CHAPTER 1
Financial Accounting and Accounting Standards
ASSIGNMENT CLASSIFICATION TABLE (By Topic)
Topics
Questions
Concepts for
Analysis
1.
Subject matter of accounting.
1
4
2.
Environment of accounting.
2, 3, 21
6, 7
3.
Role of principles, objectives, standards,
and accounting theory.
4, 5, 6, 7
1, 2, 3, 5
4.
Historical development of GAAP.
8, 9, 10, 11
8
making bodies.
16, 17, 18, 19,
6.
Role of pressure groups.
21, 22, 23, 24, 25,
10, 16, 17
7.
Ethical issues.
28
ASSIGNMENT CLASSIFICATION TABLE (By Learning Objective)
Learning Objectives
Questions
Cases
Understand the financial reporting environment.
1, 2, 3, 4, 5, 6, 7
CA1.2, CA1.3, CA1.4,
CA1.5, CA1.6, CA1.7,
CA1.9
Explain the meaning of generally accepted
12, 14, 18, 19, 20, 21
CA1.2, CA1.3, CA1.7,
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
CA1.1
FASB and standard-setting.
Simple
15–20
CA1.2
GAAP and standard-setting.
Simple
15–20
CA1.3
Financial reporting and accounting standards.
Simple
15–20
CA1.4
Financial accounting.
Simple
15–20
CA1.5
Objective of financial reporting.
20–25
CA1.6
Accounting numbers and the environment.
Simple
10–15
CA1.7
Need for GAAP.
Simple
15–20
CA1.8
Simple
20–25
CA1.9
FASB role in rule-making.
Simple
20–25
CA1.10
Politicization of GAAP.
30–40
CA1.11
Models for setting GAAP.
Simple
15–20
CA1.12
GAAP terminology.
30–40
CA1.13
Rule-making Issues.
20–25
CA1.14
Securities and Exchange Commission.
30–40
CA1.15
Financial reporting pressures.
25–35
CA1.16
Economic consequences.
25–35
CA1.17
GAAP and economic consequences.
25–35
ANSWERS TO QUESTIONS
1. Financial accounting measures, classifies, and summarizes in report form those activities and that
information which relate to the enterprise as a whole for use by parties both internal and external to a
business enterprise. Managerial accounting also measures, classifies, and summarizes in report
2. Financial statements generally refer to the four basic financial statements: balance sheet, income
statement, statement of cash flows, and statement of changes in owners’ or stockholders’ equity.
3. If a company’s financial performance is measured accurately, fairly, and on a timely basis, the right
4. The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to present and potential equity investors, lenders, and other creditors
5. Investors are interested in financial reporting because it provides information that is useful for
making decisions (referred to as the decision-usefulness approach). When making these
decisions, investors are interested in assessing the company’s (1) ability to generate net cash
6. A common set of standards applied by all businesses and entities should produce financial
statements which are reasonably comparable. Without a common set of standards, each
7. General-purpose financial statements are not likely to satisfy the specific needs of all interested
parties. Since the needs of interested parties such as creditors, managers, owners, governmental
Questions Chapter 1 (Continued)
8. The SEC has the power to prescribe, in whatever detail it desires, the accounting practices and
principles to be employed by the companies that fall within its jurisdiction. Because the SEC receives
audited financial statements from nearly all companies that issue securities to the public or are listed
9. The Committee on Accounting Procedure was a special committee of the American Institute of CPAs
that, between the years of 1939 and 1959, issued 51 Accounting Research Bulletins dealing with
10. The creation of the Accounting Principles Board was intended to advance the written expression
of accounting principles, to determine appropriate practices, and to narrow the differences and
11. APB Opinions were issued by the Accounting Principles Board during the years 1959 through
1973 and, unless superseded by FASB Statements, are recognized as accepted practice and
constitute the requirements to be followed by all business enterprises. Accounting Standards
12. The explanation should note that generally accepted accounting principles or standards have
“substantial authoritative support.” They consist of accounting practices, procedures, concepts,
13. It was believed that FASB Pronouncements would carry greater weight than APB Opinions because
of significant differences between the FASB and the APB, namely, the FASB has: (1) a smaller
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
Questions Chapter 1 (Continued)
14. The technical staff of the FASB conducts research on an identified accounting topic and prepares
a “preliminary view” that is released by the Board for public reaction. The Board analyzes and
15. Statements of financial accounting standards contained in Accounting Standards updates
constitute generally accepted accounting principles and dictate acceptable financial accounting
and reporting practices as promulgated by the FASB. The first standards statement was issued by
the FASB in 1973.
