Intermediate Accounting HomeWork

Match the financial statement users and other parties involved in the use of and preparation of financial information with their role.​(Select the financial statement user or other party that matches each​ role.)RoleFinancial Statement Users and Other Parties 1.Are banks and other financial institutions that lend money to the company. 2. Use financial statements to determine whether to conduct business or purchase products from a company. 3. Use financial information to determine their market position relative to the reporting entity and to attempt to identify future strategies of the reporting entity. 4. Are independent of the company and responsible for ensuring that management prepares and issues financial statements that comply with accounting standards and fairly present the financial position and economic performance of the company. 5. Use financial information to review and analyze reported results of the companies they cover and make investment recommendations. 6. Are employees of the company serving in an advisory role to management. They provide information to management regarding the company's operations and the proper functioning of its internal controls. 7. Review the financial statements of publicly traded companies for a variety of reasons that are in the public interest .8.Use financial information during the negotiation of new labor agreements and compensation contracts. 9. Support accounting professionals throughout their careers by providing training, professional skills development, and other resources. 10. Are shareholders of the company. 11. Protect investors and oversee the accounting and auditing standard-setting processes.

1. Creditors 2. Suppliers and Customers 3. Competitors 4. External Auditors 5. Financial Analysts 6. Internal Auditors 7. Government Agencies 8. Employees and Labor Unions 9. Professional Organizations 10. Equity Investors 11. Regulatory Bodies

What is an economic​ entity?

An economic entity is an organization or unit with activities that are separate from those of its owners and other entities. Financial information always relates to a particular economic entity. Economic entities can be ​corporations, partnerships, sole​ proprietorships, or governmental organizations.​ Also, economic entities may be privately held or publicly held.

Identify at least three types of parties in the financial reporting process and discuss why each would be interested in the financial statements.

Auditors Accounting standard setters Regulatory bodies

How does a​ principles-based standard differ from a​ rules-based standard?

A​ principles-based standard is consistent with a theoretical framework. In​ contrast, a​ rules-based standard does not necessarily rely on a consistent theoretical framework.​ Rather, it contains more specific and prescriptive rules.

What are the roles and responsibilities of an external​ auditor?

External auditors ensure that the management of a company has prepared financial statements in accordance with Generally Accepted Accounting Principles and fairly present the financial position and economic performance of a company. In​ addition, external auditors must be an independent party and cannot be employees of the company they are auditing.

Define financial accounting and describe the four main elements in that definition.

Financial accounting is the process of identifying, measuring, and communicating financial information about an economic entity to various user groups within the political, social, legal and economic environment.

What is the definition of financial​ accounting?

Financial accounting is the process of​ identifying, measuring, and communicating financial information about an economic entity to various user groups within the​ legal, economic,​ political, and social environment.

Is this concept synonymous with the term financial​ statements? Explain.

Financial information is not synonymous with the term financial statements because the financial statements are a subset of the different types of financial information provided.

The four major elements of financial accounting​ are: ​(Select four that best describe the major​ elements.)

Financial information​ - includes items such as the footnotes to the financial​ statements, the letter to the​ owners, management's discussion and​ analysis, the​ auditors' report, the management​ report, and press releases. Environment​ - the​ legal, economic,​ political, or social setting that shapes and influences the financial reporting process. Economic entities​ - An economic entity is an organization or unit whose activities are separate from its owners and other entities. Economic entities can be​ corporations, partnerships, sole​ proprietorships, or governmental​ organizations, and may be privately held or publicly held. User groups​ - demand financial information about an economic entity. Users include​ investors, creditors,​ competitors, financial​ analysts, employee and labor​ unions, suppliers,​ customers, and government agencies.

Which items are included in the definition of financial​ information?

Financial statements, ​Auditor's report President's letter to the owners Management report Footnotes to the financial statements

Consider the following​ comment: "Accounting standards have always focused on the​ asset/liability approach and still do​ today." Requirement Do you agree or disagree with this​ comment? Explain your answer.

I disagree. If we base the decision on whether an economic resource meets the definition of an​ asset, we would be using an​ asset/liability (balance​ sheet) approach. In the​ FASB's early​ years, they tended to focus on an income statement approach.​ However, in recent years we have seen the focus shift to the​ asset/liability approach.

