,SOLUTION MANUAL FOR Accounting and Auditing
Research Tools and Strategies, 11th Edition
Weirich
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
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:
, Accounting & Auditing Research:
Tools and Strategies
11th Edition
SOLUTIONS MANUAL
Thomas R. Weirich, PhD, CPA
Thomas Pearson, LL.M., J.D., CPA
Natalie T. Churyk, PhD, CPA
©2025 John Wiley & Sons, Inc. 1
, CHAPTER 1
INTRODUCTION TO APPLIED PROFESSIONAL RESEARCH
Discussion Questions
1. Research in general involves the investigation and analysis of an issue in question. The
researcher usually applies reasonable and reflective thinking to develop an answer to the issue or
problem at hand. Research requires a clear definition of the problem, using professional databases
to search the authoritative literature, reviewing and evaluating the data collected, drawing
conclusions and communicating your results.
2. Accounting, auditing, or tax research involve a systematic and logical investigation of an issue
or problem using the accountant’s professional judgment. Furthermore, accountants approach this
problem using critical-thinking skills to obtain and document evidence underlying a conclusion
relating to an issue or problem currently confronting the accountant or auditor.
3. Accounting, auditing, or tax research are necessary to determine the proper recording,
classification, and disclosure of economic events; to determine compliance with authoritative
pronouncements; or to determine the preferability of alternative accounting procedures.
4. The objective of accounting, auditing, or tax research is a systematic investigation of an issue
or problem utilizing the researcher’s professional judgment to arrive at appropriate and timely
conclusions regarding the issues at hand.
5. Research plays an important role within an accounting firm or department. It is critical for the
accountant/auditor to be able to find and locate applicable authoritative pronouncements and to
ascertain their current status. Given the number and diversity of clients served, public accounting
firms constantly engage in research on a wide array of accounting, auditing, or tax issues. This
research process is usually conducted by the local office staff, selected local or regional "research
specialists," and/or the executive office research personnel.
6. The functions of a multi-office CPA firm's Policy Committee are to evaluate significant
accounting and auditing issues and establish firm-wide policies on these issues. Its Executive
Subcommittee handles daily ongoing policy (i.e., lower-level) decisions for the firm as a whole.
7. Some basic questions that the researcher must address in performing, accounting, auditing, or
tax research include: Do I have the knowledge to do the research?; What is authoritative literature?;
Does authoritative literature address the issue?; If authoritative literature does exist, where can I
©2025 John Wiley & Sons, Inc. 2
,find it?; If there exist more than one alternative of authoritative support, which one do I use?; If
authoritative literature does not exist, what do I do?; What professional databases do I use?
8. Theoretical (pure or basic) research involves investigating questions that, while interesting, have
little or no present, practical applications; while applied research involves investigating issues of
immediate, practical importance.
9. Some of the characteristics that a practitioner-researcher should possess include inquisitiveness,
open-mindedness, patience, thoroughness, and perseverance.
10. The “Research Navigation Guide” serves as a tool in navigating through the authoritative
literature. The guide helps to focus or narrow one’s research when utilizing various databases like
the FASB’s Codification System. One would first focus on a functional area like “Financial
Accounting”. Once the functional area is identified then focus on the broad categorization of the
topic such as “Revenue”. This is followed by focusing on the subtopic that allows for further
segregation of the issue “Software Revenue”. The final step would be to focus on the section or
nature of the content of the issue which is often a recognition, measurement, or disclosure issue
such as “Recognition of Software Revenue”.
11. While a priori (before the fact) research refers to research before the client actually enters into
the (proposed) transaction, a posteriori (after the fact) research refers to research relating to past
or completed economic transactions. For planning purposes, the practitioner would rather be
involved with a priori research to work with the client to develop a correct solution rather than
attempting to correct a completed transaction.
12. The California court decision stresses that "well-informed" accountants are expected to master
"standard research techniques" (or face severe malpractice claims).
