, Solution manual for Intermediate Accounting
Reporting and Analysis 4th Edition by James M.
Wahlen
Notes
1- The file is chapter after chapter.
2- We have shown you 10 or five pages.
3- The file contains all Appendix and Excel
sheet if it exists.
4- We have all what you need, we make
update at every time. There are many
new editions waiting you.
5- If you think you purchased the wrong file
You can contact us at every time, we can
replace it with true one.
Our email:
,© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 1
The Demand for and Supply of Financial Accounting Information
Content Analysis of End-of-Chapter Assignments
TIME
NUMBER TOPIC CONTENT LO ADAPTED DIFFICULTY EST. AACSB AICPA BLOOM’S
1-1 Role of Financial Financial accounting; 1 Easy 5 Analytic Measurement Understand
Reporting financial reporting
1-2 Financial Reporting Major categories of financial 1 Easy 5 Analytic Measurement Understand
Stakeholders reporting stakeholders
1-3 Financial Reporting Different information needs 1 Easy 5 Analytic Measurement Apply
Stakeholders of investors and creditors
1-4 Information Information asymmetry 1 Easy 5 Analytic Measurement Understand
Asymmetry between financial reporting
preparers and users
1-1
1-5 Financial Reporting Demand for financial 1 Easy 5 Analytic Measurement Apply
Information reporting information
1-6 Accounting Demand for accounting 1 Easy 5 Analytic Measurement Understand
Standards and standards and audit
Audits verification
1-7 Generally Accepted Definition of U.S. GAAP 1 Easy 5 Analytic Measurement Understand
Accounting
Principles
1-8 Standard Setting Supply of accounting 2 Easy 5 Analytic Measurement Understand
information
1-9 Standard Setting Role of SEC 2 Easy 5 Analytic Measurement Understand
1-10 Standard Setting Role of FASB 3 Easy 5 Analytic Measurement Understand
1-11 Standard Setting Role of EITF 3 Easy 5 Analytic Measurement Understand
1-12 Standard Setting FASB Accounting Standards 4 Easy 5 Analytic Measurement Apply
Codification
,© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
TIME
NUMBER TOPIC CONTENT LO ADAPTED DIFFICULTY EST. AACSB AICPA BLOOM’S
1-13 Standard Setting Process for issuing 4 Easy 5 Analytic Measurement Understand
accounting standard
update
1-14 Standard Setting FASB; IASB 5 Easy 5 Analytic Measurement Analyze
1-15 Standard Setting Definition of IFRS 5 Easy 5 Analytic Measurement Apply
1-16 Standard Setting Changing standards over 5 Easy 5 Analytic Measurement Understand
time; U.S. GAAP; IFRS
1-17 Standard Setting The impact of pure theory vs. 5 Easy 5 Analytic Measurement Analyze
politics in standard setting
1-18 Financial Statements Balance sheet; financial 6 Easy 5 Analytic Reporting Apply
reporting stakeholders
1-19 Financial Statements Income statement; financial 6 Easy 5 Analytic Reporting Apply
reporting stakeholders
1-20 Financial Statements Statement of cash flows; 6 Easy 5 Analytic Reporting Apply
1-2
financial reporting
stakeholders
1-21 Financial Statements Statement of shareholders' 6 Easy 5 Analytic Reporting Apply
equity; financial reporting
stakeholders
1-22 Financial Statements Purpose of footnotes; 6 Easy 5 Analytic Reporting Apply
disclosure of financial
information
1-23 Earnings and the Economic consequences of 7 Easy 5 Analytic Measurement Analyze
Stock Market earnings information
1-24 Ethics Ethics 7 Easy 5 Analytic Measurement Apply
1-25 Ethics Ethics; code of professional 7 Easy 5 Analytic Measurement Understand
conduct
,© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Number Topic Content LO Adapted Difficulty Time AACSB AICPA Bloom’s
MC1-1 Stakeholders Different stakeholders that need financial 1 Easy 5 Analytic Reporting Understand
statement information
MC1-2 Business Activities Financing activities 1 Easy 5 Analytic Reporting Understand
MC1-3 Business Activities Investing activities 1 Easy 5 Analytic Reporting Understand
MC1-4 Business Activities Operating activities 1 Easy 5 Analytic Reporting Understand
MC1-5 Demand Information asymmetry 1 Easy 5 Analytic Reporting Understand
MC1-6 Supply Determinants of supply 2 Easy 5 Analytic Reporting Understand
MC1-7 FASB Structure of the FASB 3 Easy 5 Analytic Reporting Understand
MC1-8 Codification Objective of the Codification 4 Easy 5 Analytic Reporting Understand
