1-1
CHAPTER 1
Financial Accounting and Accounting Standards
ASSIGNMENT CLASSIFICATION TABLE
Topics
Questions
Cases
1.
Subject matter of accounting.
1
4
2.
Environment of accounting.
2, 3, 29
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,
20, 21, 22, 23
14, 16, 17
6.
Role of pressure groups.
26, 27, 28
10, 19, 20
7.
Ethical issues.
15, 18
ASSIGNMENT CHARACTERISTICS TABLE
Item
Level of
Difficulty
Time
(minutes)
CA1-1
Simple
15–20
CA1-2
Simple
15–20
CA1-3
Simple
15–20
CA1-4
Simple
15–20
CA1-5
Moderate
20–25
CA1-6
Simple
10–15
CA1-7
Simple
15–20
CA1-8
Simple
20–25
CA1-9
Simple
20–25
CA1–10
30–40
CA1–11
Simple
15–20
CA1–12
Moderate
30–40
CA1–13
Simple
15–20
CA1–14
Simple
10–15
CA1–15
20–25
CA1–16
Moderate
30–40
CA1–17
Moderate
25–35
CA1–18
Moderate
25–35
CA1–19
Moderate
25–35
CA1–20
Moderate
25–35
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SOLUTIONS TO CODIFICATION EXERCISES
CE1-1
There is no answer to this requirement as it asks the student to register to use the Codification.
CE1-2
(a) The Codification Overview module illustrates three items (1) the topic structure (2) different methods of
accessing and viewing content, and (3) a summary of the unique features of the Codification
Research System.
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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
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
in decisions about providing resources to the entity through equity investments and loans or other
forms of credit. Information that is decision-useful to capital providers (investors) may also be useful
to other users of financial reporting who are not investors.
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 provides financial statements
which are reasonably comparable. Without a common set of standards, each enterprise could, and
would, develop its own theory structure and set of practices, resulting in noncomparability among
enterprises.
7. General-purpose financial statements are not likely to satisfy the specific needs of all interested
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
inconsistencies in practice. To achieve its basic objectives, its mission was to develop an overall
conceptual framework to assist in the resolution of problems as they became evident and to do
substantive research on individual issues before pronouncements were issued.
11. Accounting Research Bulletins were pronouncements on accounting practice issued by the
Committee on Accounting Procedure between 1939 and 1959; since 1964 they have been
recognized as accepted accounting practice unless superseded in part or in whole by an opinion of
12. The explanation should note that generally accepted accounting principles or standards have
“substantial authoritative support.” They consist of accounting practices, procedures, theories,
13. It was believed that FASB Statements would carry greater weight than APB Opinions because of
significant differences between the FASB and the APB, namely: (1) The FASB has a smaller mem–
bership, (2) full-time compensated members; (3) the FASB has greater autonomy, (4) increased
independence; (5) the FASB has broader representation than the APB.
14. The technical staff of the FASB conducts research on an identified accounting topic and prepares
a “preliminary views” that is released by the Board for public reaction. The Board analyzes and
Questions Chapter 1 (Continued)
15. Statements of financial accounting standards 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
departure from an accounting principle promulgated by the FASB, or its predecessors, the APB
and the CAP, unless the member can demonstrate that because of unusual circumstances the
financial statements would otherwise have been misleading. Failure to follow Rule 203 can lead to
a loss of a CPA’s license to practice. This rule is extremely important because it requires auditors
to follow FASB standards.
17. FASB Standards, FASB Technical Bulletins, AICPA Practice Bulletins.
18. 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
19. FASB Staff Positions (FSP) are used to provide interpretive guidance and to make minor amend-
ments to existing standards. The due process used to issue a FSP is the same used to issue a
new standard.
20. 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
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Questions Chapter 1 (Continued)
21. The Financial Accounting Standards Board Accounting Standards Codification (Codifications) is a
compilation of all GAAP in one place. Its purpose is to integrate and synthesize existing GAAP and
22. Hopefully, 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
be substantially reduced. In addition, through the electronic web-based format, GAAP can be easily
updated which will help users stay current.
23. The sources of pressure are innumerable, but the most intense and continuous pressure to
24. 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
25. No one particular proposal is expected in answer to this question. The students’ proposals, however,
should be defensible relative to the following criteria:
(1) The method must be efficient, responsive, and expeditious.
(2) The method must be free of bias and be above or insulated from pressure groups.
(3) The method must command widespread support if it does not have legislative authority.
(4) The method must produce sound yet practical accounting principles or standards.
The students’ proposals might take the form of alterations of the existing methodology, an accoun–
ting court (as proposed by Leonard Spacek), or governmental device.
26. Concern exists about fraudulent financial reporting because it can undermine the entire financial
27. 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
Questions Chapter 1 (Continued)
28. 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.
29. Some major challenges facing the accounting profession relate to the following items:
Nonfinancial measurement—how to report significant key performance measurements such as
30. 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)
Purpose—to provide the student with an opportunity to answer questions about FASB and standard
setting.
CA 1-2 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to answer questions about FASB and standard
setting.
