QUESTIONS
1.
Differentiate broadly between financial accounting and managerial accounting.
Answer:
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
form enterprise activities, but the communication is for the use of internal, managerial parties, and
relates more to subsystems of the entity. Managerial accounting is management decision oriented
and directed more toward product line, division, and profit center reporting
2. Differentiate between “financial statements” and “financial reporting.”
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
form enterprise activities, but the communication is for the use of internal, managerial parties, and
relates more to subsystems of the entity. Managerial accounting is management decision oriented
and directed more toward product line, division, and profit center reporting
2. Differentiate between “financial statements” and “financial reporting.”
Answer:
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.
Financial reporting is a broader concept; it includes the basic financial statements and any other
means of communicating financial and economic data to interested external parties. Examples of
financial reporting other than financial statements are annual reports, prospectuses, reports filed with
the government, news releases, management forecasts or plans, and descriptions of an enterprise’s
social or environmental impact.
3. How does accounting help the capital allocation process?
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.
Financial reporting is a broader concept; it includes the basic financial statements and any other
means of communicating financial and economic data to interested external parties. Examples of
financial reporting other than financial statements are annual reports, prospectuses, reports filed with
the government, news releases, management forecasts or plans, and descriptions of an enterprise’s
social or environmental impact.
3. How does accounting help the capital allocation process?
Answer:
3. If a company’s financial performance is measured accurately, fairly, and on a timely basis, the right
managers and companies are able to attract investment capital. To provide unreliable and irrelevant
information leads to poor capital allocation which adversely affects the securities market.
4. What is the objective of financial reporting?
3. If a company’s financial performance is measured accurately, fairly, and on a timely basis, the right
managers and companies are able to attract investment capital. To provide unreliable and irrelevant
information leads to poor capital allocation which adversely affects the securities market.
4. What is the objective of financial reporting?
Answer:
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. Briefly explain the meaning of decision-usefulness in the context of financial reporting.
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. Briefly explain the meaning of decision-usefulness in the context of financial reporting.
Answer:
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 inflows and (2)
management’s ability to protect and enhance the capital providers’ investments. Financial
reporting should therefore help investors assess the amounts, timing, and uncertainty of
prospective cash inflows from dividends or interest, and the proceeds from the sale, redemption,
or maturity of securities or loans. In order for investors to make these assessments, the economic
resources of an enterprise, the claims to those resources, and the changes in them must be
understood.
6. Of what value is a common set of standards in financial accounting and reporting?
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 inflows and (2)
management’s ability to protect and enhance the capital providers’ investments. Financial
reporting should therefore help investors assess the amounts, timing, and uncertainty of
prospective cash inflows from dividends or interest, and the proceeds from the sale, redemption,
or maturity of securities or loans. In order for investors to make these assessments, the economic
resources of an enterprise, the claims to those resources, and the changes in them must be
understood.
6. Of what value is a common set of standards in financial accounting and reporting?
Answer:
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. What is the likely limitation of “general-purpose financial statements”?
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. What is the likely limitation of “general-purpose financial statements”?
Answer:
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
agencies, and financial analysts vary considerably, it is unlikely that one set of financial statements
is equally appropriate for these varied uses.
8. In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards?
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
agencies, and financial analysts vary considerably, it is unlikely that one set of financial statements
is equally appropriate for these varied uses.
8. In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards?
Answer:
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
on the stock exchanges, it is greatly interested in the content, accuracy, and credibility of the
statements. For many years the SEC relied on the AICPA to regulate the profession and develop
and enforce accounting principles. Lately, the SEC has assumed a more active role in the development
of accounting standards, especially in the area of disclosure requirements. In December 1973,
in ASR No. 150, the SEC said the FASB’s statements would be presumed to carry substantial
authoritative support and anything contrary to them to lack such support. It thereby supports the
development of accounting principles in the private sector.
9. What was the Committee on Accounting Procedure, and what were its accomplishments and failings?
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
on the stock exchanges, it is greatly interested in the content, accuracy, and credibility of the
statements. For many years the SEC relied on the AICPA to regulate the profession and develop
and enforce accounting principles. Lately, the SEC has assumed a more active role in the development
of accounting standards, especially in the area of disclosure requirements. In December 1973,
in ASR No. 150, the SEC said the FASB’s statements would be presumed to carry substantial
authoritative support and anything contrary to them to lack such support. It thereby supports the
development of accounting principles in the private sector.
9. What was the Committee on Accounting Procedure, and what were its accomplishments and failings?
Answer:
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
a wide variety of timely accounting problems. These bulletins provided solutions to immediate
problems and narrowed the range of alternative practices. But, the Committee’s problem-by-problem
approach failed to provide a well-defined and well-structured body of accounting theory that was so
badly needed. The Committee on Accounting Procedure was replaced in 1959 by the Accounting
Principles Board.