MC1-9 IASB and IFRS Importance 5 Easy 5 Analytic Reporting Understand
1-3
MC1-10 Product Balance sheet information 6 Easy 5 Analytic Reporting Understand
MC1-11 Product Income statement information 6 Easy 5 Analytic Reporting Apply
MC1-12 Product Statement of cash flows information 6 Easy 5 Analytic Reporting Apply
MC1-13 Economic Returns consequences associated with 7 Easy 5 Analytic Reporting Apply
Consequences changes in earnings
MC1-14 Ethics AICPA Code of Ethics 7 Easy 5 Analytic Reporting Apply
,© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
NUMBER TOPIC CONTENT LO ADAPTED DIFFICULTY TIME AACSB AICPA BLOOM’S
E1-1 Stakeholders Different characteristics and needs for information 1 Easy 5 Analytic Reporting Understand
E1-2 Demand Demand for information in different financial 1 Easy 10 Analytic Reporting Understand
statement0073
E1-3 Supply Role of SEC and FASB 2 Easy 10 Analytic Reporting Understand
E1-4 FASB Characteristics of standard setters 3 Easy 10 Analytic Reporting Understand
E1-5 Codification Objective and use of the Codification 4 Easy 10 Analytic Reporting Understand
E1-6 IASB The SEC and IFRS 5 Easy 10 Analytic Reporting Understand
E1-7 Product Financial statement information 6 Easy 10 Analytic Reporting Understand
E1-8 Product Balance sheet information 6 Easy 10 Analytic Reporting Apply
E1-9 Product Income statement information 6 Easy 10 Analytic Reporting Apply
E1-10 Economic Returns consequences associated with changes in 7 Easy 10 Analytic Reporting Apply
Consequences earnings
1-4
,© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
TIME
NUMBER TOPIC CONTENT LO ADAPTED DIFFICULTY EST. AACSB AICPA BLOOM’S
C1-1 Accounting Principles Describe the meaning of the 3 AICPA Easy 10 Analytic Measurement Apply
terms “accounting
principles” and “generally
accepted”
C1-2 Standard Setting Describe why there is 3 CMA Easy 10 Analytic Measurement Apply
political action and social
involvement in the standard-
setting process
C1-3 Organization of the Summarize the structure of 3 Easy 15 Analytic Measurement Apply
FASB the FASB and its operating
procedures
C1-4 Code of Professional Identify, briefly discuss, and 7 Easy 10 Analytic Measurement Apply
Conduct provide examples to illustrate
the first five principles of CPC
1-5
C1-5 Lobbying the FASB Discuss pros and cons of 3 Easy 5 Analytic Measurement Apply
lobbying the FASB by
interested parties
C1-6 International Discuss convergence of U.S. 5 Moderate 10 Analytic Measurement Apply
Convergence GAAP and international
accounting standards;
include discussion of SEC
and its role in this
convergence; includes IFRS
C1-7 Clorox's Financial Identify two important pieces 6 Moderate 20 Analytic Reporting Apply
Statements of information from each of
the four primary financial
statements and
management discussion and
analysis
,© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
TIME
NUMBER TOPIC CONTENT LO ADAPTED DIFFICULTY EST. AACSB AICPA BLOOM’S
C1-8 Nestlé’s Financial Identify two important pieces 6 Moderate 20 Analytic Reporting Apply
Statements of information from each of
three primary financial
statements
C1-9 Coca Cola's Financial Identify two important pieces 6 Moderate 20 Analytic Reporting Apply
Statements of information from each of
three primary financial
statements
C1-10 Ethical Responsibilities Discuss steps to take in an 7 Moderate 5 Reflective Measurement Analyze
ethical dilemma Thinking
(“misplaced” book in library)
C1-11 Ethical Responsibilities Discuss steps to take in an 7 Moderate 5 Reflective Measurement Analyze
ethical dilemma (cheating Thinking
by friend on exam)
C1-12 Codification Prepare a memo to explain Moderate 25 Analytic Measurement Apply
1-6
and demonstrate the
Codification to an
introductory accounting
student, who is familiar with
the financial statements and
accounts
C1-13 Codification Search the Codification to Moderate 15 Analytic Measurement Apply
determine how a company
should account for the cost
of a new desktop computer
for use in the office
C1-14 Codification Search the Codification to Moderate 25 Analytic Measurement Apply
determine how a company
should account for
recognition of retail revenues
with the right to return
,Answers to Got It?