What is the composition of the​ IASB's membership? The IASB is comprised of 14 members who are appointed by the _____. At least _____ members serve full​ time, and not more than _____ can be​ part-time members. To ensure broad and diverse international​ representation, the IASB is composed​ of: four members from the _____, four members from _____, four members from _____​, one member from ​, and one member appointed from any​ area, subject to maintaining overall geographical balance.▼ countries they represent.Financial Accounting Standards Board (FASB).IFRS Foundation's board of trustees.Securities Exchange Commission (SEC).▼fiveteneleventwelve▼onetwothreefourfive▼Asia/Oceania regionNorth American regionSouth American region▼EuropeFranceGreat BritainSwitzerland​▼AfricaAustraliathe Americasthe Netherlands▼AfricaAustraliaJapanNew Zealand

IFRS Foundation's board of trustees. eleven three Asia/Oceania region Europe the Americas Africa The IASB is comprised of 14 members who are appointed by the IFRS Foundation's board of trustees. At least eleven members serve full​ time, and not more than three can be​ part-time members. To ensure broad and diverse international​ representation, the IASB is composed​ of: four members from the Asia/Oceania region ​, four members from Europe ​, four members from the Americas ​, one member from Africa ​, and one member appointed from any​ area, subject to maintaining overall geographical balance.

Auditors

It is their job to ensure that the management of the company has prepared financial statements that follow the accounting rules and fairly present the position and performance of the company.

Describe what is meant by the term​ general-purpose financial statements. Discuss what​ group(s) benefit(s) from​ general-purpose financial statements.

Most financial information in general purpose financial statements is provided to satisfy users with limited ability or authority to obtain additional information. ​General-purpose financial statements provide information to investors, creditors, financial analysts, insurance companies, unions, and government agencies

Can U.S. companies listed on U.S. stock exchanges use​ IFRS?

No. U.S. companies do not have the option to report under IFRS.

Joe​ Choi, a history​ major, is considering transferring to your school of business to study accounting. Joe is having some doubts because he is uncertain if there is any room for history in accounting. Read the requirements: ​(a) When did financial reporting standard setting begin in the United​ States? Financial reporting standard setting began in the United States in ▼ 1934 with the 1934 Securities Exchange Act. 1939 by the Committee on Accounting Procedures (CAP). 1959 by the Accounting Principles Board (APB). 1973 by the Financial Accounting Standards Boards (FASB). ​(b) Who had initial authority to set accounting​ standards? The ___________initially had the power to promulgate accounting standards that all​ publicly-traded firms must follow.​ However, this power was delegated to the ________. ▼ Financial Accounting Standards Board (FASB) Internal Revenue Service (IRS) Securities and Exchange Commission (SEC) Senate ▼ Accounting Principles Board (APB). Financial Accounting Standards Board (FASB). private sector. (c) Which organizations were delegated the authority to set​ standards? Comment on the types of standards issued and concerns with the​ standard-setting process under each organization. The ________ was formed in 1939. The​ organization's purpose was to ______ the number of accounting methods used in practice. During its​ tenure, it produced 51​ standards, referred to as ________. The organization accomplished its purpose and was replaced in 1959 by the _________. ▼ American Institute of Certified Public Accountants (AICPA) Committee on Accounting Procedures (CAP) Financial Accounting Standards Board (FASB) ▼ increase reduce ▼ Accounting Research Bulletins (ARBs). Accounting Standards Updates (ASUs). Generally Accepted Accounting Principles (GAAP). International Financial Reporting Standards (IFRS). Opinions. ▼ Accounting Principles Board (APB). American Institute of Certified Public Accountants (AICPA). Committee on Accounting Procedures (CAP). The​ APB's purpose was to _______. The pronouncements of the APB were known as ________. ​The APB was criticized for two reasons.​ First, the board members were ________. ​Second, the board did not develop standards _________. Rather, the Board simply responded to long​ existing, controversial accounting issues. ▼ issue pronouncements on accounting standards needed to meet existing and emerging problems in financial reports or regulate accounting standards needed to meet existing and emerging problems in financial reporting. ▼ Accounting Research Bulletins (ARBs). Accounting Standards Updates (ASUs). Generally Accepted Accounting Principles (GAAP). International Financial Reporting Standards (IFRS). Opinions. ▼ part-time, were CPAs and were still affiliated with their employers. part-time, were not CPA's and were independent. ▼ in anticipation of changes in the accounting environment. that kept up with changing international markets. that kept up with changing laws. ​(d) Who currently sets accounting standards in the United​ States? What is the structure of the​ organization? What types of standards are​ issued? The ________ currently sets accounting standards in the United States. All members are independent and are employed _________ and _______. The members can join the board from _______. The ______ is responsible for the​ oversight, administration and finances of the organization. The _____ advises the organization on technical issues. The organization currently issues ________ as part of the Accounting Standards Codification. ▼ Accounting Principles Board (APB) American Institute of Certified Public Accountants (AICPA) Financial Accounting Standards Board (FASB) ▼ full-time part-time and ▼ do not have to must be accountants or CPAs. ▼ government agencies and education. government agencies and industry. industry, education and public service. ▼ Emerging Issues Task Force Financial Accounting Foundation Financial Accounting Standards Advisory Council Private Company Council ▼ Emerging Issues Task Force Financial Accounting Foundation Financial Accounting Standards Advisory Council Private Company Council ▼ Accounting Research Bulletins (ARBs). Accounting Standards Updates (ASUs). Generally Accepted Accounting Principles (GAAP). International Financial Reporting Standards (IFRS). Opinions.