13. The research process "adds value" to an accounting firm’s services, since today's complex
business transactions and proliferation of new authoritative pronouncements mandates that the
firm efficiently and effectively conduct such research for their clients.
14. Some economic consequences to the standard-setting process of performing research include
the impact of such pronouncements to investors and creditors resource allocation decisions in
today's (competitive) capital markets, and the cost/benefit analysis of the issuance of a new
standard.
15. Since the accounting and auditing literature is organized with a keyword indexing system,
listing keywords in step one of the research process will aid the researcher in locating the
©2025 John Wiley & Sons, Inc. 3
,authoritative literature in an efficient and effective manner. Failure to describe the keywords in
sufficient detail can cause one to overlook important sources.
16. The five steps involved in the research process include: identifying the (research) issue,
collecting the (appropriate) evidence, evaluating the results and identifying alternative solutions,
developing (appropriate) conclusions, and communicating the results to the interested parties.
17. Research can support or refute a biased alternative by gathering evidence that is either unbiased
or slanted toward the alternative being researched. Since the researcher should be unbiased in
evaluating the various alternatives, the process often requires a (detailed and logical) analysis of
complex and detailed accounting issues--thereby requiring "critical thinking" skills.
18. Problem distillation entails "refining" and "restating" the research issue from general to
sufficiently specific terms, in order not to waste time investigating irrelevant items.
19. The skills tested on the CPA exam include: understanding, analysis, judgment, communication,
and synthesis.
20. A research memorandum should contain such attributes as selecting objective and unbiased
words; a grammatically correct and well-spelled, clear statement of the issue researched; a
statement of the facts; a brief and precise discussion of the issue; and a straightforward conclusion
based upon supported and identified authoritative literature.
The researcher should avoid making such common errors as excessive discussion of the issues and
facts, excessive citations to authoritative sources, avoidance of presenting a conclusion, and
including irrelevant information.
21. Critical-thinking skills (e.g., understanding a variety of contents and circumstances and
applying various accounting, auditing, and business principles to help solve the problem under
review) helps the researcher effectively and efficiently gather relevant facts, synthesize and
evaluate alternatives, and develop alternative solutions.
22. The SEC stressed the importance of accountants performing effective research, claiming that
this CPA's deficiency constituted a lack of exercising "due professional care."
23. Although this question is raised in Chapter 1, it is not directly answered until a later chapter.
However, in Chapter 1 it briefly discusses that when authoritative literature does not exist on a
specific issue, the practitioner would normally develop a theoretical solution based on logic or
analogous authoritative literature. In a later chapter we will focus on this question in detail whereby
©2025 John Wiley & Sons, Inc. 4
,one utilizes the “FASB’s Conceptual Framework” and other authoritative literature by analogy to
solve the problem.
24. The standard setter for accounting standards for federal government entities is the Federal
Accounting Standards Advisory Board (FASAB). The PCAOB does not set accounting standards,
but auditing standards.
25. Since you are conducting accounting research for a public company (Microsoft), the researcher
would utilize the standards of the FASB located on the FASB Codification database which is the
focus of Chapter 4. This database also includes the authoritative standards of the AICPA. GAO
and PCAOB standards are auditing standards, not accounting standards.
26. Qualitative analytics focuses on non-quantitative data such as videos, pictures, or an entity’s
e-mails. Whereas quantitative analysis focuses on the analysis of numerical data such as trends of
dollar sales and focusing on the outliers.
27. Data analytics is considered a process of inspecting, cleansing, transforming, and modeling
data with the goal of discovering useful information, suggesting conclusions, and supporting
decision-making.
28. Examples of structured data would be data found in excel spreadsheets. Examples of
unstructured data would include pictures, videos, or Twitter feeds.
Exercises
1. Current Quality Control standards of the PCAOB include:
QC 20- System of QC for a CPA Firm’s Accounting & Auditing Practice.
