CHAPTER 2 SOLUTIONS TO B EXERCISES EXERCISE 2-1B (15–20 minutes) (a) True. (b) False – General-purpose financial reports helps users who lack the ability to demand all the financial information they need from an entity and therefore must rely, at least partly, on the information in financial reports. (c) False – Standard-setting that is based on personal conceptual frameworks will lead to different conclusions about identical or similar issues. As a result, standards will not be consistent with one another, and past decisions may not be indicative of future ones. (d) False – Information that is decision-useful to capital providers may also be useful to other users of financial reporting, who are not capital providers. (e) …show more content…
(c) Comparability requires that disclosure of changes in accounting principles be made in the financial statements. To do otherwise would result in financial statements that are misleading. Financial statements are more useful if they can be compared with similar reports for prior years. (d) The proper accounting for this situation is to report the equipment as an asset and the notes payable as a liability on the balance sheet. Offsetting is permitted in only limited situations where certain assets are contractually committed to pay off liabilities. (e) It is well established in accounting that revenues and cost of goods sold must be disclosed in the reporting of an income statement. It might be noted to students that such was not always the case. At one time, only net income was reported but over time we have evolved to the present reporting format. E2-9B (15–20 minutes) (a) Probably the company is too conservative in its accounting for this transaction. The expense recognition principle indicates that expenses should be allocated to the appropriate periods involved. In this case, there appears to be a high uncertainty that the company will have to pay. FASB ASC 450-20-25 requires that a loss should be accrued only (1) when it is probable that the company would lose the suit
Some individuals assume that the usefulness of financial statements is to predict the future of a business with data from the past. Sometimes this can be true in respect for trends that have continued for many years, for at least the near future. The fact is financial
ChaNoel A. Torres Acevedo Intermediate Accounting I Homework: Exercise 3-1: Apr. | 2 | Cash | 30,000 | | | | Equipment | 14,000 | | | | Christine Ewing, Capital | | 44,000 | | | | | | | 2 | No entry—not a transaction. | | | | | | | | | 3 | Supplies | 700 | | | | Accounts Payable | | 700 | | | | | | | 7 | Rent Expense | 600 | | | | Cash | | 600 | | | | | | | 11 | Accounts Receivable | 1,100 | | | | Service Revenue | | 1,100 | | | | | | | 12 | Cash | 3,200 | | | | Unearned Service Revenue | | 3,200 | | | | | | | 17 | Cash | 2,300 | | | | Service Revenue | | 2,300 |
As the business environment grows and companies find new ways to expand into their respective - or even new – markets, it is important that reporting standards stay up to date with changes and continue to assist companies in providing their users with useful accounting information. Information is labelled as being useful when it meets the
The aim of this report is to distinguish between capital expenditure and revenue expenditure and to explain the accounting treatment of different transactions. The classification of expenditures as capital or revenue will have an impact on the statements of financial position and comprehensive income. Therefore, when preparing financial statements, accountants need to adhere to and comply with the rules and regulations set out by the International Accounting Standards Board (IASB). As such, the report is limited to discussing the various expenditures covered by accounting standards. Furthermore, the report identifies what items can be recorded in accounts as assets in terms with the relevant accounting standards.
Ans: The income statement lists the revenues minus expenses or costs of goods sold and operating expenses and will reveal a net income or net loss (Revenues – Expenses = Net Profit or Net Loss). Income statements show how much money a company made and spent over a period of time. Income Statements cover a specified period of time usually annually or quarterly. An Income Statement represents only one limited view of the companies’ net profits or net loss after all revenues are listed while expenses (costs) and taxes are subtracted. The Income
Secondly, the claim made by ‘free market’ perspective to treat accounting information as other normal goods should be rejected because accounting information are unlike normal goods such as bread or house. It is a public good because the use of it by one investor does not prevent the usage of others (Hendriksen & Breda 1992, p.247). As non-investors have right to use the accounting information such as income statement and balance sheet as much as investors, investors will not agree to pay for the financial reports because others will become free-rider; thus, this prevent the function of normal pricing system of accounting information. As no income is received by producers of financial reports, they will not willing to produce it or will underproduce it so ‘free-market’ perspective is not applicable. Under this circumstance, Demski and Feltham (cited in Deegan 2009, p.65) states that for public good like accounting information, a more collective approach to its production is more desirable. This can be achieved by legislatively regulating the productions of accounting information so companies will produce the accounting information to meet the demands of external users and thus ensuring efficient capital market.