1-1 The objective of financial accounting is to identify, measure, record, and report relevant
and reliable financial information about companies to present and potential future
stakeholders. Financial reporting is the process of communicating financial accounting
information about a company to existing and potential future investors, creditors, and
other external decision makers and stakeholders. An important way a company’s
financial accounting information is reported is in its quarterly and annual reports. The role
of financial reporting is to inform investors, creditors, and other stakeholders. Financial
reporting also provides information to mitigate agency problems which stem from the
separation of ownership and control of resources.
1-2 The primary stakeholders that are important users of financial information include
investors, creditors, banks, suppliers, customers, employees, executives, labor unions,
pension funds, government regulatory authorities, tax authorities, local communities, and
many others (see Exhibit 1.1). In class we discuss how these stakeholders can be divided
into two major categories: external users and internal users. These two groups do not
have the same decision-making information needs because of their differing
relationships with the company providing economic information. Of these groups, FASB
has stated the primary purpose of financial reporting is to inform investors and creditors.
1-3 Investors and creditors take different downside risks and enjoy different potential upside
gains from investing or lending. Equity investors are the residual risk bearers of
corporations but stand to enjoy potentially greater upside if the company is successful
and profitable. Creditors face less risk of loss of their investments because they have
superior claim in bankruptcy over equity investors. But creditors do not share in the same
upside potential as equity investors. As a result of these differences, their information
needs differ. Equity investors are more concerned with profitability, whereas creditors
tend to be more focused on cash flows.
1-4 Information asymmetry arises from the separation of ownership and control of resources.
Financial reporting helps reduce (but not eliminate) information asymmetry problems by
enabling managers (agents) to provide relevant and faithfully represented information to
investors and creditors (principals), thereby reducing information asymmetry.
1-5 The demand for financial accounting information, as an economic good in society,
arises from the needs of equity shareholders, creditors, and various other stakeholders for
information to make resource allocation decisions. This demand arises because
businesses have to compete for and attract scarce economic resources, such as equity
and debt capital, productive resources, employees, supplier and customer relationships,
and so forth. In order to compete for these valuable resources, companies must provide
relevant and faithfully represented information to those who can provide the resources.
1-6 To solve the problems that would arise from biases in a self-reporting accounting system,
a natural demand arises for accounting standards and audits. The demand for
accounting information drives the demand for professionally established accounting
standards that provide authoritative guidance on how to measure and report economic
activities in financial statements. In addition, the demand for accounting information also
drives the demand for auditing—independent verification and attestation of whether the
financial statements have been fairly presented in accordance with professional
accounting standards.
1-7
© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, 1-7 Generally Accepted Accounting Principles (GAAP) are the principles, concepts,
guidelines, procedures, and practices that U.S. companies that are listed in the United
States and subject to SEC regulation are required to use in recording and reporting the
accounting information in audited financial statements.