QC 30- Monitoring a CPA Firm’s Accounting & Auditing Practice
QC 40- The Personnel Management Element of a Firm’s QC Competencies.
2. The IASB is the independent, accounting standard setting body that issues international
financial reporting standards (IFRS) which are discussed in Chapter 6.
3. Standards may vary due to new issued standards. Recent IAASB standards listed on
7/1/24 include:
International Standards on Auditing for Audits of Financial Statements of Less Complex
Entities 12/6/23.
International Standard on Auditing 600 (Revised) Special Consideration 4/7/22
©2025 John Wiley & Sons, Inc. 5
, CHAPTER 2
AI’S IMPACT ON ACCOUNTING AND AUDITING
Discussion Questions:
1. The major impacts on accounting include automation, accuracy, efficiency, and insight.
2. Various challenges of utilizing AI in accounting include the potential job displacement, ethical
considerations, data security, and privacy.
3. For the detection and prevention of fraud (more details in chapter 11) includes the detection of
anomalies and red flags in real-time.
4. The focus of data privacy in accounting is the protection of sensitive financial data from
exposure to third parties.
5. LLM stands for large language models that are trained on extensive amount of data that have
resulted in the creation of generative AI tools such as ChatGPT and Gemini.
6. Generative AI is a type of artificial intelligence that can create content such as videos, images,
conversation, text data, and music.
7. A direct prompt makes a basic request limited to a certain instruction.
A chain-of-thought prompt provides ample detail in the prompt and requests that the LLM explains
the reasoning process in the response to the prompt.
8. Hallucination (or false positive) is when the LLM provides content that is inconsistent with
real-world facts (wrong answer!)
9. Ethical considerations can include bias, plagiarism, or misuse of the information.
10. GPT processes text unidirectional which means the communication or flow moves in a single
direction only, from a source to a destination. An example would be data transmission from a
server to a client without the client sending data back.
BERT processes text bidirectional where the data can flow in both directions. An example
would be internet communication where data can be sent and received by both parties.
©2025 John Wiley & Sons, Inc. 6
, Prompt engineering in accounting research is the request often for ChatGPT to prove an answer
from the authoritative literature addressing the issue under consideration. (Many examples will
be provided in subsequent chapters!)
11. Bias in training LLMs can significantly affect financial document analysis which can lead to
skewed insights, inaccurate predictions, and unfair outcomes.
Some mitigating strategies include diverse and representative training data, regularly audit the
model for bias, or incorporate fairness constraints and algorithms into the model designed to
mitigate bias during model training.
12. Measures that an accounting firm should consider related to ethical concerns include the
development of clear AI ethics guidelines for all employees, conduct comprehensive training,
monitor and audit the AI system, and foster transparency with clients as to how AI is utilized
by the accounting firm with the clients’ projects and data.
13.A significance performance limitation of AI is its dependency on large datasets for training
which can impact data quality, interpretability, bias and security with the datasets.
14. Semantic clustering can be highly valuable in accounting by organizing and analyzing large
amounts of unstructured financial data. For example, semantic clustering can cluster invoices,
receipts, and expense reports into relevant categories based on their content reducing the
manual effort required to do the task.
Exercises:
1. An example of a direct prompt- In discussion with a client we are debating the proper
accounting for research and development costs. Provide me with authoritative literature for my
discussion with the client.
2a. Prompt: Company A purchased a car for its car inventory from Company B which finances the
transaction through it financial subsidiary. Company A pays no funds to Company B or the
subsidiary until Company A sells the car. Company A then pays the loan to Company B. How
should Company A report the acquisition and repayment transaction in its statement of cash
flows?
AI response:
In this scenario, Company A's acquisition of a car and the subsequent repayment of the loan to
Company B should be reported in the statement of cash flows as follows:
©2025 John Wiley & Sons, Inc. 7
, Acquisition of the Car:
Since Company A acquires the car on credit and no cash is exchanged at the time of acquisition,
this transaction does not affect the cash flow statement at the time of acquisition. However, it
impacts the balance sheet by increasing inventory and increasing accounts payable or notes
payable.
