Brief Learning
Exercises Topic Objectives Skills
B. Ex. 1.1 Users of accounting information 1-1, 1-3, 1-5 Analysis
B. Ex. 1.2 Components of internal control 1-2, 1-5 Analysis
B. Ex. 1.3 Inexact or approximate measures 1-3, 1-4 Analysis, judgment
B. Ex. 1.4 Standards for the preparation of 1-5, 1-6 Analysis
accounting information
B. Ex. 1.5 FASB conceptual framework 1-1, 1-3, 1-5, 1-6 Analysis
B. Ex. 1.6 PCAOB 1-5, 1-6 Analysis, research
B. Ex. 1.7 COSO 1-2, 1-5, 1-6 Analysis, ethics
B. Ex. 1.8 Professional certifications in accounting 1-7,1- 8 Analysis
B. Ex. 1.9 AICPA code of professional conduct 1-5, 1-7 Analysis, ethics
B. Ex. 1.10 Personal benefits of accounting skills 1-1 Analysis
Learning
Exercises Topic Objectives Skills
1.1 You as a user of accounting information 1-1 Analysis, judgment
1.2 1-3, 1-4 Analysis, research
Users of accounting information
1.3 What is financial reporting? 1-3 Analysis, judgment
1.4 Generally accepted accounting 1-6 Analysis
1.5 Accounting organizations 1-6 Analysis, communication
1.6 Investment return 1-3 Analysis
1.7 Accounting terminology 1-3-1-5, 1-7 Analysis
1.8 Accounting organizations 1-6 Analysis
1.9 Financial and management accounting 1-3, 1-4 Judgment
1.10 Management accounting information 1-4 Communication, judgment
1.11 Accounting organizations 1-6 Analysis, judgment
1.12 Purpose of an audit 1-5 Analysis, judgment
1.13 Audits of financial statements 1-5 Analysis
1.14 Ethics and professional judgment 1-7
1.15 Careers in accounting 1-8
Judgment,
1.16 Home Depot, Inc. general information 1-1, 1-3, 1-5
Real World: Boeing Company,
California Public Employees
Retirement System, China Airlines
CHAPTER 1
ACCOUNTING: INFORMATION FOR DECISION MAKING
OVERVIEW OF BRIEF EXERCISES, EXERCISES, AND CRITICAL THINKING
CASES
Analysis,
communication,
Analysis, judgment,
research
1.1 Real World: Fannie Mae 1-5
Analysis, ethics,
Reliability of financial statements
1.2 Objectives of financial accounting 1-3
1.3 Accounting systems 1-2 Analysis, communication
1.4 1-7
1.5 1-6, 1-7 Research, technology
Accessing information on the Internet
(Internet)
Critical Thinking Cases
Codes of ethics (Ethics, fraud, and
corporate governance)
Analysis,
communication, group,
Analysis,
communication,
Due to the introductory nature of this chapter and the conceptual nature of its contents, no items labeled
Problems are included. In all future chapters you will find a series of Problems that generally include
computations, are more complex, and generally require more time to complete than Exercises.
Critical Thinking Cases
Fannie Mae
Reliability of Financial Statements
Objectives of Financial Accounting
Accounting Systems
Codes of Ethics
Ethics, Fraud, and Corporate Governance
Accessing Information on the Internet
Internet
DESCRIPTIONS OF CRITICAL THINKING CASES
1.1
15 Easy
Characteristics of accounting and accounting information (e.g., useful for
decision making, language of business) are used to explain the importance of
accounting information.
1.2
15 Medium
This case explores the general subject of integrity in financial statements—what
causes potential investors to be able to rely on information and what precludes
management from portraying a company in more positive terms than it should.
The purpose and functions of accounting systems are covered, as well as the
definition of what an accounting system is and who is responsible for designing
and implementing accounting systems.
Students are placed in the position of a new employee who is faced with the
challenge of becoming familiar with an appropriate code of ethics and must think
through how that code might influence his/her behavior on the job.
1.3
15 Easy
Below are brief descriptions of each case. These descriptions are accompanied by the estimated time (in
minutes) required for completion and by a difficulty rating.
1.5
30 Medium
Students are introduced to learning on the Internet by accessing the Rutgers
University web page on accounting information. Once there, they learn about
accounting firms, accounting textbook publishers, and professional accounting
organizations.
1.4
30 Medium
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
2.
activities during a period of time.
5.
6.
7.
Internal accounting information is primarily oriented toward the future. While some
management accounting information is historical, the purpose of management accounting
Generally accepted accounting principles are agreed-upon ways that economic activity will be
While financial information has an appearance of precision, it often requires judgment and
The return of your investment is the repayment to you of the amount you invested earlier. The
The three primary objectives of financial reporting, from general to specific, are to provide:
The three primary financial statements that are the means of communicating financial
accounting information are:
Statement of financial position (balance sheet)—A statement that shows where the
Note to instructor: We regularly include discussion questions as part of the assigned homework. One
objective of these questions is to help students develop communications skills; however, we find that
they also increase students’ conceptual understanding of accounting.