1-8 The supply of accounting information that companies report to external stakeholders is
determined primarily by the interactions between two sets of forces:
The authoritative professional accounting standards that govern in the
company’s country of incorporation, such as U.S. GAAP or IFRS, and
the many choices, methods, estimates, and judgments that the company must
make in order to apply those accounting standards to measure and report their
financial statements.
1-9 The stated mission of the U.S. Securities and Exchange Commission is to “protect
investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
The U.S. Congress created the SEC to administer the Securities Act of 1933 and the
Securities Exchange Act of 1934. Under these Acts, the SEC has the legal authority to
prescribe accounting principles and reporting practices for all corporations issuing
publicly traded securities within the U.S. capital markets. The SEC has mandated that the
information communicated to external users in financial reporting be based on
professionally established accounting principles, such as GAAP for U.S. companies and
IFRS for non-U.S. companies.
The SEC delegates the authority over standard setting to private standard-setting bodies
within the accounting profession, such as the Financial Accounting Standards Board
(FASB) establishing GAAP for U.S. companies and the International Accounting Standards
Board (IASB) establishing IFRS for companies from many other countries around the world.
The SEC monitors closely and oversees the standards being developed by these
standard setters. From time to time, the SEC exerts pressure on the standard setters to
adopt, or not adopt, specific standards.
1-10 The FASB is responsible for identifying financial accounting issues, conducting research to
address these issues, and resolving them by issuing new accounting standards
applicable to U.S. companies. The FASB fulfills its responsibility by:
establishing standards that are the most acceptable, given the various affected
constituencies, and
continually monitoring the consequences of its actions so that revised standards can
be issued where appropriate.
1-11 In assisting the FASB, the primary objectives of the EITF are:
to identify significant emerging accounting issues (i.e., unique transactions and
accounting problems) that it feels the FASB should address.
to develop consensus positions on the implementation issues involving the
application of standards. In some cases, these consensus positions may be viewed as
the ‘‘best available guidance’’ on GAAP, particularly as they relate to new
accounting issues.
1-8
© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reporting and Analysis 4th Edition by James M.
Wahlen
Notes
1- The file is chapter after chapter.
2- We have shown you 10 or five pages.
3- The file contains all Appendix and Excel
sheet if it exists.
4- We have all what you need, we make
update at every time. There are many
new editions waiting you.
5- If you think you purchased the wrong file
You can contact us at every time, we can
replace it with true one.
Our email:
,© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 1
The Demand for and Supply of Financial Accounting Information
Content Analysis of End-of-Chapter Assignments
TIME
NUMBER TOPIC CONTENT LO ADAPTED DIFFICULTY EST. AACSB AICPA BLOOM’S
1-1 Role of Financial Financial accounting; 1 Easy 5 Analytic Measurement Understand
Reporting financial reporting
1-2 Financial Reporting Major categories of financial 1 Easy 5 Analytic Measurement Understand
Stakeholders reporting stakeholders
1-3 Financial Reporting Different information needs 1 Easy 5 Analytic Measurement Apply
Stakeholders of investors and creditors
1-4 Information Information asymmetry 1 Easy 5 Analytic Measurement Understand
Asymmetry between financial reporting
preparers and users
1-1
1-5 Financial Reporting Demand for financial 1 Easy 5 Analytic Measurement Apply
Information reporting information
1-6 Accounting Demand for accounting 1 Easy 5 Analytic Measurement Understand
Standards and standards and audit
Audits verification
1-7 Generally Accepted Definition of U.S. GAAP 1 Easy 5 Analytic Measurement Understand