Repayment of the Loan:
When Company A eventually sells the car and repays the loan to Company B, the repayment of
the loan will affect the cash flow statement. This should be reported in the statement of cash
flows under financing activities because it involves the repayment of a financing arrangement.
The authoritative literature supporting the treatment of such transactions in the statement of cash
flows can be found in the following accounting standards and principles:
US Generally Accepted Accounting Principles (GAAP)
1. ASC 230 - Statement of Cash Flows:
o This standard provides guidance on how to classify cash flows resulting from
various types of transactions.
o Under ASC 230, cash payments to settle obligations from the acquisition of
inventory are typically classified under operating activities. However, since the
acquisition is financed and not paid for immediately, the cash outflow when the
obligation is settled should be classified under financing activities.
2. ASC 840 - Leases (before ASC 842, Leases, took effect):
o If the transaction involves a financing lease, the cash payment for the lease would
be classified as a financing activity. The principles here can guide the
classification of other financing arrangements.
2b. Hopefully by searching the internet or utilizing the FASB codification, the student
should find the same answer as provide by AI.
2c. Different prompts can provide more or less detail in the responses by AI.
3. Utilizing Gemini, a chain-of-thought prompt might be as follows:
Prompt: As an auditor of company A, the president has informed me that it has recently
developed a data security strategy. Next Monday, I have a meeting with the client as to
what basic elements I need to discuss with the client. At the meeting I would like to hand
the client a tentative report as to the basic elements. Please provide me with a draft of a
report of the basic elements to discuss with the client.
Gemini response:
Data Security Strategy Review - Basic Elements
Introduction:
This report outlines the key elements for discussion during our meeting on Monday, [Date], to
review Company A's data security strategy.
Purpose:
©2025 John Wiley & Sons, Inc. 8
Research Tools and Strategies, 11th Edition
Weirich
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
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:
, Accounting & Auditing Research:
Tools and Strategies
11th Edition
SOLUTIONS MANUAL
Thomas R. Weirich, PhD, CPA
Thomas Pearson, LL.M., J.D., CPA
Natalie T. Churyk, PhD, CPA
©2025 John Wiley & Sons, Inc. 1
, CHAPTER 1
INTRODUCTION TO APPLIED PROFESSIONAL RESEARCH
Discussion Questions
1. Research in general involves the investigation and analysis of an issue in question. The
researcher usually applies reasonable and reflective thinking to develop an answer to the issue or
problem at hand. Research requires a clear definition of the problem, using professional databases
to search the authoritative literature, reviewing and evaluating the data collected, drawing
conclusions and communicating your results.
2. Accounting, auditing, or tax research involve a systematic and logical investigation of an issue
or problem using the accountant’s professional judgment. Furthermore, accountants approach this
problem using critical-thinking skills to obtain and document evidence underlying a conclusion
relating to an issue or problem currently confronting the accountant or auditor.
3. Accounting, auditing, or tax research are necessary to determine the proper recording,
classification, and disclosure of economic events; to determine compliance with authoritative
pronouncements; or to determine the preferability of alternative accounting procedures.
4. The objective of accounting, auditing, or tax research is a systematic investigation of an issue
or problem utilizing the researcher’s professional judgment to arrive at appropriate and timely
conclusions regarding the issues at hand.
5. Research plays an important role within an accounting firm or department. It is critical for the
accountant/auditor to be able to find and locate applicable authoritative pronouncements and to
ascertain their current status. Given the number and diversity of clients served, public accounting
firms constantly engage in research on a wide array of accounting, auditing, or tax issues. This
research process is usually conducted by the local office staff, selected local or regional "research
specialists," and/or the executive office research personnel.