Accounting is a way of communicating the results of business activity and, therefore, is
4.
3.
Information that is useful in making investment and credit decisions.
Information useful in assessing the amount, timing, and uncertainty of future cash flows.
claims on them.
8.
9.
10.
11.
12.
13.
14.
15.
The primary role of the PCAOB with respect to audits of financial statements is its
different roles, including providing oversight of the public accounting profession.
The FASB is the primary standard-setting body in the United States that is responsible for
establishing generally accepted accounting principles to guide the preparation of financial
The SEC is a government body that has the legal authority to establish generally accepted
The IASB is the organization that creates and promotes International Financial Reporting
Standards (IFRS). Its goals are to create a single set of global accounting standards and bring
opinions on the fairness of financial statements.
CPA means Certified Public Accountant. CMA means Certified Management Accountant.
The Sarbanes-Oxley Act was passed largely in response to several major financial frauds that
occurred in 2001 and 2002. It is generally viewed as the most important legislation affecting
Internal control is a process designed to provide reasonable assurance that the organization
An audit is an examination of a company’s financial information, including financial
B. Ex. 1.2 c.
B. Ex. 1.3
B. Ex. 1.4
B. Ex. 1.5
B. Ex. 1.7
Accounting relies on inexact or approximate measures because many accounts in
financial statements are dependent on judgment about future events and on an
The sponsoring organizations of COSO are the American Accounting Association
(AAA), the American Institute of Certified Public Accountants (AICPA), Financial
The Securities and Exchange Commission (SEC) has the statutory authority to
The FASB’s Conceptual Framework sets forth the Board’s views on the: (1)
SOLUTIONS TO BRIEF EXERCISES
External users of accounting information include investors, creditors, customers,
and regulators.
B. Ex. 1.1
Control environment
Monitoring activities
Risk assessment
Control activities
Information and communication
B. Ex. 1.9 e.
Integrity
Objectivity and independence
Due care
The Public interest
B. Ex. 1.10
B. Ex. 1.8
Although there are more than three professional certifications offered in
accounting, the three professional certifications that we discuss in this chapter
are:
Although there are many potential answers to this question, examples of
Responsibilities
although the CPA exam is a uniform national exam that is prepared and
Certified Internal Auditor (CIA) — this certification is offered by the Institute
Applying for a loan for a car.
Applying for a scholarship or financial aid.
Renting an apartment.
Ex. 1.2 a.
b.
c.
Boeing’s financial health and future prospects affect the demand for housing (and
apartments) in much of the Seattle area. (Note to instructor: Boeing’s impact
As one of the world’s largest pension funds, California Public Employees
As a student, you may be required to supply financial information about yourself
when doing such things as:
As a rapidly growing airline, China Airlines may be a major customer of Boeing
Applying for a credit card.
SOLUTIONS TO EXERCISES
The following are just a few of the ways in which you might use accounting
information as a student:
Ex. 1.1
Deciding which school to go to, and what living accommodations you can afford.
Planning in advance for major expenditures, such as the deposit on an apartment,
buying textbooks, paying tuition, or taking a vacation.
Ex. 1.3 a.
b.
c.
d.
Ex. 1.4 a.
b.
c.
Financial reporting is the process of supplying financial information about an
organization to persons outside the organization.
through accepted practices. These are not necessarily codified.
The FASB has developed a codification of all promulgated (i.e. written) sources
Generally accepted accounting principles, established by the authoritative
Accounting principles have evolved from a variety of sources. Today, the
Financial statements are the principal accounting reports involved in the
Publicly owned companies are required by law to make their annual and
Financial reporting helps decision makers in utilizing scarce economic
d.
e.
The financial health and future prospects of Boeing affect the contracts that
Ex. 1.5 a.
b.
c.
Ex. 1.6
$18,000
Return on investment (periodically, as stated in your investment
agreement) ($18,000 6% 3 years) ………………………………………………..
Total expected cash flow ………………………………………………..
in the U.S.
The FASB (Financial Accounting Standards Board) is the principal authoritative
Return of investment (at maturity) …………………………………….
Prior to the creation of the FASB, the AICPA (American Institute of Certified
Public Accountants) had responsibility for developing accounting principles.
The SEC (Securities and Exchange Commission) has the legal authority to specify
generally accepted accounting principles. However, the SEC generally has chosen
You expect two cash flows from your investment:
d.
Ex. 1.7 c.
Ex. 1.8 d.
Financial Accounting Standards Board
American Accounting Association
Public Company Accounting Oversight Board
Securities and Exchange Commission
American Institute of CPAs
Institute of Management Accountants
Ex. 1.9 a.
b.
c.
Ex. 1.10 a.
Information useful to help the enterprise achieve its goals, objectives, and
b.