a) 1934 with the 1934 Securities Exchange Act. b) Securities and Exchange Commission (SEC) private sector c) Committee on Accounting Procedures (CAP) reduce Accounting Research Bulletins (ARBs). Accounting Principles Board (APB). issue pronouncements on accounting standards needed to meet existing and emerging problems in financial reporting. Opinions. part-time, were CPAs and were still affiliated with their employers. in anticipation of changes in the accounting environment. d) Financial Accounting Standards Board (FASB) full-time do not have to industry, education, and public service. Financial Accounting Foundation Financial Accounting Standards Advisory Council Accounting Standards Updates (ASUs).

Review the following statements and indicate if the statement is referring to a​ principles-based or a​ rule-based accounting standard. a. ...the length of a contract covers substantially all of the useful life of a plant asset. b. ...the number of new common shares a firm issues is equal to 20% of the previously outstanding shares. c. ...a corporation owns over 50% of the voting shares of an affiliate company. d. ...a corporation has the ability to control the operating and financial activities of an affiliate company. e. ...it is more likely than not that a company's tax position will be sustained upon examination by the Internal Revenue Service. f. ...the sum of the undiscounted future cash flows from the use of a plant asset is less than its carrying value.

a. Principles-based standard b. Rules-based standard c. Rules-based standard d. Principles-based standard e. Principles-based standard f. Rules-based standard

Alicia​ O'Malley, a sociology​ major, is considering changing her major to accounting. Alicia is having some doubts because she fears that accounting and financial reporting are concerned only with numbers and are isolated from society. Requirement Convince Alicia to major in accounting by explaining how accounting interacts with its environment. In your​ answer, include a discussion of proactive and reactive factors. Accounting and financial reporting are far from isolated from society. Accounting and financial reporting interact with environmental factors such as --------, that shape and influence the financial reporting process. The_________of financial statement users change as business evolves.

legal, economic, political, and social information needs

part 2 Financial accounting interacts with its environment in both a reactive and proactive fashion. In a reactive​ fashion, financial accounting reacts to____________in its environment. Accounting theories and procedures evolve to meet the dynamic changes and demands from the environment. The________________ is also a political process that is heavily influenced by the various groups within the reporting environment. Financial accounting is also proactive. That​ is, it can____________that is used by organizations and individuals to reshape the economy.

pressure (lobbying) from various groups and changes, development of accounting standards, change or influence its environment by providing feedback information

Who does the FASB consult in the​ standard-setting process?

The FASB seeks and welcomes comments from all parties in the financial reporting process including managers, investors, accountants, preparers, creditors, lenders, financial statement users, governmental agencies, financial analysts, industry groups, and auditors. FASB also receives feedback from public roundtable discussions, public meetings, the FASAC, the Private company Council, and EITF.