6. The functions of a multi-office CPA firm's Policy Committee are to evaluate significant
accounting and auditing issues and establish firm-wide policies on these issues. Its Executive
Subcommittee handles daily ongoing policy (i.e., lower-level) decisions for the firm as a whole.
7. Some basic questions that the researcher must address in performing, accounting, auditing, or
tax research include: Do I have the knowledge to do the research?; What is authoritative literature?;
Does authoritative literature address the issue?; If authoritative literature does exist, where can I
©2025 John Wiley & Sons, Inc. 2
,find it?; If there exist more than one alternative of authoritative support, which one do I use?; If
authoritative literature does not exist, what do I do?; What professional databases do I use?
8. Theoretical (pure or basic) research involves investigating questions that, while interesting, have
little or no present, practical applications; while applied research involves investigating issues of
immediate, practical importance.
9. Some of the characteristics that a practitioner-researcher should possess include inquisitiveness,
open-mindedness, patience, thoroughness, and perseverance.
10. The “Research Navigation Guide” serves as a tool in navigating through the authoritative
literature. The guide helps to focus or narrow one’s research when utilizing various databases like
the FASB’s Codification System. One would first focus on a functional area like “Financial
Accounting”. Once the functional area is identified then focus on the broad categorization of the
topic such as “Revenue”. This is followed by focusing on the subtopic that allows for further
segregation of the issue “Software Revenue”. The final step would be to focus on the section or
nature of the content of the issue which is often a recognition, measurement, or disclosure issue
such as “Recognition of Software Revenue”.
11. While a priori (before the fact) research refers to research before the client actually enters into
the (proposed) transaction, a posteriori (after the fact) research refers to research relating to past
or completed economic transactions. For planning purposes, the practitioner would rather be
involved with a priori research to work with the client to develop a correct solution rather than
attempting to correct a completed transaction.
12. The California court decision stresses that "well-informed" accountants are expected to master
"standard research techniques" (or face severe malpractice claims).
13. The research process "adds value" to an accounting firm’s services, since today's complex
business transactions and proliferation of new authoritative pronouncements mandates that the
firm efficiently and effectively conduct such research for their clients.
14. Some economic consequences to the standard-setting process of performing research include
the impact of such pronouncements to investors and creditors resource allocation decisions in
today's (competitive) capital markets, and the cost/benefit analysis of the issuance of a new
standard.
15. Since the accounting and auditing literature is organized with a keyword indexing system,
listing keywords in step one of the research process will aid the researcher in locating the
©2025 John Wiley & Sons, Inc. 3
,authoritative literature in an efficient and effective manner. Failure to describe the keywords in
sufficient detail can cause one to overlook important sources.
16. The five steps involved in the research process include: identifying the (research) issue,
collecting the (appropriate) evidence, evaluating the results and identifying alternative solutions,
developing (appropriate) conclusions, and communicating the results to the interested parties.
17. Research can support or refute a biased alternative by gathering evidence that is either unbiased
or slanted toward the alternative being researched. Since the researcher should be unbiased in
evaluating the various alternatives, the process often requires a (detailed and logical) analysis of
complex and detailed accounting issues--thereby requiring "critical thinking" skills.
18. Problem distillation entails "refining" and "restating" the research issue from general to
sufficiently specific terms, in order not to waste time investigating irrelevant items.
19. The skills tested on the CPA exam include: understanding, analysis, judgment, communication,
and synthesis.
20. A research memorandum should contain such attributes as selecting objective and unbiased
words; a grammatically correct and well-spelled, clear statement of the issue researched; a
statement of the facts; a brief and precise discussion of the issue; and a straightforward conclusion
based upon supported and identified authoritative literature.
The researcher should avoid making such common errors as excessive discussion of the issues and
facts, excessive citations to authoritative sources, avoidance of presenting a conclusion, and
including irrelevant information.