16. Rule 203 of the Code of Professional Conduct prohibits a member of the AICPA from expressing
an opinion that financial statements conform with GAAP if those statements contain a material
17. The chairman of the FASB was indicating that too much attention is put on the bottom line and not
enough on the development of quality products. Managers should be less concerned with short-
term results and be more concerned with the long-term results. In addition, short-term tax benefits
often lead to long-term problems.
Questions Chapter 1 (Continued)
18. The Emerging Issues Task Force often arrives at consensus conclusions on certain financial report–
ing issues. These consensus conclusions are then looked upon as GAAP by practitioners because
the SEC has indicated that it will view consensus solutions as preferred accounting and will require
19. The Financial Accounting Standards Board Accounting Standards Codification (Codification) is a
compilation of all GAAP in one place. Its purpose is to integrate and synthesize existing GAAP and
20. It is hoped that the Codification will help users to better understand what GAAP is. If this occurs,
companies will be more likely to comply with GAAP and the time to research accounting issues will
21. The sources of pressure are innumerable, but the most intense and continuous pressure to
change or influence accounting principles or standards come from individual companies, industry
22. Economic consequences means the impact of accounting reports on the wealth positions of issuers
and users of financial information and the decision-making behavior resulting from that impact. In
other words, accounting information impacts various users in many different ways which leads to
23. No one particular proposal is expected in answer to this question. The students’ proposals, however,
should be defensible relative to the following criteria:
Questions Chapter 1 (Continued)
24. Concern exists about fraudulent financial reporting because it can undermine the entire financial
reporting process. Failure to provide information to users that is accurate can lead to inappropriate
25. The expectations gap is the difference between what people think accountants should be doing and
what accountants think they can do. It is a difficult gap to close. The accounting profession recognizes
26. The following are some of the key provisions of the Sarbanes-Oxley Act:
• Establishes an oversight board for accounting practices. The Public Company Accounting Over-
sight Board (PCAOB) has oversight and enforcement authority and establishes auditing, quality
control, and independence standards and rules.
27. Some major challenges facing the accounting profession relate to the following items:
Nonfinancial measurement—how to report significant key performance measurements such as
28. Accountants must perceive the moral dimensions of some situations because GAAP does not
define or cover all specific features that are to be reported in financial statements. In these instances
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 1.1 (Time 15–20 minutes)
CA 1.2 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to answer questions about GAAP and standard
setting.
CA 1.3 (Time 15–20 minutes)
CA 1.4 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to distinguish between financial accounting and
CA 1.5 (Time 20–25 minutes)
CA 1.6 (Time 10–15 minutes)
Purpose—to provide the student with an opportunity to describe how reported accounting numbers
might affect an individual’s perceptions and actions.
CA 1.7 (Time 15–20 minutes)
CA 1.8 (Time 20–25 minutes)
CA 1.9 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to identify the sponsoring organization of the
CA 1.10 (Time 30–40 minutes)
Purpose—to provide the student with an opportunity to focus on the types of organizations involved in the
CA 1.11 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to focus on what type of rule-making environment
CA 1.12 (Time 30–40 minutes)
Time and Purpose of Concepts for Analysis (Continued)
CA 1.13 (Time 20–25 minutes)
CA 1.14 (Time 30–40 minutes)
CA 1.15 (Time 25–35 minutes)
Purpose—to provide the student with a writing assignment concerning the ethical issues related to
meeting earnings targets.