Each and every one of us uses information to help us make decisions. Such information
These range from Shareholders who will check on what direction the company is heading, whether it has achieved healthy profits, that it's solvent, the value of the company and possible signs of failure. Other users are the employees, who will want to check the statements to see whether their jobs are safe and see if possible, whether there could be wage and pension increases. This report offers information on operating results and financial conditions of companies to stakeholders as well as to shareholders. Any fraudulent financial reporting of a company like Enron for example would have a widespread and severe impact on employees, business
It is very important that users of financial statements such as a company’s managers, stockholders, bondholders, security analysts, suppliers, lending financial institutions, employees, labor unions, regulatory authorities, and the general public (Gibson, 2013, p. 1) know the importance of a financial statements’ performance. But, what are these internal and external stakeholder groups using the financial reports for? According to Gibson (2013), they use the financial reports for making business financial decisions (p. 1). Potential investors use financial reports on whether to but stock, suppliers use financial reports on whether to sell merchandise to a company on credit, labor unions use financial reports to help figure out their demands when they make an agreement for employees, and last management use financial reports to resolve a company’s profitability (Gibson, 2013, p. 1). A good example, if anybody plan on having more than one hundred participants, a financial statement and a Form 5500 must be submitted to a Certified Public Accountant for audit (Reinhardt, 2014, p. 47). The audit will perform everything according to Generally Accepted Auditing Standards (Reinhardt, 2014, p. 47).
The most common user of general purpose financial reporting is present and potential investors, lenders, and creditors. So the objective of financial reporting is to provide relevant financial information that is useful for users in making decision about buying, selling and providing loans or setting loans. The user needs information about resources of the company as well as also wants to know how efficiently management of the company performs their duties to use resources of the entity. The IFRS framework says that financial reports cannot provide all the information to users that users may need to make decisions. They must need relevant information from other source.
Companies use accounting policies while preparing their financial statements. All financial statements are set to follow an international standard guideline. These policies are available to users of financial statements while making financial decisions in order to make sure that the proper decisions are being made. According to The Financial reporting and analysis article by Gibson, the full disclosure principle states that a company’s financial statements should include all the information needed in order for the reader to fully understand statements (Gibson, 2012). Disclosures not only provide extensive information to users but also monitor the preparation of financial statements to guarantee that it is free from any misleading policies that might have been used by management while preparing financial statements. Some of the requirements by the disclosure when preparing financial statements are reporting all transactions and trades that occurred during the period that the financial statements are covering are actually reflected on the financial statements. This includes any errors that might have caused any false calculations should also be reported on the financial statements. In addition to that, footnotes should be provided along with the financial statements to support and better explain financial reporting (Prentzas, 2012).
Financial information is playing a crucial role in a business to help the owner make correct decision, this is because as the financial statement, it is ‘a collection of reports about an organization 's financial results, financial condition, and cash flows’ (AccountingTools, ND). Decision making is one of the most vital factors that will affect business to move forward, if the financial information inaccurate, the decision will be inappropriate, such as price setting, and then the business will loss the chance to maximize their profit what is the main objective in a business. Therefore, having accurate financial information is the heart of the business management it can help with decision making process in many ways.
According to the conceptual frameworks used by both the Financial Accounting Standards Board and the International Financial Standards Board, one of the main reasons why companies prepare financial reports is to allow users of financial statements make decisions regarding the provision of resources to the firm (Financial Accounting Standards Board, 2010; International Financial Standards Board, 2010). These decisions relate to the buy, sell, or hold moves that investors make based on the information received from the company. Both conceptual frameworks also include credit investors as being interested in the company’s performance as reflected in the financial reports. Apart from proving information to investors on the company’s projected cash flows, financial statements also play the important role in enhancing stewardship responsibilities that rest with managers. These requirements have connotations of financial statements being relevant to the targeted audience. In addition, financial statements are expected to be reliable from the audience’s viewpoint.
Socially: Financial Reporting must be correct so that the shareholders can profit the most from the information and the distribution of goods to the public can be maximized.
Since the core objective of financial reporting is to provide useful information to report users for making and reviewing resource allocation decisions (Deegan, 2012), it is of paramount importance that these statements are faithfully represented and relevant. The absence of either characteristic will cripple the decision making process.