21. Critical-thinking skills (e.g., understanding a variety of contents and circumstances and
applying various accounting, auditing, and business principles to help solve the problem under
review) helps the researcher effectively and efficiently gather relevant facts, synthesize and
evaluate alternatives, and develop alternative solutions.
22. The SEC stressed the importance of accountants performing effective research, claiming that
this CPA's deficiency constituted a lack of exercising "due professional care."
23. Although this question is raised in Chapter 1, it is not directly answered until a later chapter.
However, in Chapter 1 it briefly discusses that when authoritative literature does not exist on a
specific issue, the practitioner would normally develop a theoretical solution based on logic or
analogous authoritative literature. In a later chapter we will focus on this question in detail whereby
©2025 John Wiley & Sons, Inc. 4
,one utilizes the “FASB’s Conceptual Framework” and other authoritative literature by analogy to
solve the problem.
24. The standard setter for accounting standards for federal government entities is the Federal
Accounting Standards Advisory Board (FASAB). The PCAOB does not set accounting standards,
but auditing standards.
25. Since you are conducting accounting research for a public company (Microsoft), the researcher
would utilize the standards of the FASB located on the FASB Codification database which is the
focus of Chapter 4. This database also includes the authoritative standards of the AICPA. GAO
and PCAOB standards are auditing standards, not accounting standards.
26. Qualitative analytics focuses on non-quantitative data such as videos, pictures, or an entity’s
e-mails. Whereas quantitative analysis focuses on the analysis of numerical data such as trends of
dollar sales and focusing on the outliers.
27. Data analytics is considered a process of inspecting, cleansing, transforming, and modeling
data with the goal of discovering useful information, suggesting conclusions, and supporting
decision-making.
28. Examples of structured data would be data found in excel spreadsheets. Examples of
unstructured data would include pictures, videos, or Twitter feeds.
Exercises
1. Current Quality Control standards of the PCAOB include:
QC 20- System of QC for a CPA Firm’s Accounting & Auditing Practice.
QC 30- Monitoring a CPA Firm’s Accounting & Auditing Practice
QC 40- The Personnel Management Element of a Firm’s QC Competencies.
2. The IASB is the independent, accounting standard setting body that issues international
financial reporting standards (IFRS) which are discussed in Chapter 6.
3. Standards may vary due to new issued standards. Recent IAASB standards listed on
7/1/24 include:
International Standards on Auditing for Audits of Financial Statements of Less Complex
Entities 12/6/23.
International Standard on Auditing 600 (Revised) Special Consideration 4/7/22
©2025 John Wiley & Sons, Inc. 5
, CHAPTER 2
AI’S IMPACT ON ACCOUNTING AND AUDITING
Discussion Questions:
1. The major impacts on accounting include automation, accuracy, efficiency, and insight.
2. Various challenges of utilizing AI in accounting include the potential job displacement, ethical
considerations, data security, and privacy.
3. For the detection and prevention of fraud (more details in chapter 11) includes the detection of
anomalies and red flags in real-time.
4. The focus of data privacy in accounting is the protection of sensitive financial data from
exposure to third parties.
5. LLM stands for large language models that are trained on extensive amount of data that have
resulted in the creation of generative AI tools such as ChatGPT and Gemini.
6. Generative AI is a type of artificial intelligence that can create content such as videos, images,
conversation, text data, and music.
7. A direct prompt makes a basic request limited to a certain instruction.
A chain-of-thought prompt provides ample detail in the prompt and requests that the LLM explains
the reasoning process in the response to the prompt.
8. Hallucination (or false positive) is when the LLM provides content that is inconsistent with
real-world facts (wrong answer!)
9. Ethical considerations can include bias, plagiarism, or misuse of the information.
10. GPT processes text unidirectional which means the communication or flow moves in a single
direction only, from a source to a destination. An example would be data transmission from a
server to a client without the client sending data back.
BERT processes text bidirectional where the data can flow in both directions. An example
would be internet communication where data can be sent and received by both parties.
