Communication Case 1–7
Suggested Grading Concepts and Grading Scheme:
Content (70%)
_______ 30 Briefly outlines the standard setting process.
______ Role of FASB, SEC.
______ The process.
Writing (30%)
_______ 6 Terminology and tone appropriate to the audience of
a business journal.
Ethics Case 1–8
Discussion should include these elements.
Auditors’ Role in Examining Financial Statements:
The function of the auditor is to assure the fairness of financial statements and
their compliance with GAAP, not the verification of account correctness. As some
An auditor must provide an independent opinion on an entity’s financial
Who is affected?
Auditors
Company management
Company employees and labor unions
Ethical Values:
Ethical values pertaining to auditor responsibility include honesty, integrity,
Ethics Case 1–8 (concluded)
Ethical issues or challenges:
1. Pressure from management to bias the audit opinion by threatening to
2. Pressure from management to bias the audit opinion by providing an
3. Pressure to bias the audit opinion in favor of the client because the auditor,
4. Pressure to bias the audit opinion in favor of the client because the auditor,
5. An unfavorable opinion may provoke a lawsuit by investors and other
Judgment Case 1–9
The two primary qualitative characteristics of accounting information are
relevance and faithful representation. However, these qualities often can conflict,
requiring a trade-off between various degrees of relevance and faithful
Judgment Case 1–10
Requirement 1
Mary will be able to compare the financial statements due to the existence of
Requirement 2
Judgment Case 1–11
Requirement 1
The desired benefit is that the new standard will provide a better set of
Requirement 2
The costs could include increased information-gathering, processing and
Requirement 3
The FASB undertakes a series of elaborate information gathering steps before
Judgment Case 1–12
Disagree. Wolf has been paid, so collectability is not a concern. However,
Analysis Case 1–13
Requirement 1
Expenses generally are recognized in the same period they are used to produce
revenues. The term matched with revenues means that an attempt is made to
Requirement 2
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
Requirement 3
a. The cost of producing a product – 1.
b. The cost of advertising – 4.
Judgment Case 1–14
Requirement 1
The key factor is whether or not the expenditure creates a benefit beyond the
current period. If it does, then the expenditure should be capitalized and expensed
Requirement 2
Yes, the materiality constraint. If an expenditure creates a benefit beyond the
Real World Case 1–15
Requirement 1
a. Total net revenues = $ 15,797 million
b. Total operating expenses = $ 4,196 million
Requirement 2
Requirement 3
The presentation of more than one year facilitates the ability of investors and
Judgment Case 1–16
Requirement 1
Pro-convergence arguments include:
1. U.S. financial markets would be more attractive to companies with
4. Cooperation with the rest of the world is good. Cooperating on
5. Preference for principles-based reporting under IFRS.
Requirement 2
Anti-convergence arguments include:
1. Regulatory requirements (like Sarbanes-Oxley) are more important
2. Actual comparability depends on regulatory enforcement and how
3. For local companies, transition to IFRS would be expensive.
5. Rules-based U.S. regime has developed because companies and their
6. IASB is more vulnerable to political pressure from various
governments like the EU.
Target Case
Requirement 1
a. Total revenues = $73,785 million
b. Income from current operations = $ 3,321 million
Requirement 2
Requirement 3
The accounting profession and the SEC encourage companies to adopt a fiscal
year that corresponds to a natural business year, ending when a company’s business
cycle is at its lowest point. December 31 is in the hectic holiday shopping season
Requirement 4
a. Target’s auditor is Ernst & Young LLP.
b. Target received a “clean” (unmodified) audit opinion. Specifically: “In
Air France–KLM Case
Requirement 1
a. Total revenues = € 25,530 million
b. Income from current operations = € 130 million
Requirement 2
AF’s basic loss per share was €(6.17).
Requirement 3
AF’s note 4.1.1 indicates that “the consolidated financial statements as of
December 31, 2013 have been prepared in accordance with International Financial
This note indicates that IFRS as adopted by the EU could differ from IFRS as