CA 1.16 (Time 25–35 minutes)
CA 1.17 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to comment on a letter sent by business execu-
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 1.1
1. True
CA 1.2
1. False. In addition to providing decision-useful information about future cash flows, management
also is accountable to investors for the custody and safekeeping of the company’s economic
CA 1.3
1. (d)
CA 1.4
(a) Financial accounting is the process that culminates in the preparation of financial reports relative to
CA 1.4 (Continued)
(c) Financial statements are the principal means through which financial information is communicated to
CA 1.5
(a) In accordance with Statement of Financial Accounting Concepts No. 1, “Objectives of Financial
Reporting by Business Enterprises,” the objectives of financial reporting are to provide information to
(b) Statement of Financial Accounting Concepts No. 1 establishes standards to meet the information
needs of large groups of external users such as investors, creditors, and their representatives.
CA 1.6
Accounting numbers affect investing decisions. Investors, for example, use the financial statements of
different companies to enhance their understanding of each company’s financial strength and operating
CA 1.7
It is not appropriate to abandon mandatory accounting rules and allow each company to voluntarily
disclose the type of information it considers important. Without a coherent body of accounting theory and
standards, each accountant or enterprise would have to develop its own theory structure and set of
CA 1.8
(a) One of the committees that the AICPA established prior to the establishment of the FASB was the
Committee on Accounting Procedures (CAP). The CAP, during its existence from 1939 to 1959,
CA 1.8 (Continued)
The APB had more authority and responsibility than did the CAP. Unfortunately, the APB was
beleaguered throughout its 14-year existence. It came under fire early, charged with lack of produc-
tivity and failing to act promptly to correct alleged accounting abuses. The APB also met a lot of
industry and CPA firm opposition and occasional governmental interference when tackling numerous
the needs and viewpoints of the entire economic community, not just the public accounting profession.
(c) The AICPA supplements the FASB’s efforts in the present standard-setting environment. Their
issue papers, which are prepared by the Financial Reporting Executive Committee (FinREC) formerly
the Accounting Standards Executive Committee (AcSEC), identify current financial reporting
CA 1.9
(a) The Financial Accounting Foundation (FAF) is the sponsoring organization of the FASB. The FAF
selects the members of the FASB and its Advisory Council, funds their activities, and generally
oversees the FASB’s activities.
The FASB follows a due process in establishing a typical FASB Statement of Financial Accounting
(b) The FASB issues two major types of pronouncements: Accounting Standards Updates (ASUs) and
Concepts Statements. ASUs issued by the FASB are considered GAAP.
CA 1.9 (Continued)
ASU’s may be comprised of major standards projects, EITF consensus, or interpretations.
Regardless of nature, if approved by the FASB in an ASU, then the guidance is considered GAAP.
CA 1.10
(a) CAP. The Committee on Accounting Procedure, CAP, which was in existence from 1939 to 1959,
was an outgrowth of AICPA committees which were in existence during the period 1933 to 1938.
The committee was formed in direct response to the criticism received by the accounting profession
during the financial crisis of 1929 and the years thereafter. The authorization to issue
pronouncements on matters of accounting principles and procedures was based on the belief that
the AICPA had the responsibility to establish practices that would become generally accepted by the
profession and by corporate management.
CA 1.10 (Continued)
APB. The objectives of the APB were formulated mainly to correct the deficiencies of the CAP as
described above. The APB was thus charged with the responsibility of developing written expression
of generally accepted accounting principles through consideration of the research done by other
members of the AICPA in preparing Accounting Research Studies. The committee was in turn
given substantial authoritative standing in that all opinions of the APB were to constitute substantial
FASB. The formal organization of the FASB represents an attempt to vest the responsibility of
establishing GAAP in an organization representing the diverse interest groups affected by the use of
GAAP. The FASB is independent of the AICPA. It is independent, in fact, of any private or govern-
Conclusion. The evolution of the current FASB certainly does represent “increasing politicization
of accounting standards setting.” Many of the efforts extended by the AICPA can be directly
attributed to the desire to satisfy the interests of many groups within our society. The FASB
represents, perhaps, just another step in this evolutionary process.
(b) Arguments for politicization of the accounting rule-making process:
1. Accounting depends in large part on public confidence for its success. Consequently, the