©2025 John Wiley & Sons, Inc. 6
, Prompt engineering in accounting research is the request often for ChatGPT to prove an answer
from the authoritative literature addressing the issue under consideration. (Many examples will
be provided in subsequent chapters!)
11. Bias in training LLMs can significantly affect financial document analysis which can lead to
skewed insights, inaccurate predictions, and unfair outcomes.
Some mitigating strategies include diverse and representative training data, regularly audit the
model for bias, or incorporate fairness constraints and algorithms into the model designed to
mitigate bias during model training.
12. Measures that an accounting firm should consider related to ethical concerns include the
development of clear AI ethics guidelines for all employees, conduct comprehensive training,
monitor and audit the AI system, and foster transparency with clients as to how AI is utilized
by the accounting firm with the clients’ projects and data.
13.A significance performance limitation of AI is its dependency on large datasets for training
which can impact data quality, interpretability, bias and security with the datasets.
14. Semantic clustering can be highly valuable in accounting by organizing and analyzing large
amounts of unstructured financial data. For example, semantic clustering can cluster invoices,
receipts, and expense reports into relevant categories based on their content reducing the
manual effort required to do the task.
Exercises:
1. An example of a direct prompt- In discussion with a client we are debating the proper
accounting for research and development costs. Provide me with authoritative literature for my
discussion with the client.
2a. Prompt: Company A purchased a car for its car inventory from Company B which finances the
transaction through it financial subsidiary. Company A pays no funds to Company B or the
subsidiary until Company A sells the car. Company A then pays the loan to Company B. How
should Company A report the acquisition and repayment transaction in its statement of cash
flows?
AI response:
In this scenario, Company A's acquisition of a car and the subsequent repayment of the loan to
Company B should be reported in the statement of cash flows as follows:
©2025 John Wiley & Sons, Inc. 7
, Acquisition of the Car:
Since Company A acquires the car on credit and no cash is exchanged at the time of acquisition,
this transaction does not affect the cash flow statement at the time of acquisition. However, it
impacts the balance sheet by increasing inventory and increasing accounts payable or notes
payable.
Repayment of the Loan:
When Company A eventually sells the car and repays the loan to Company B, the repayment of
the loan will affect the cash flow statement. This should be reported in the statement of cash
flows under financing activities because it involves the repayment of a financing arrangement.
The authoritative literature supporting the treatment of such transactions in the statement of cash
flows can be found in the following accounting standards and principles:
US Generally Accepted Accounting Principles (GAAP)
1. ASC 230 - Statement of Cash Flows:
o This standard provides guidance on how to classify cash flows resulting from
various types of transactions.
o Under ASC 230, cash payments to settle obligations from the acquisition of
inventory are typically classified under operating activities. However, since the
acquisition is financed and not paid for immediately, the cash outflow when the
obligation is settled should be classified under financing activities.
2. ASC 840 - Leases (before ASC 842, Leases, took effect):
o If the transaction involves a financing lease, the cash payment for the lease would
be classified as a financing activity. The principles here can guide the
classification of other financing arrangements.
2b. Hopefully by searching the internet or utilizing the FASB codification, the student
should find the same answer as provide by AI.
2c. Different prompts can provide more or less detail in the responses by AI.
3. Utilizing Gemini, a chain-of-thought prompt might be as follows:
Prompt: As an auditor of company A, the president has informed me that it has recently
developed a data security strategy. Next Monday, I have a meeting with the client as to
what basic elements I need to discuss with the client. At the meeting I would like to hand
the client a tentative report as to the basic elements. Please provide me with a draft of a
report of the basic elements to discuss with the client.
Gemini response:
Data Security Strategy Review - Basic Elements
Introduction:
This report outlines the key elements for discussion during our meeting on Monday, [Date], to
review Company A's data security strategy.
Purpose:
©2025 John Wiley & Sons, Inc. 8
