CHAPTER 1
The Financial Reporting Environment
Solutions
Questions
Q1-
1aFinancialainformationaisaaamuchabroaderaconceptathanasimplyatheafinancialastatementsaandafootnot
esatoatheafinancialastatements.aFinancialainformationaincludesaitemsasuchaasatheaPresident‘saletteratoat
heaowners,amanagement‘sadiscussionaandaanalysis,atheaauditors‘areport,atheamanagementareportaand
apressareleases.aOfacourse,atheabasicafinancialastatementsaandafootnotesaareaincludedainatheatermafina
ncialainformation.aTheabasicafinancialastatementsaare:atheabalanceasheeta(alsoa referredatoaasatheastate
mentaofafinancialaposition),atheastatementaofacomprehensiveaincomea(alsoareferredatoaasatheastateme
ntaofanetaincomeaandatheastatementaofacomprehensiveaincome),atheastatementaofacashaflows,aandathea
statementaofashareholders‘aequity.aFinancialainformationaisanotasynonymousawithatheatermafinancial
astatementsabecauseatheafinancialastatementsaareaaasubsetaofatheadifferentatypesaofafinancialainformat
ionaprovided.
Q1-
2aTheapurposeaofageneratingafinancialastatementsaisatoaprovideausefulainformationatoausersatoaevalua
teaeconomicaentitiesaandamakeaefficientaresourceaallocationadecisionsabasedaonathearisksaandareturns
aofaaaparticularainvestment.aTheaFinancialaAccountingaStandardsaBoarda(FASB)aidentifiesainvestor
s,alendersaandaotheracreditorsaasatheaprimaryausersaofatheafinancialastatements.aTheafinancialastateme
ntsaareatheaculminationaofatheafinancialareportingaprocess.
Q1-
3aCapitalaisaaascarcearesource.aInvestorsaandacreditorsahaveatoamakeadecisionsaasatoahowamuchacapita
latoainvestainaanyagivenaentity;atherefore,atheyademandarelevantaandafaithfullyarepresentativeainforma
tionaaboutatheaeconomicaperformanceaandafinancialapositionaofaaacompany.aThisainformationaisaprov
idedainatheafinancialastatements.
Q1-
4aExternalaauditorsaensureathatatheamanagementaofaaacompanyahasapreparedafinancialastatementsaina
accordanceawithaGenerallyaAcceptedaAccountingaPrinciplesaandafairlyapresentatheafinancialapositio
naandaeconomicaperformanceaofaaacompany.aInaaddition,aexternalaauditorsamustabeaanaindependenta
partyaandacannotabeaemployeesaofatheacompanyatheyaareaauditing.aExternalaauditorsaprovideaaasigni
ficantaamountaofacredibilityatoatheafinancialastatements.
Q1-
5aDataaanalyticsaisatheaprocessaofaanalyzingalargeadataasetsainaorderatoadrawausefulaconclusions.aItain
volvesaconvertingarawadataaintoausefulaknowledge.aInafinancialareporting,adataaanalyticsacanabeause
datoaimproveatheaqualityaofaestimatesaandavaluations.
Q1-
6aStandardasettersacreateaaccountingaconcepts,arules,aandaguidelinesatoaensureathatafinancialastateme
ntsaaccuratelyapresentatheaeconomicaperformanceaandafinancialapositionaofaaafirm.aTheastandardsaen
courageatransparentaandatruthfulareporting.
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NG a
Q1-
7aU.S.acompaniesalistedaonaU.S.astockaexchangesadoanotahaveatheaoptionatoareportaunderaIFRS.aHow
ever,aforeignacompaniesathatatradeainatheaU.S.aexchangesacanareportaunderaIFRS.aTheaSECapermitsat
heauseaofaIFRS-
basedafinancialastatementsabyainternationalacompaniesawithasharesatradingaonaU.S.astockaexchanges
.
Q1-
8aTheaFASBaseeksaandawelcomesacommentsafromaallapartiesainatheafinancialareportingaprocessaincl
udingamanagers,ainvestors,aaccountants,apreparers,acreditors,alenders,afinancialastatementausers,ago
vernmentalaagencies,afinancialaanalysts,aindustryagroups,aandaauditors.aFASBaalsoareceivesafeedbac
kafromapublicaroundtableadiscussions,apublicameetings,atheaFASAC,atheaPrivateaCompanyaCouncil,
aandaEITF.
Q1-
9aYes,atheapromulgationaofafinancialaaccountingastandardsaisaaapoliticalaprocess.aThereaareaseveralag
roupsathatainfluenceatheastandardasettingaprocess.aTheastandardasettingaprocessaisaaapoliticalaprocessa
thataisaaffectedabyatheaimpactaofaseveralalobbyingagroups.aTheagovernment,athroughatheaSEC,ainflue
ncesaaccountingastandards.aTheaSECahasatheaauthorityatoaissueaaccountingastandardsabutahasaassigne
dathisaresponsibilityatoatheaprivateasector.aNonetheless,atheaSECacanaexertapressureaonatheaFASBatoai
ssueaaccountingastandardsaandavetoatheastandardsapromulgatedabyatheaFASB.aAuditingafirms,atheaco
rporateasector,acreditors,afinancialaanalysts,atheafinancialacommunity,aaccountingaorganizations,ain
dustryagroups,aandainvestorsacanainfluenceatheaFASBabyawrittenacommentsaaboutaExposureaDraftsaa
ndaparticipationainapublicameetingsaandapublicaroundtablesaregardingaaaproposedafinancialareportin
gastandard.
