts8and8participation8in8public8meetings8and8public8roun
dtables8regarding8a8proposed8financial8reporting8standard.
Q1-108A8principles-
based8standard8is8consistent8with8a8theoretical8framework.8In8contrast,8a8rules-
based8standard8does8not8necessarily8rely8on8a8consistent8theoretical8framework.8Rather,8it8co
ntains8more8specific8and8prescriptive8rules.
Q1-
118Recently,8the8FASB8has8taken8an8asset/liability8approach8in8setting8standards.8With8this8ap
proach,8a8transaction8is8recorded8based8on8whether8an8asset8or8liability8is8created.8Another8tre
nd8has8been8the8movement8toward8the8use8of8fair8value8measurements8as8an8alternative8to8hist
orical8cost.8FASB8has8also8focused8on8the8promulgation8of8principles-
based8standards8instead8of8rules-based8standards.
Brief8Exercises8Solut
ion8to8BE1-1
General-
purpose8financial8statements8provide8general8financial8information8about8an8entity8that8will8be8
useful8to8many8types8of8users.8General-
purpose8financial8statements8provide8information8to8a8wide8spectrum8of8user8groups:8investors,
8creditors,8financial8analysts,8customers,8employees,8competitors,8suppliers,8unions,8and8govern
ment8agencies.8Most8financial8information8in8general8purpose8financial8statements8is8provided8
to8satisfy8users8with8limited8ability8or8authority8to8obtain8additional8information,8which8include
s8investors8and8creditors.8The8Financial8Accounting8Standards8Board8(FASB)8identifies8invest
©820218Pearson8Education,8In
c.
, C8H8A8P8T8E8R8 18 T8H8E8 F8I8N8A8N8C8I8A8L8 R8E8P8O8R8T8I8N8G8 E8N 18-838
8V8I8R8O8N8M8E8N8T
ors,8lenders,8and8other8creditors8as8the8primary8users8of8the8financial8statements.
©820218Pearson8Education,8In
c.
, 18-848 S8O8L8U8T8I8O8N8S8 M8A8N8U8A8L8 F8O8R8 I8N8T8E8R8M8E8D8I8A8T8E8 A
8C8C8O8U8N8T8ING8
Solution8to8BE1-2
Financial8accounting8is8the8process8of8identifying,8measuring,8and8communicating8financial8in
formation8about8an8economic8entity8to8various8user8groups8within8the8legal,8economic,8politic
al,8and8social8environment.8This8definition8contains8four8major8elements:81.8 Financial8informa
tion;82.Economic8entity;83.8User8groups8and84.8Legal,8economic,8political,8and8social8environ
ment
Solution8to8BE1-3
Financial8Statement8Users8
and8Other8Parties Role
10. Are8shareholders8of8the8company.
8108Equity8Investors
1. Are8banks8and8other8financial8institutions8that8len
818Creditors d8money8to8the8company.
5.8 Use8financial8information8to8review8and8analyz
858Financial8Analysts e8reported8results8of8the8companies8they8cover8
and8make8investment8recommendations.
888Employees8and8Labor8Union
s 8. Use8financial8information8during8negotiation8of8n
ew8labor8agreements8and8compensation8contracts.
828Suppliers8and8Customers 2. Use8financial8statements8to8determine8whether8t
o8conduct8business8or8purchase8products8from8
878Government8Agencies a8company.
7.8 Review8the8financial8statements8of8publicly8traded8
838Competitors
companies8for8a8variety8of8reasons8that8are8in8the8
public8interest.
848External8Auditors
3. Use8financial8information8to8determine8their8mark
868Internal8Auditors et8position8relative8to8the8reporting8entity8and8to8a
ttempt8to8identify8future8strategies8of8the8reporting
8118Regulatory8Bodies 8entity.
4. Are8independent8of8the8company8and8responsibl
898Professional8Organizations
e8for8ensuring8that8management8prepares8and8iss
ues8financial8statements8that8comply8with8accou
nting8standards8and8fairly8present8the8financial8p
osition8and8economic8performance8of8the8compa
ny.
6.8 Are8employees8of8the8company8serving8in8an8advis
ory8role8to8management.8They8provide8information
8to8management8regarding8the8company‘s8operatio
ns8and8proper8functioning8of8its8internal8controls.
11. Protect8investors8and8oversee8the8accounting8an
d8auditing8standard8setting8processes.
9. Support8accounting8professionals8throughout8their
©820218Pearson8Education,8In
c.
