Chapter 1 Neutrality is an attribute of faithful representation

Exercise 1–14

Statement Concept

1. d. Monetary unit assumption

2. h. Full-disclosure principle

Exercise 1–15

1. b

CPA / CMA REVIEW QUESTIONS

CPA Exam Questions

1. a. Auditor independence is not a qualitative characteristic.

5. d. Predictive value is an ingredient of relevance.

6. b. Completeness is an ingredient of faithful representation.

7. b. The objective of financial reporting is to provide information that is useful to

CMA Exam Questions

1. b. Accounting standards in the United States for nongovernmental entities

2. c. Verifiability implies a consensus among different measurers.

3. c. The four fundamental recognition criteria are (1) the item meets the

1–22 Intermediate Accounting, 8/e

Judgment Case 1–1

Requirement 1

In the 1934 Securities Act, Congress gave the SEC the job of setting accounting

and reporting standards for companies whose securities are publicly traded. However,

Requirement 2

1. SEC employees may not have the expertise necessary to set accounting

standards.

CASES

Research Case 1–2

Requirement 2

The 1933 Act has two basic objectives:

1. To require that investors be provided with material information concerning

Requirement 3

EDGAR:

EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system,

performs automated collection, validation, indexing, acceptance, and forwarding of

1–24 Intermediate Accounting, 8/e

Research Case 1–3

Requirement 1

The mission of the Financial Accounting Standards Board is to establish and

Requirement 2

Answers to these questions will vary depending on the date the research is

conducted.

Requirement 3

The FASB receives many requests for action on various financial accounting and

reporting topics from all segments of a diverse constituency, including the SEC. The

The Board turns to many other organizations and groups for advice and

information on various matters, including its agenda. Among the groups with which

liaison is maintained are the Financial Accounting Standards Advisory Council, the

Accounting Standards Executive Committee and Auditing Standards Board of the

.

Research Case 1–4

Requirement 1

The IASB is committed to developing, in the public interest, a single set of high–

Requirement 2

The IASB has 16 Board members, each with one vote.

Requirement 3

Requirement 4

London, United Kingdom

Research Case 1–5

Requirement 2

In 1978, China’s enterprise reform program was initiated. Prior to 1978, all

Requirement 3

The author feels that the accounting environment in China differs considerably

1–26 Intermediate Accounting, 8/e

Communication Case 1–6

In the long run, a company will be able to provide investors with a return only if

it can generate a profit. That is, it must be able to use the resources provided by

investors and creditors to generate cash receipts from selling a product or service that

exceed the cash disbursements necessary to provide that product or service. If this

excess cash can be generated, the marketplace is implicitly saying that society’s

resources have been efficiently allocated. The marketplace is assigning a value to the

product or service that exceeds the value assigned to the resources used to produce

that product or service. Pollution costs to society should be borne by the

company/individual causing the costs to be incurred. If they are, and the pollution–

Communication Case 1–7

Suggested Grading Concepts and Grading Scheme:

Content (70%)

_____ 30 Briefly outlines the standard setting process.

____ Role of FASB, SEC.

Writing (30%)

_____ 6 Terminology and tone appropriate to the audience of

a business journal.

_____ 12 Organization permits ease of understanding.

1–28 Intermediate Accounting, 8/e

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

Who is affected?

Auditors

Company management

Ethical Values:

Ethical values pertaining to auditor responsibility include honesty, integrity, and

Ethics Case 1–8 (concluded)

Ethical issues or challenges:

1. Pressure from management to bias the audit opinion by threatening to

withhold audit fee payment, to hire another audit firm, or to assign tax

preparation work to another audit firm.

2. Pressure from management to bias the audit opinion by providing an

Judgment Case 1–9

The two primary qualitative characteristics of accounting information are

relevance and faithful representation. However, these qualities often can conflict,

1–30 Intermediate Accounting, 8/e

Judgment Case 1–10

Requirement 1

Mary will be able to compare the financial statements due to the existence of

Requirement 2

Auditors examine financial statements to express an opinion on their compliance

with GAAP.

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, Wolf

performs its rental service over time, and at the beginning of the period has not yet

1–32 Intermediate Accounting, 8/e

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

between a revenue and expense event. Cost of goods sold is an example of an

Requirement 3

a. The cost of producing a product – 1.

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 in

Requirement 2

Yes, the materiality constraint. If an expenditure creates a benefit beyond the

1–34 Intermediate Accounting, 8/e

Real World Case 1–15

Requirement 1

a. Total net revenues = $ 16,148 million

Requirement 2

The balance sheet reports 1,106 million shares of common stock issued as of

February 1, 2014.

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

uniform accounting standards.

2. More comparable financial statements are easier for users.

3. Less costly information systems to prepare financial statements for multi-

Requirement 2

Anti-convergence arguments include:

1. Regulatory requirements (like Sarbanes-Oxley) are more important than

accounting standards for discouraging use of U.S. capital markets.

2. Actual comparability depends on regulatory enforcement and how IFRS

is applied in particular countries; could make financial statements seem

1–36 Intermediate Accounting, 8/e

Air France–KLM Case

Requirement 1

a. Total revenues = € 25,530 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 Reporting