Q1-10aAaprinciples-
basedastandardaisaconsistentawithaaatheoreticalaframework.aInacontrast,aaarules-
basedastandardadoesanotanecessarilyarelyaonaaaconsistentatheoreticalaframework.aRather,aitacontain
samoreaspecificaandaprescriptivearules.
Q1-
11aRecently,atheaFASBahasatakenaanaasset/liabilityaapproachainasettingastandards.aWithathisaapproac
h,aaatransactionaisarecordedabasedaonawhetheraanaassetaoraliabilityaisacreated.aAnotheratrendahasabeen
atheamovementatowardatheauseaofafairavalueameasurementsaasaanaalternativeatoahistoricalacost.aFASB
ahasaalsoafocusedaonatheapromulgationaofaprinciples-basedastandardsainsteadaofarules-
basedastandards.
BriefaExercisesaSoluti
onatoaBE1-1
General-
purposeafinancialastatementsaprovideageneralafinancialainformationaaboutaanaentityathatawillabeausef
ulatoamanyatypesaofausers.aGeneral-
purposeafinancialastatementsaprovideainformationatoaaawideaspectrumaofauseragroups:ainvestors,acred
itors,afinancialaanalysts,acustomers,aemployees,acompetitors,asuppliers,aunions,aandagovernmentaag
encies.aMostafinancialainformationainageneralapurposeafinancialastatementsaisaprovidedatoasatisfyause
rsawithalimitedaabilityaoraauthorityatoaobtainaadditionalainformation,awhichaincludesainvestorsaandacr
editors.aTheaFinancialaAccountingaStandardsaBoarda(FASB)aidentifiesainvestors,alenders,aandaother
©a2021aPearsonaEducation,aInc.
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NaT
a creditorsaasatheaprimaryausersaofatheafinancialastatements.
©a2021aPearsonaEducation,aInc.
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NG a
SolutionatoaBE1-2
Financialaaccountingaisatheaprocessaofaidentifying,ameasuring,aandacommunicatingafinancialainfor
mationaaboutaanaeconomicaentityatoavariousauseragroupsawithinathealegal,aeconomic,apolitical,aandas
ocialaenvironment.aThisadefinitionacontainsafouramajoraelements:a1.a Financialainformation;a2.Econ
omicaentity;a3.aUseragroupsaanda4.aLegal,aeconomic,apolitical,aandasocialaenvironment
SolutionatoaBE1-3
FinancialaStatementaUsersa
andaOtheraParties Role
10. Areashareholdersaofatheacompany.
a 10aEquityaInvestors
1. Areabanksaandaotherafinancialainstitutionsathatalenda
a 1aCreditors moneyatoatheacompany.
5.a Useafinancialainformationatoareviewaandaanalyzear
a5aFinancialaAnalysts eportedaresultsaofatheacompaniesatheyacoveraandam
akeainvestmentarecommendations.
a8aEmployeesaandaLaboraUnions
8. Useafinancialainformationaduringanegotiationaofane
a2aSuppliersaandaCustomers walaboraagreementsaandacompensationacontracts.
2. Useafinancialastatementsatoadetermineawhetheratoa
a7aGovernmentaAgencies conductabusinessaorapurchaseaproductsafromaaaco
mpany.
a 3aCompetitors 7.a Reviewatheafinancialastatementsaofapubliclyatradedaco
mpaniesaforaaavarietyaofareasonsathataareainatheapublica
a 4aExternalaAuditors
interest.
a 6aInternalaAuditors 3. Useafinancialainformationatoadetermineatheiramarketa
positionarelativeatoatheareportingaentityaandatoaattemp
a 11aRegulatoryaBodies tatoaidentifyafutureastrategiesaofatheareportingaentity.
4. Areaindependentaofatheacompanyaandaresponsibleaf
a9aProfessionalaOrganizations oraensuringathatamanagementapreparesaandaissuesafi
nancialastatementsathatacomplyawithaaccountingast
andardsaandafairlyapresentatheafinancialapositionaan
daeconomicaperformanceaofatheacompany.
6.a Areaemployeesaofatheacompanyaservingainaanaadvisory
aroleatoamanagement.aTheya provideainformationatoam
anagementaregardingatheacompany‘saoperationsaandap
roperafunctioningaofaitsainternalacontrols.
11. Protectainvestorsaandaoverseeatheaaccountingaanda
auditingastandardasettingaprocesses.
9. Supportaaccountingaprofessionalsathroughoutatheir
©a2021aPearsonaEducation,aInc.