Accounting
Principles
1-8 Standard Setting Supply of accounting 2 Easy 5 Analytic Measurement Understand
information
1-9 Standard Setting Role of SEC 2 Easy 5 Analytic Measurement Understand
1-10 Standard Setting Role of FASB 3 Easy 5 Analytic Measurement Understand
1-11 Standard Setting Role of EITF 3 Easy 5 Analytic Measurement Understand
1-12 Standard Setting FASB Accounting Standards 4 Easy 5 Analytic Measurement Apply
Codification
,© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
TIME
NUMBER TOPIC CONTENT LO ADAPTED DIFFICULTY EST. AACSB AICPA BLOOM’S
1-13 Standard Setting Process for issuing 4 Easy 5 Analytic Measurement Understand
accounting standard
update
1-14 Standard Setting FASB; IASB 5 Easy 5 Analytic Measurement Analyze
1-15 Standard Setting Definition of IFRS 5 Easy 5 Analytic Measurement Apply
1-16 Standard Setting Changing standards over 5 Easy 5 Analytic Measurement Understand
time; U.S. GAAP; IFRS
1-17 Standard Setting The impact of pure theory vs. 5 Easy 5 Analytic Measurement Analyze
politics in standard setting
1-18 Financial Statements Balance sheet; financial 6 Easy 5 Analytic Reporting Apply
reporting stakeholders
1-19 Financial Statements Income statement; financial 6 Easy 5 Analytic Reporting Apply
reporting stakeholders
1-20 Financial Statements Statement of cash flows; 6 Easy 5 Analytic Reporting Apply
1-2
financial reporting
stakeholders
1-21 Financial Statements Statement of shareholders' 6 Easy 5 Analytic Reporting Apply
equity; financial reporting
stakeholders
1-22 Financial Statements Purpose of footnotes; 6 Easy 5 Analytic Reporting Apply
disclosure of financial
information
1-23 Earnings and the Economic consequences of 7 Easy 5 Analytic Measurement Analyze
Stock Market earnings information
1-24 Ethics Ethics 7 Easy 5 Analytic Measurement Apply
1-25 Ethics Ethics; code of professional 7 Easy 5 Analytic Measurement Understand
conduct
,© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Number Topic Content LO Adapted Difficulty Time AACSB AICPA Bloom’s
MC1-1 Stakeholders Different stakeholders that need financial 1 Easy 5 Analytic Reporting Understand
statement information
MC1-2 Business Activities Financing activities 1 Easy 5 Analytic Reporting Understand
MC1-3 Business Activities Investing activities 1 Easy 5 Analytic Reporting Understand
MC1-4 Business Activities Operating activities 1 Easy 5 Analytic Reporting Understand
MC1-5 Demand Information asymmetry 1 Easy 5 Analytic Reporting Understand
MC1-6 Supply Determinants of supply 2 Easy 5 Analytic Reporting Understand
MC1-7 FASB Structure of the FASB 3 Easy 5 Analytic Reporting Understand
MC1-8 Codification Objective of the Codification 4 Easy 5 Analytic Reporting Understand
MC1-9 IASB and IFRS Importance 5 Easy 5 Analytic Reporting Understand
1-3
MC1-10 Product Balance sheet information 6 Easy 5 Analytic Reporting Understand
MC1-11 Product Income statement information 6 Easy 5 Analytic Reporting Apply
MC1-12 Product Statement of cash flows information 6 Easy 5 Analytic Reporting Apply
MC1-13 Economic Returns consequences associated with 7 Easy 5 Analytic Reporting Apply
Consequences changes in earnings
MC1-14 Ethics AICPA Code of Ethics 7 Easy 5 Analytic Reporting Apply
,© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
NUMBER TOPIC CONTENT LO ADAPTED DIFFICULTY TIME AACSB AICPA BLOOM’S
E1-1 Stakeholders Different characteristics and needs for information 1 Easy 5 Analytic Reporting Understand
E1-2 Demand Demand for information in different financial 1 Easy 10 Analytic Reporting Understand
statement0073
E1-3 Supply Role of SEC and FASB 2 Easy 10 Analytic Reporting Understand
E1-4 FASB Characteristics of standard setters 3 Easy 10 Analytic Reporting Understand
E1-5 Codification Objective and use of the Codification 4 Easy 10 Analytic Reporting Understand
E1-6 IASB The SEC and IFRS 5 Easy 10 Analytic Reporting Understand
E1-7 Product Financial statement information 6 Easy 10 Analytic Reporting Understand
E1-8 Product Balance sheet information 6 Easy 10 Analytic Reporting Apply
E1-9 Product Income statement information 6 Easy 10 Analytic Reporting Apply
E1-10 Economic Returns consequences associated with changes in 7 Easy 10 Analytic Reporting Apply