CA 1-3 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to answer questions about financial reporting and
accounting standards topics.
CA 1-4 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to distinguish between financial accounting and
managerial accounting, identify major financial statements, and differentiate financial statements and
financial reporting.
CA 1-5 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to explain the basic objective of financial reporting.
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)
Purpose—to provide the student with an opportunity to evaluate the viewpoint of removing mandatory
accounting rules and allowing each company to voluntarily disclose the information it desired.
CA 1-8 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to explain the evolution of accounting rule-making
organizations and the role of the AICPA in the rule making environment.
CA 1-9 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to identify the sponsoring organization of the
FASB, the method by which the FASB arrives at a decision, and the types and the purposes of docu–
ments issued by the FASB.
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
rule making process, what impact accounting has on the environment, and the environment’s influence
on accounting.
CA 1-11 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to focus on what type of rule-making environment
exists in the United States. In addition, this CA explores why user groups are interested in the nature of
GAAP and why some groups wish to issue their own rules.
CA 1-12 (Time 30–40 minutes)
Purpose—to provide the student with an opportunity to identify and define acronyms appearing in the
first chapter. Some are self-evident, others are not so.
1-10
Time and Purpose of Concepts for Analysis (Continued)
CA 1-13 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to identify the various documents issued by different
accounting organizations. This CA should help the student to better focus on the more important documents
issued in the financial reporting area.
CA 1-14 (Time 10–15 minutes)
Purpose—to provide the student with an opportunity to match the descriptions of a number of authori-
tative pronouncements issued by rule-making bodies to the pronouncements.
CA 1-15 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to consider the ethical dimensions of implementation
of a new accounting pronouncement.
CA 1-16 (Time 30–40 minutes)
Purpose—to provide the student with an assignment that explores the role and function of the
Securities and Exchange Commission.
CA 1-17 (Time 25–35 minutes)
Purpose—to provide the student with an assignment that explores the role of the FASB and the rule-
making process.
CA 1-18 (Time 25–35 minutes)
Purpose—to provide the student with a writing assignment concerning the ethical issues related to
meeting earnings targets.
CA 1-19 (Time 25–35 minutes)
Purpose—to provide the student with the opportunity to discuss the role of Congress in accounting rule-
making.
CA 1-20 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to comment on a letter sent by business execu–
tives to the FASB and Congress on the accounting for derivatives.
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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
CA 1-3
1. (d)
CA 1-4
(a) Financial accounting is the process that culminates in the preparation of financial reports relative to
the enterprise as a whole for use by parties both internal and external to the enterprise. In contrast,
CA 1-4 (Continued)
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
investors, creditors, and others
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
1-13
CA 1-7
It is not appropriate to abandon mandatory accounting rules and allow each company to voluntarily
disclose the type of information it considered 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,
issued 51 Accounting Research Bulletins (ARB). In 1959, the AICPA created the Accounting Prin–
ciples Board (APB) to replace the CAP. Before being replaced by the FASB, the APB released
31 official pronouncements, called APB Opinions.
CA 1-8 (Continued)
(c) The AICPA has supplemented the FASB’s efforts in the present standard-setting environment. The
issue papers, which are prepared by the Accounting Standards Executive Committee (AcSEC),
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.
1-15
CA 1-9 (Continued)
In addition, the FASB’s Emerging Issues Task Force (EITF) issues statements to provide guidance
CA 1-10
(a) CAP. The Committee on Accounting Procedure, CAP, which was in existence from 1939 to 1959,
was a natural 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.
It was not until well after the demise of the CAP, in 1964, that the Council of the AICPA adopted
recommendations that departures from effective CAP Bulletins should be disclosed in financial
statements or in audit reports of members of the AICPA. The demise of the CAP could probably be
traced to four distinct factors: (1) the narrow nature of the subjects covered by the bulletins issued by
the CAP, (2) the lack of any theoretical groundwork in establishing the procedures presented in the
bulletins, (3) the lack of any real authority by the CAP in prescribing adherence to the procedures
described by the bulletins, and (4) the lack of any formal representation on the CAP of interest
groups such as corporate managers, governmental agencies, and security analysts.
CA 1-10 (Continued)
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–
mental organization. Individual CPAs, firms of CPAs, accounting educators, and representatives of
private industry will now have an opportunity to make known their views to the FASB through their
membership on the Board. Independence is facilitated through the funding of the organization and
payment of the members of the Board. Full-time members are paid by the organization and the
organization itself is funded solely through contributions. Thus, no one interest group has a vested
interest in the FASB.
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CA 1-10 (Continued)
(c) Arguments against the politicalization of the accounting rule-making process:
1. Many accountants feel that accounting is primarily technical in nature. Consequently, they feel
that substantive, basic research by objective, independent and fair-minded researchers ultimately
CA 1-11
(a) The public/private mixed approach appears to be the way rules are established in the United States. In
many respects, the FASB is a quasi-governmental agency in that its pronouncements are required to
be followed because the SEC has provided support for this approach. The SEC has the ultimate
power to establish GAAP but has chosen to permit the private sector to develop these rules. By