Vikram​ Patel, one of your friends from high school who is a finance​ major, is surprised that you are learning about international accounting. Explain why it is important for an accountant in the United States to learn international financial reporting standards​ (IFRS). ​(Select all that​ apply.) A. The SEC permits the use of IFRS or U.S. GAAP for U.S. companies. B. The SEC permits the use of​ IFRS-based financial statements by international companies with shares trading on U.S. stock exchanges. As an accountant and auditor in the​ U.S., I may be asked to assist these​ non-U.S. companies in preparing U.S. regulatory reports. C. The SEC prefers the use of IFRS over U.S. GAAP. D. ​I'll be taking the CPA exam and IFRS is tested on it. The accounting profession has determined that a working knowledge of IFRS is important for​ today's accountant. E. The SEC promotes​ high-quality, globally accepted accounting standards. U.S. accountants and auditors will need a working knowledge of IFRS to implement these standards in companies and perform audits. F. I may want to work outside of the U.S. at some time in my career. As of​ 2019, IFRS is required or permitted in over 144 countries worldwide G. U.S. companies operate subsidiaries outside of the U.S. Many of these subsidiaries report under IFRS in their home countries. Accountants must convert the​ subsidiaries' financial statements to U.S. GAAP when preparing consolidated financial statements.​ So, if I am the accountant or auditor of a company with international​ subsidiaries, I will need to understand IFRS. H. ​Non-U.S. companies operate in the U.S. and prepare their financial statements using IFRS. If I am working at or auditing an international​ firm, I am likely to see IFRS.

B., D., E., F., G., H.

How is the allocation of capital linked to the demand for financial​ reporting?

Capital is a scarce resource . Investors and creditors have to make decisions as to how much capital to invest in any given entity ​ ​therefore, they demand relevant and faithfully representative information about the economic performance and financial position of a company This information is provided in the financial statements.

Select four types of financial statement users and the corresponding letter for the description of each financial statement user. Financial Statement User: Accounting standard settersAuditorsCreditorsEmployee and labor unionsEquity Investors Regulatory bodies Suppliers and customers description. They loan money to the company. The financial statements help them assess the​ creditworthiness of the company. b.They review the filings of public companies in the U.S. c.They create accounting​ concepts, rules, and guidelines that will result in financial statements that provide financial information that is relevant and that faithfully represent the financial performance and position of the reporting entity. d.They buy stock in the​ company. That​ is, they purchase a percentage of the company itself. The financial statements help them make investment decisions. e.They can use the financial statements to determine a​ company's financial position and whether they want to do business with the company. f.They provide information to management regarding the​ company's operations and proper functioning of its internal controls. g.They use financial statements to assess the​ company's performance, which is important information in wage negotiations.

Creditors - a. Equity investors - d. Employee and labor unions - g. Suppliers and customers - e.

Provide the key characteristics of​ rules-based standards and​ principles-based standards. Key characteristics of​ rules-based standards: ​(Select all that apply. If a box is not used in the​ table, leave the box​ empty; do not select a​ label.) 1. Are consistent with an established theory or conceptual framework 2. Key characteristics of​ principles-based standards: ​(Select all that apply. If a box is not used in the​ table, leave the box​ empty; do not select a​ label.) Contain detailed application guidance Contain numerous bright-line tests Contain numerous exceptions to the types of firms and industries that are covered by the standard Do not rely on extensive use of professional judgement Involve a significant amount of judgement in application Involve few, if any, exceptions Involve no "bright-line" tests Provide a clear discussion of the accounting objective related to the standard Provide insufficient guidance to implement the standard Result in inconsistencies between standard

Provide the key characteristics of​ rules-based standards and​ principles-based standards. Key characteristics of​ rules-based standards: ​(Select all that apply. If a box is not used in the​ table, leave the box​ empty; do not select a​ label.) -Contain numerous exceptions to the types of firms and industries that are covered by the standard -Contain numerous bright-line tests -Result in inconsistencies between standards -Contain detailed application guidance -Do not rely on extensive use of professional judgment Key characteristics of​ principles-based standards: ​ (Select all that apply. If a box is not used in the​ table, leave the box​ empty; do not select a​ label.) Provide a clear discussion of the accounting objective related to the standard Involve few, if any, exceptions Involve no "bright-line" tests Provide insufficient guidance to implement the standard Involve a significant amount of judgment in application

Identify whether the items below are characteristics of a​ principles-based (P) or​ rules-based (R) accounting​ system:

Provides a clear discussion of the accounting objective related to the standard P Contains detailed application guidance R Contains numerous exceptions to the types of firms and industries that are covered R Involves no bright-line tests P Contains numerous bright-line tests R Part 2 Involves a significant amount of interpretation in application P Involves few, if any, exceptions P Provides insufficient guidance to implement the standard P Would not rely on extensive use of professional judgment R Results in inconsistencies between standards R

What is the function of the accounting standard​ setters?

