SOLUTION MANUAL
INTERMEDIATE ACCOUNTING
, TABLE OF CONTENTS
Chapter 1: Environment And Theoretical Structure Of Financial
AccountingChapter 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
FlowsChapter 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
DispositionChapter 12: Investments
Chapter 13: Current Liabilities And
ContingenciesChapter 14: Bonds And Long-
Term Notes Chapter 15: Leases
Chapter 16: Accounting For Income Taxes
Chapter 17: Pensions And Other Postretirement
BenefitsChapter 18: Shareholders’ Equity
Chapter 19: Share-Based Compensation And Earnings Per
ShareChapter 20: Accounting Changes And Error Corrections
Chapter 21: The Statement Of Cash Flows Revisited
,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.
.
Question 1–25
The Four Different Approaches To Implementing Expense Recognition Are:
1. Recognizing An Expense Based On An Exact Cause-And-Effect Relationship
Between A Revenue And Expense Event. Cost Of Goods Sold Is An Example
Of An Expense Recognized By This Approach.
2. Recognizing An Expense By Identifying The Expense With The Revenues
Recognized In A Specific Time Period. Office Salaries Are An Example Of An
Expense Recognized By This Approach.
3. Recognizing An Expense By A Systematic And Rational Allocation To
Specific Time Periods. Depreciation Is An Example Of An Expense
Recognized By This Approach.
, 4. Recognizing Expenses In The Period Incurred, Without Regard To Related
Revenues. Advertising Is An Example Of An Expense Recognized By This
Approach.
Question 1–26
In Addition To The Financial Statement Elements Arrayed In The Basic Financial
Statements, Information Is Disclosed By Means Of Parenthetical Or Modifying
Comments, Notes, And Supplemental Schedules And Tables.
Question 1–27
GAAP Prioritizes The Inputs Companies Should Use When Determining Fair
Value. The Highest And Most Desirable Inputs, Level 1, Are Quoted Market Prices In
Active Markets For Identical Assets Or Liabilities. Level 2 Inputs Are Other Than
Quoted Prices That Are Observable, Including Quoted Prices For Similar Assets Or
Liabilities In Active Or Inactive Markets And Inputs That Are Derived Principally From
Observable Related Market Data. Level 3 Inputs, The Least Desirable, Are Inputs That
Reflect The Entity‘S Own Assumptions About The Assumptions Market Participants
Would Use In Pricing The Asset Or Liability Based On The Best Information Available
In The Circumstances.
Question 1–28
Common Measurement Attributes Are Historical Cost, Net Realizable Value,
Current Cost, Present Value, And Fair Value.
,
, Answers To Questions (Concluded)
Question 1–29
Under The Revenue/Expense Approach, Revenues And Expenses Are Considered
Primary, And Assets, Liabilities, And Equities Are Secondary In The Sense Of Being
Recognized At The Time And Amount Necessary To Achieve Proper Revenue And
Expense Recognition. Under The Asset/Liability Approach, Assets And Liabilities Are
Considered Primary, And Revenues And Expenses Are Secondary In The Sense Of
Being Recognized At The Time And Amount Necessary To Allow Recognition And
Measurement Of Assets And Liabilities As Required By Their Definitions.
Question 1–30
Under IFRS, The Conceptual Framework Provides Guidance To Accounting
Standard Setters But Also Provides GAAP When More Specific Accounting Standards
Do Not Provide Guidance.
Question 1–31
The International Accounting Standards Board (IASB) Is Responsible For Determining
IFRS. The IASB Is Funded By The IFRS Foundation. .
2–8 Intermediate Accounting, 11/e
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