10. For what purposes did the AICPA create the Accounting Principles Board?
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
a wide variety of timely accounting problems. These bulletins provided solutions to immediate
problems and narrowed the range of alternative practices. But, the Committee’s problem-by-problem
approach failed to provide a well-defined and well-structured body of accounting theory that was so
badly needed. The Committee on Accounting Procedure was replaced in 1959 by the Accounting
Principles Board.
10. For what purposes did the AICPA create the Accounting Principles Board?
Answer:
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. Distinguish between Opinions of the Accounting Principles Board and Accounting Standards Updates.
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. Distinguish between Opinions of the Accounting Principles Board and Accounting Standards Updates.
Answer:
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
the APB or an FASB standard. 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 Updates are pronouncements of the Financial Accounting Standards Board
that are incorporated into the FASB codification and therefore represent the accounting profession’s
authoritative pronouncements on financial accounting and reporting practices.
12. If you had to explain or define “generally accepted accounting principles or standards,” what essential characteristics would you include in your explanation?
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
the APB or an FASB standard. 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 Updates are pronouncements of the Financial Accounting Standards Board
that are incorporated into the FASB codification and therefore represent the accounting profession’s
authoritative pronouncements on financial accounting and reporting practices.
12. If you had to explain or define “generally accepted accounting principles or standards,” what essential characteristics would you include in your explanation?
Answer:
12. The explanation should note that generally accepted accounting principles or standards have
“substantial authoritative support.” They consist of accounting practices, procedures, theories,
concepts, and methods which are recognized by a large majority of practicing accountants as well
as other members of the business and financial community. Bulletins issued by the Committee on
Accounting Procedure, opinions rendered by the Accounting Principles Board, and statements
issued by the Financial Accounting Standards Board constitute “substantial authoritative support.”
13. In what ways was it felt that the pronouncements issued by the Financial Accounting Standards Board would carry greater weight than the opinions issued by the Accounting Principles Board?
12. The explanation should note that generally accepted accounting principles or standards have
“substantial authoritative support.” They consist of accounting practices, procedures, theories,
concepts, and methods which are recognized by a large majority of practicing accountants as well
as other members of the business and financial community. Bulletins issued by the Committee on
Accounting Procedure, opinions rendered by the Accounting Principles Board, and statements
issued by the Financial Accounting Standards Board constitute “substantial authoritative support.”
13. In what ways was it felt that the pronouncements issued by the Financial Accounting Standards Board would carry greater weight than the opinions issued by the Accounting Principles Board?
14. How are FASB preliminary views and FASB exposure drafts related to FASB “statements”?
15. Distinguish between FASB Accounting Standards Updates and FASB Statements of Financial Accounting Concepts.
16. What is Rule 203 of the Code of Professional Conduct?
17. The chair of the FASB at one time noted that “the flow of standards can only be slowed if (1) producers focus less on quarterly earnings per share and tax benefits and more on quality products, and (2) accountants and lawyers rely less on rules and law and more on professional judgment and conduct.” Explain his comment.
18. Explain the role of the Emerging Issues Task Force in establishing generally accepted accounting principles.
19. What is the difference between the Codification and the Codification Research System?
20. What are the primary advantages of having a Codification of generally accepted accounting principles?
21. What are the sources of pressure that change and influence the development of GAAP?
22. Some individuals have indicated that the FASB must be cognizant of the economic consequences of its pronouncements. What is meant by “economic consequences”? What dangers exist if politics play too much of a role in the development of GAAP?
23. If you were given complete authority in the matter, how would you propose that GAAP should be developed and enforced?
24. One writer recently noted that 99.4 percent of all companies prepare statements that are in accordance with GAAP. Why then is there such concern about fraudulent financial reporting?
25. What is the “expectations gap”? What is the profession doing to try to close this gap?
26. The Sarbanes-Oxley Act was enacted to combat fraud and curb poor reporting practices. What are some key provisions of this legislation?
27. What are some of the major challenges facing the accounting profession?
28. How are financial accountants challenged in their work to make ethical decisions? Is technical mastery of GAAP not sufficient to the practice of financial accounting?
CONCEPTS FOR ANALYSIS
CA1-1
(FASB and Standard-Setting) Presented below are four statements which you are
to identify as true or false. If false, explain why the statement is false.
1. GAAP
is the term used to indicate the whole body of FASB authoritative literature.
2. Any
company claiming compliance with GAAP must comply with most standards and
interpretations but does not have to follow the disclosure requirements.
3. The
primary governmental body that has influence over the FASB is the SEC.