Consequences earnings
1-4
,© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
TIME
NUMBER TOPIC CONTENT LO ADAPTED DIFFICULTY EST. AACSB AICPA BLOOM’S
C1-1 Accounting Principles Describe the meaning of the 3 AICPA Easy 10 Analytic Measurement Apply
terms “accounting
principles” and “generally
accepted”
C1-2 Standard Setting Describe why there is 3 CMA Easy 10 Analytic Measurement Apply
political action and social
involvement in the standard-
setting process
C1-3 Organization of the Summarize the structure of 3 Easy 15 Analytic Measurement Apply
FASB the FASB and its operating
procedures
C1-4 Code of Professional Identify, briefly discuss, and 7 Easy 10 Analytic Measurement Apply
Conduct provide examples to illustrate
the first five principles of CPC
1-5
C1-5 Lobbying the FASB Discuss pros and cons of 3 Easy 5 Analytic Measurement Apply
lobbying the FASB by
interested parties
C1-6 International Discuss convergence of U.S. 5 Moderate 10 Analytic Measurement Apply
Convergence GAAP and international
accounting standards;
include discussion of SEC
and its role in this
convergence; includes IFRS
C1-7 Clorox's Financial Identify two important pieces 6 Moderate 20 Analytic Reporting Apply
Statements of information from each of
the four primary financial
statements and
management discussion and
analysis
,© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
TIME
NUMBER TOPIC CONTENT LO ADAPTED DIFFICULTY EST. AACSB AICPA BLOOM’S
C1-8 Nestlé’s Financial Identify two important pieces 6 Moderate 20 Analytic Reporting Apply
Statements of information from each of
three primary financial
statements
C1-9 Coca Cola's Financial Identify two important pieces 6 Moderate 20 Analytic Reporting Apply
Statements of information from each of
three primary financial
statements
C1-10 Ethical Responsibilities Discuss steps to take in an 7 Moderate 5 Reflective Measurement Analyze
ethical dilemma Thinking
(“misplaced” book in library)
C1-11 Ethical Responsibilities Discuss steps to take in an 7 Moderate 5 Reflective Measurement Analyze
ethical dilemma (cheating Thinking
by friend on exam)
C1-12 Codification Prepare a memo to explain Moderate 25 Analytic Measurement Apply
1-6
and demonstrate the
Codification to an
introductory accounting
student, who is familiar with
the financial statements and
accounts
C1-13 Codification Search the Codification to Moderate 15 Analytic Measurement Apply
determine how a company
should account for the cost
of a new desktop computer
for use in the office
C1-14 Codification Search the Codification to Moderate 25 Analytic Measurement Apply
determine how a company
should account for
recognition of retail revenues
with the right to return
,Answers to Got It?
1-1 The objective of financial accounting is to identify, measure, record, and report relevant
and reliable financial information about companies to present and potential future
stakeholders. Financial reporting is the process of communicating financial accounting
information about a company to existing and potential future investors, creditors, and
other external decision makers and stakeholders. An important way a company’s
financial accounting information is reported is in its quarterly and annual reports. The role
of financial reporting is to inform investors, creditors, and other stakeholders. Financial
reporting also provides information to mitigate agency problems which stem from the
separation of ownership and control of resources.
1-2 The primary stakeholders that are important users of financial information include
investors, creditors, banks, suppliers, customers, employees, executives, labor unions,
pension funds, government regulatory authorities, tax authorities, local communities, and
many others (see Exhibit 1.1). In class we discuss how these stakeholders can be divided
into two major categories: external users and internal users. These two groups do not
have the same decision-making information needs because of their differing
relationships with the company providing economic information. Of these groups, FASB
has stated the primary purpose of financial reporting is to inform investors and creditors.