Financial accounting
The third is most specific and deals with information for a specific
The first is the most general and deals with management’s responsibility in the
allowed you to assess the probability of those events occurring in the future. You
might also have certain nonfinancial objectives.
As an investor in a company, your primary objective would be the return of your
investment in the future, as well as a return on the use of your funds used by the
decisions possible to enhance the value of the company.
As a manager of the company, your primary objective would be to have
While there is some information that would be equally important for investors
The primary purposes of management accounting, in hierarchical order (i.e.,
from general to specific) are as follows:
Institute of Internal Auditors
Internal control
Public accounting
Management accounting
Financial reporting
Financial statements
Ex. 1.11 a.
b.
c.
Ex. 1.12 a.
b.
c.
c.
Examples of the kinds of decisions that are supported by management accounting
information are:
As an accounting educator, the organization that would be most directly involved
An audit conclusion stating that financial statements are not fairly presented in
support your work.
As a certified public accountant, the American Institute of Certified Public
An audit is an examination of a company’s financial statements by an
As a user of external financial information, the favorable opinion of an external
As a management accountant, the Institute of Management Accountants would be
Ex. 1.13 a.
c.
Ex. 1.14 a.
b.
Ex. 1.15
Accountants must rely upon their professional judgment in such matters as
Acosta, who entered public accounting, is likely to find herself specializing in
auditing financial statements, in doing tax work, or in providing management
is to function efficiently, these decision makers must have confidence in the
People use accounting information to make economic decisions. If the economy
information.
An audit is an independent examination of the financial statements and related
The purpose of an audit is to provide users of financial statements with
independent, expert assurance that the financial statements present fairly the
Ex. 1.16 a.
b.
Notes to Consolidated Financial Statements
Five-Year Summary of Financial and Operating Results
Management’s Report on Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Management’s Responsibility for Financial Statements
Consolidated Statements of Cash Flows
Consolidated Statements of Earnings
15 Minutes, Easy CASE 1.1
FANNIE MAE
SOLUTIONS TO CRITICAL THINKING CASES
Several factors prevent a large publicly owned corporation such as Fannie Mae from issuing
misleading financial statements, no matter how desperately the company needs investors’
capital. To begin with, there is the basic honesty and integrity of the company’s management
and its accounting personnel. Many people participate in the preparation of the financial
statements of a large corporation. For these statements to be prepared in a grossly misleading
RELIABILITY OF FINANCIAL STATEMENTS
provide for criminal penalties as well as financial liability for all persons engaged in the
automatically if the company declared bankruptcy or became insolvent shortly after issuing
OBJECTIVES OF FINANCIAL ACCOUNTING
a.
b.
As an external investor or creditor, your primary concern is the security of your investment
and the return you are making on permitting another to use your money rather than having
CASE 1.2
15 Minutes, Medium
Communication involves a sender and a receiver. The message between the two is
communicated in some manner, which could be words, numbers, or in some other way.
Describing financial accounting as being useful for decision making by investors or
creditors and as the language of business are very consistent. For information to be used by
decision makers—whether internal or external—that information must be communicated.
CASE 1.3
ACCOUNTING SYSTEMS
a.
b.
c.
15 Minutes, Easy
The purpose of an accounting system is to provide information needed by the
organization, and to do this in an efficient manner. The basic functions of an accounting
system are to:
knowledge, etc.
An accounting system is everything that it takes to produce reliable and accurate
accounting and increasingly incorporates computer technology.
The design and implementation of an accounting system varies from situation to situation,
CASE 1.4
30 Minutes, Medium
Among the things you would learn in studying the Statement of Ethical Professional Practice of
the IMA is that the code includes requirements in the following areas: competence,
confidentiality, integrity, and credibility. While these may sound like “lofty” terms, they will have
direct relevance to you in your job, starting on the very first day.
ETHICS, FRAUD & CORPORATE GOVERNANCE
CODES OF ETHICS
that you should include all information that is required for understanding that information.
Integrity refers to your need to avoid conflicts of interest by doing something that would subvert
your organization’s objectives, communicate biased information, or engage in activities that
would discredit your company or the accounting profession.
Competence refers to the quality of having the skills, knowledge, and background to be able to do
judgment about your competence, and you passed the test, or you would not have been hired.
information in any way.
CASE 1.5
ACCESSING INFORMATION ON THE INTERNET
c.
d.
At the time this book went to press, the IASB had 14 board members: Hans Hoogervorst, Ian
30 Minutes, Medium
a.
At the time this book went to press, the seven members of the FASB were: Russell Golden,
James Kroeker, Christine Botosan, Daryl Buck, Harold Schroeder, Marc Siegel, and
Lawrence Smith. Golden is the FASB’s chairman and was formerly the FASB’s technical
Deloitte’s services include: advisory, audit, consulting, human capital, mergers and
acquisitions, operations, regulatory, risk and resilience, strategy, tax, and technology. EY’s