Solution Manual for Intermediate Accounting 2nd Edition by Gordon

Solution Manual for Intermediate Accounting 2nd Edition by Gordon CHAPTER 1 The Financial Reporting Environment Solutions Questions Q1-1 Financial information is a much broader concept than simply the financial statements and footnotes to the financial statements. Financial information includes items such as the President’s letter to the owners, management’s discussion and analysis, the auditors’ report, the management report and press releases. Of course, the basic financial statements and footnotes are included in the term financial information. The basic financial statements are: the balance sheet (also referred to as the statement of financial position), the statement of comprehensive income (also referred to as the statement of net income and the statement of comprehensive income), the statement of cash flows, and the statement of shareholders’ equity. Financial information is not synonymous with the term financial statements because the financial statements are a subset of the different types of financial information provided. Q1-2 The purpose of generating financial statements is to provide useful information to users to evaluate economic entities and make efficient resource allocation decisions based on the risks and returns of a particular investment. The Financial Accounting Standards Board (FASB) identifies investors, lenders and other creditors as the primary users of the financial statements. The financial statements are the culmination of the financial reporting process. Q1-3 Capital is a scarce resource. Investors and creditors have to make decisions as to how much capital to invest in any given entity; therefore, they demand relevant and faithfully representative information about the economic performance and financial position of a company. This information is provided in the financial statements. Q1-4 External auditors ensure that the management of a company has prepared financial statements in accordance with Generally Accepted Accounting Principles and fairly present the financial position and economic performance of a company. In addition, external auditors must be an independent party and cannot be employees of the company they are auditing. External auditors provide a significant amount of credibility to the financial statements. Q1-5 Standard setters create accounting concepts, rules, and guidelines to ensure that financial statements accurately present the economic performance and financial position of a firm. The standards encourage transparent and truthful reporting. Q1-6 U.S. companies listed on U.S. stock exchanges do not have the option to report under IFRS. However, foreign companies that trade in the U.S. exchanges can report under IFRS. The SEC permits the use of IFRS-based financial statements by international companies with shares trading on U.S. stock exchanges.