4. The
FASB has a government mandate and therefore does not have to follow due process
in issuing a standard.
CA1-2
(GAAP and Standard-Setting) Presented below are four statements which you are
to identify as true or false. If false, explain why the statement is false.
1. The
objective of financial statements emphasizes a stewardship approach for
reporting financial information.
2. The
purpose of the objective of financial reporting is to prepare a balance sheet,
an income statement, a statement of cash flows, and a statement of owners’ or
stockholders’ equity.
3.
Because they are generally shorter, FASB interpretations are subject to less
due process, compared to FASB standards.
4. The
objective of financial reporting uses an entity rather than a proprietary
approach in determining what information to report.
CA1-3
(Financial Reporting and Accounting Standards) Answer the following
multiple-choice questions.
1. GAAP
stands for:
(a)
governmental auditing and accounting practices.
(b)
generally accepted attest principles.
(c)
government audit and attest policies.
(d)
generally accepted accounting principles.
2.
Accounting standard-setters use the following process in establishing
accounting standards:
(a)
Research, exposure draft, discussion paper, standard.
(b)
Discussion paper, research, exposure draft, standard.
(c)
Research, preliminary views, discussion paper, standard.
(d)
Research, discussion paper, exposure draft, standard.
3. GAAP
is comprised of:
(a) FASB
standards, interpretations, and concepts statements.
(b) FASB
financial standards.
(c) FASB
standards, interpretations, EITF consensuses, and accounting rules issued by
FASB predecessor organizations.
(d) any
accounting guidance included in the FASB Codification.
4. The
authoritative status of the conceptual framework is as follows.
(a) It
is used when there is no standard or interpretation related to the reporting
issues under consideration.
(b) It
is not as authoritative as a standard but takes precedence over any
interpretation related to the reporting issue.
(c) It
takes precedence over all other authoritative literature.
(d) It
has no authoritative status.
5. The
objective of financial reporting places most emphasis on:
(a)
reporting to capital providers.
(b)
reporting on stewardship.
(c)
providing specific guidance related to specific needs.
(d)
providing information to individuals who are experts in the field.
6.
General-purpose financial statements are prepared primarily for:
(a)
internal users.
(b) external
users.
(c)
auditors.
(d)
government regulators.
7.
Economic consequences of accounting standard-setting means:
(a)
standard-setters must give first priority to ensuring that companies do not
suffer any adverse effect as a result of a new standard.
(b)
standard-setters must ensure that no new costs are incurred when a new standard
is issued.
(c) the
objective of financial reporting should be politically motivated to ensure
acceptance by the general public.
(d)
accounting standards can have detrimental impacts on the wealth levels of the
providers of financial information.
8. The
expectations gap is:
(a) what
financial information management provides and what users want.
(b) what
the public thinks accountants should do and what accountants think they can do.
(c) what
the governmental agencies want from standard-setting and what the
standard-setters provide.
(d) what
the users of financial statements want from the government and what is
provided.
CA1-4
(Financial Accounting) Omar Morena has recently completed his first year of
studying accounting. His instructor for next semester has indicated that the
primary focus will be the area of financial accounting.
Instructions
(a)
Differentiate between financial accounting and managerial accounting.
(b) One
part of financial accounting involves the preparation of financial statements.
What are the financial statements most frequently provided?
(c) What
is the difference between financial statements and financial reporting?
CA1-5
(Objective of Financial Reporting) Karen Sepan, a recent graduate of the local
state university, is presently employed by a large manufacturing company. She
has been asked by Jose Martinez, controller, to prepare the company’s response
to a current
Preliminary
Views published by the Financial Accounting Standards Board (FASB). Sepan knows
that the FASB has a conceptual framework, and she believes that these concept
statements could be used to support the company’s response to the
Preliminary
Views. She has prepared a rough draft of the response citing the objective of
financial reporting.
Instructions
(a)
Identify the objective of financial reporting.
(b)
Describe the level of sophistication expected of the users of financial
information by the objective of financial reporting.
CA1-6 (Accounting Numbers and the Environment) Hardly a day goes by without an article appearing on the continuing fallout from the financial crisis of 2008. An overheated real estate market, fueled by home purchase incentives, poor lending practices, and securitization through high-risk, mortgage-backed securities, led to a near collapse of global capital markets. As a consequence, many have argued that if the financial institutions had been required to report their loans (and loan-backed investments) at fair value instead of cost, large losses would have been reported earlier. This would have signaled regulators to the problems in the mortgage markets and therefore minimized the losses to U.S. taxpayers.
Instructions
Explain
how reported accounting numbers might affect an individual’s perceptions and
actions. Cite two examples.