1-3 Investors and creditors take different downside risks and enjoy different potential upside
gains from investing or lending. Equity investors are the residual risk bearers of
corporations but stand to enjoy potentially greater upside if the company is successful
and profitable. Creditors face less risk of loss of their investments because they have
superior claim in bankruptcy over equity investors. But creditors do not share in the same
upside potential as equity investors. As a result of these differences, their information
needs differ. Equity investors are more concerned with profitability, whereas creditors
tend to be more focused on cash flows.
1-4 Information asymmetry arises from the separation of ownership and control of resources.
Financial reporting helps reduce (but not eliminate) information asymmetry problems by
enabling managers (agents) to provide relevant and faithfully represented information to
investors and creditors (principals), thereby reducing information asymmetry.
1-5 The demand for financial accounting information, as an economic good in society,
arises from the needs of equity shareholders, creditors, and various other stakeholders for
information to make resource allocation decisions. This demand arises because
businesses have to compete for and attract scarce economic resources, such as equity
and debt capital, productive resources, employees, supplier and customer relationships,
and so forth. In order to compete for these valuable resources, companies must provide
relevant and faithfully represented information to those who can provide the resources.
1-6 To solve the problems that would arise from biases in a self-reporting accounting system,
a natural demand arises for accounting standards and audits. The demand for
accounting information drives the demand for professionally established accounting
standards that provide authoritative guidance on how to measure and report economic
activities in financial statements. In addition, the demand for accounting information also
drives the demand for auditing—independent verification and attestation of whether the
financial statements have been fairly presented in accordance with professional
accounting standards.
1-7
© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, 1-7 Generally Accepted Accounting Principles (GAAP) are the principles, concepts,
guidelines, procedures, and practices that U.S. companies that are listed in the United
States and subject to SEC regulation are required to use in recording and reporting the
accounting information in audited financial statements.
1-8 The supply of accounting information that companies report to external stakeholders is
determined primarily by the interactions between two sets of forces:
The authoritative professional accounting standards that govern in the
company’s country of incorporation, such as U.S. GAAP or IFRS, and
the many choices, methods, estimates, and judgments that the company must
make in order to apply those accounting standards to measure and report their
financial statements.
1-9 The stated mission of the U.S. Securities and Exchange Commission is to “protect
investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
The U.S. Congress created the SEC to administer the Securities Act of 1933 and the
Securities Exchange Act of 1934. Under these Acts, the SEC has the legal authority to
prescribe accounting principles and reporting practices for all corporations issuing
publicly traded securities within the U.S. capital markets. The SEC has mandated that the
information communicated to external users in financial reporting be based on
professionally established accounting principles, such as GAAP for U.S. companies and
IFRS for non-U.S. companies.
The SEC delegates the authority over standard setting to private standard-setting bodies
within the accounting profession, such as the Financial Accounting Standards Board
(FASB) establishing GAAP for U.S. companies and the International Accounting Standards
Board (IASB) establishing IFRS for companies from many other countries around the world.
The SEC monitors closely and oversees the standards being developed by these
standard setters. From time to time, the SEC exerts pressure on the standard setters to
adopt, or not adopt, specific standards.
1-10 The FASB is responsible for identifying financial accounting issues, conducting research to
address these issues, and resolving them by issuing new accounting standards
applicable to U.S. companies. The FASB fulfills its responsibility by:
establishing standards that are the most acceptable, given the various affected
constituencies, and
continually monitoring the consequences of its actions so that revised standards can
be issued where appropriate.
1-11 In assisting the FASB, the primary objectives of the EITF are:
to identify significant emerging accounting issues (i.e., unique transactions and
accounting problems) that it feels the FASB should address.
to develop consensus positions on the implementation issues involving the
application of standards. In some cases, these consensus positions may be viewed as
the ‘‘best available guidance’’ on GAAP, particularly as they relate to new
accounting issues.
1-8
© 2024 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
