978-1259722660 Chapter 1 Solution Manual Part 1

Question 1–1

Financial accounting is concerned with providing relevant financial information

about various kinds of organizations to different types of external users. The primary

Question 1–2

Resources are efficiently allocated if they are given to enterprises that will use

them to provide goods and services desired by society and not to enterprises that will

Question 1–3

Two extremely important variables that must be considered in any investment

Question 1–4

In the long run, a company will be able to provide investors and creditors with a

Question 1–5

Question 1–6

Net operating cash flows are the difference between cash receipts and cash

Solutions Manual, Vol.1, Chapter 1 1–1

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Chapter 1 Environment and Theoretical Structure

of

Financial Accounting

QUESTIONS FOR REVIEW OF KEY TOPICS

Question 1–8

In 1934, Congress created the SEC and gave it the job of setting accounting and

Question 1–9

Auditors are independent, professional accountants who examine financial

statements to express an opinion. The opinion reflects the auditors’ assessment of the

Answers to Questions (continued)

Question 1–10

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of

2002. The most dramatic change to federal securities laws since the 1930s, the Act

radically redesigns federal regulation of public company corporate governance and

Creation of an Oversight Board

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Auditor rotation

Question 1–11

New accounting standards, or changes in standards, can have significant

Question 1–12

The FASB undertakes a series of elaborate information gathering steps before

Question 1–13

The purpose of the conceptual framework is to guide the Board in developing

Answers to Questions (continued)

Question 1–14

Relevance and faithful representation are the primary qualitative characteristics

that make information decision-useful. Relevant information will possess predictive

Question 1–15

The components of relevant information are predictive value, confirmatory value

Question 1–16

The benefit from providing accounting information is increased decision

usefulness. If the information is relevant and possesses faithful representation, it will

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Question 1–17

Information is material if it is deemed to have an effect on a decision made by a

user. The threshold for materiality will depend principally on the relative dollar

Answers to Questions (continued)

Question 1–18

1. Assets are probable future economic benefits obtained or controlled by a

2. Liabilities are probable future sacrifices of economic benefits arising from

3. Equity is the residual interest in the assets of any entity that remains after

4. Investments by owners are increases in equity resulting from transfers of

5. Distributions to owners are decreases in equity resulting from transfers to owners.

6. Revenues are inflows of assets or settlements of liabilities from delivering or

7. Expenses are outflows or other using up of assets or incurrences of liabilities

9. Losses represent decreases in equity arising from peripheral or incidental

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Question 1–19

The four basic assumptions underlying GAAP are (1) the economic entity

Question 1–20

The going concern assumption means that, in the absence of information to the

Answers to Questions (continued)

Question 1–21

The periodicity assumption relates to needs of external users to receive timely

Question 1–22

Four accounting practices, often referred to as principles, that guide accounting

Question 1–23

Two advantages to basing valuation on historical cost are (1) historical cost

provides important cash flow information since it represents the cash or cash

Question 1–24

Companies recognize revenue when goods or services are transferred to

customers. However, no revenue is recognized if it isn’t probable that the seller will

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Answers to Questions (continued)

Question 1–25

The four different approaches to implementing expense recognition are:

1. Recognizing an expense based on an exact cause-and-effect relationship

2. Recognizing an expense by identifying the expense with the revenues

3. Recognizing an expense by a systematic and rational allocation to specific

4. Recognizing expenses in the period incurred, without regard to related

Question 1–26

In addition to the financial statement elements arrayed in the basic financial

Question 1–27

GAAP prioritizes the inputs companies should use when determining fair value.

The highest and most desirable inputs, Level 1, are quoted market prices in active

markets for identical assets or liabilities. Level 2 inputs are other than quoted prices

Question 1–28

Common measurement attributes are historical cost, net realizable value, current

cost, present value, and fair value.

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Answers to Questions (concluded)

Question 1–29

Under the revenue/expense approach, revenues and expenses are considered

primary, and assets, liabilities, and equities are secondary in the sense of being

Question 1–30

Under IFRS, the conceptual framework provides guidance to accounting standard

Question 1–31

Question 1–32

The SEC staff’s Final Staff Report concludes that it is not feasible for the U.S. to

simply adopt IFRS, given (1) a need for the U.S. to have strong influence on the

Brief Exercise 1–1

Revenues ($340,000 + 60,000) $400,000

Expenses:

Rent ($40,000  2) (20,000)

Brief Exercise 1–2

(1) Liabilities

(2) Assets

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BRIEF EXERCISES

Brief Exercise 1–3

1. The periodicity assumption

Brief Exercise 1–4

1. Expense recognition

Brief Exercise 1–5

1. Disagree — The full disclosure principle

Brief Exercise 1–6

1. Obtains funding for the IFRS standard setting process: IFRS Foundation

2. Determines IFRS: International Accounting Standards Board (IASB)

Exercise 1–1

Requirement 1

Pete, Pete, and Roy

Operating Cash Flow

Year 1 Year 2

Cash collected $160,000 $190,000

Cash disbursements:

Salaries (90,000) (100,000)

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EXERCISES

Requirement 2

Pete, Pete, and Roy

Income Statements

Year 1 Year 2

Revenues $170,000 $220,000

Expenses:

Salaries (90,000) (100,000)

Requirement 3

Year 1:Amount billed to clients $170,000

Year 2: Beginning accounts receivable $ 10,000

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