Standard setters create accounting​ concepts, rules, and guidelines to ensure that financial statements accurately present the economic performance and financial position of a firm.

What is the​ standard-setting process followed by​ FASB? The FASB follows a​ seven-step process to issue a final standard. Place the steps listed in the proper order.

Step# Description Step 1 The FASB identifies a financial reporting issue. Step 2 The FASB Chairperson decides whether to add the issue to the technical agenda. Step 3 The FASB holds public meetings to deliberate various issues identified. Step 4 The Board issues an Exposure Draft. Step 5 The Board may hold public roundtables to discuss the Exposure Draft. Step 6 The Board analyzes comments and redeliberates the issue. Step 7 The Board issues an Accounting Standards Update.

Order the steps in the Financial Accounting Standards​ Board's standard-setting process from 1 to 7.

The Board issues an Exposure Draft (ED), which is intended to solicit input. (4) After consultation with FASB members and others as appropriate, the FASB Chairperson decides whether to add the issue to the technical agenda. (2) The FASB staff analyzes the comment letters received, public roundtable discussions, and any other information. The Board then redeliberates the issue. (6) The Board may hold public roundtables to discuss the ED, if needed. (5) The Board issues an Accounting Standards Update (ASU), which is the final standard. It then incorporates the ASU into the Accounting Standards Codification that makes up U.S. GAAP. (7) A financial reporting issue is identified either by requests of financial statement users or by some other means. (1) The Board holds public meetings where it deliberates the various issues identified by the FASB staff. (3)

In recent​ years, what has been the​ FASB's approach to standard​ setting?

The FASB has taken an​ asset/liability approach in setting standards. With this​ approach, a transaction is recorded based on whether an asset or liability is created. Another trend has been the movement toward the use of fair value measurements as an alternative to historical cost. FASB has also focused on the promulgation of​ principles-based standards instead of​ rules-based standards.

Briefly explain how the financial statements​ preparers, users, and other interested parties are involved in the​ standard-setting process for U.S. GAAP. (Select all that apply)

The correct answers are : A. After an exposure draft is​ issued, standard setters sometimes hold roundtables​ discussions, or public​ forums, which include these various parties. Your answer is correct. B. When an exposure draft is​ issued, interested parties are invited to prepare comment letters. Your answer is correct. C. Accounting standard setters follow a process to set accounting standards which involves considering the input of financial statement​ preparers, users and other interested parties at several stages. Standard setters consider input from these parties to identify financial reporting issues to pursue. Your answer is correct. D. Once an issue is added to the​ agenda, standard setters usually have public meetings where they seek comment from these interested parties. Your answer is correct. E. When deliberating on issuing a final​ standard, the standard setters consider the input obtained from outside parties at these various stages in the standard setting process.

What is the purpose of generating financial statements and who are the primary users of this​ information?

The purpose of generating financial statements is to provide useful information to users to evaluate economic entities and make efficient resource allocation decisions based on the risks and returns of a particular investment. The Financial Accounting Standards Board​ (FASB) identifies​ investors, lenders and other creditors as the primary users of the financial statements.

Accounting standard setters

They create accounting​ concepts, rules, and guidelines that will result in financial statements that provide financial information that is relevant and that faithfully represent the financial performance and position of the reporting entity.

Regulatory bodies

They oversee the accounting standard setting​ process, including giving the FASB the authority to determine U.S. GAAP.

What is the​ SEC's role in standard​ setting, both historically and​ currently?

U.S. financial reporting standard setting began with the 1934 Securities Exchange​ Act, which gave the SEC the power to promulgate accounting standards for all publicly traded firms. The SEC delegated its​ standard-setting power to the private​ sector, prompting the accounting profession to establish the first U.S.​ standard-setting board.​ Currently, the SEC issues standards and continues in an oversight function over the US standards setting bodies such as the FASB.

Is the promulgation of financial accounting standards a political​ process? Explain.

Yes, the promulgation of financial accounting standards is a political process. The standard setting process is impacted by several lobbying groups. The SEC can exert pressure on the FASB to issue accounting standards and veto the standards promulgated by the FASB. Many other​ groups, such as auditing​ firms, the corporate​ sector, and investors can influence the FASB by written comments and participation in public hearings regarding a proposed financial reporting standard.