Overview:ProblemLength{S}[M]Chapter1-SolutionsOverview:ProblemLength{S}[M]Problem#s1to23241.{S}(i)Short-termlendersareconcernedprimarilywithliquidity.Accountingstandardswouldfocusprimarilyonnear-termcashflowsandmightincludecashflowforecasting.Performaneereportingwouldlikelyemphasizecash-basedmeasures.Long-termequityinvestorsareprimarilyconcernedwiththeearningpowerofthefirm.Incomemeasurementwouldbethefocusofstandardsforsuchusers.Taxauthoritiesareconcernedwiththegenerationoftaxrevenue.Accountingstandardsmightlimittheabilityoffirmstoshiftincomefromoneperiodtoanotherandplacestrictcontrolsontherecognitionandtiming(accrual)ofbothrevenuesanddeductibleexpenditures.Corporate managersseekto control their reportedearnings, tocast thebest possible light ontheirstewardship.Accountingstandardssetbymanagerswouldbehighlyflexible,withlittlesupplementaryinformationandfootnotedisclosure.{S}Thematchingprinciplestatesthatrevenuesshouldbematchedwiththeexpensesthatgeneratethem.Astherevenuesrelatedexpendituresmay andbeincurredindifferentaccountingperiods,accrualaccountingisrequiredtorecognizetheminthesameperiod.Thisassumption{S}Thegoingconcernassumptionstatesthattheenterprisewillcontinueoperatinginanormalfashion.permitsfinancialstatementstorecordassetsandliabilitiesbasedontheThisassumptioncashflowsthattheywillgenerateasthefirmoperates.liabilitiesbasis.asKuMpOssumptionwouldhavetoAccrualaccountingthatexpenditureswereabsent,

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wouldproduceallassetsandusediquidationfuture astherevenuescouldnoIongerbemade.{S}Publiccompaniesmustprovidecurrentinvestorswithdetailedfinancialstatements,mandatedbytheFASBandBecauseofSECfiling theSEC.requirements,annualfinancialdataarepubliclyavailabletopotentialandquarterlyinvestorsaswell.Privatecompaniesmaynotprepareauditedfinancialdata.Whenauditedfinancialstatementsarewilllacksomedisclosures(e.g.,earningscertainSEC-mandateddata(suchasthemanagementprepared,theydiscussionandanalysis).Inaddition,thesestatementsmaynotbepershare)andmadeavailabletopotentialinvestors.5.{S}Allissuedpeutebrlimcifnineadnocoviamelrbpsyaenethiseesadindit5.{S}AllissuedpeutebrlimcifnineadnocoviamelrbpsyaenethiseesadindithioenalinvestordUisnciltoesduresS.tatesfollowlocathl(isindsisocmloesucareseasn,dIASsBt)ataecmcoeunntstingstwahnodsaerds,wfoirtmhlessdisclosure.LocalstanudsaerdFsArSeBfleacfttelergaanldandmpuoclihticalpublicrequirementsprotectioFnpinrgaoencnceeisarslsaullypprelepmoretnintsgisthenorm.theseU.requirements.Asorientation,statementstheyissuedrequiredcontentTheareanddebate.standardsS.GAAPhaverequiredetailednon-bUy.S.firmsto

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anandoftenasobjectiveinprovidedonotdonothavethetheUnitedStates.quarterlyreports;sameinvestorForeignfirmssemi-annualandoftenasobjectiveinprovidedonotdonothavethetheUnitedStates.quarterlyreports;sameinvestorForeignfirmssemi-annual6.{S}TheFASBsetsaccountingstandardsforallauditedfinancialstatementspreparedunderU.S.GAAP.TheSEChasjurisdictionoveralljurisdiction,sptaunbdliacrcdosmdpisacnloiessu.rethperoStEeCctinvestoGrisveinnpubliccompanies.generallybutsupplementsreliesonthoserequirementsdeemedstandardsnecessary6.{S}TheFASBsetsaccountingstandardsforallauditedfinancialstatementspreparedunderU.S.GAAP.TheSEChasjurisdictionoveralljurisdiction,sptaunbdliacrcdosmdpisacnloiessu.rethperoStEeCctinvestoGrisveinnpubliccompanies.generallybutsupplementsreliesonthoserequirementsdeemedstandardsnecessarythethe overlappingwithto FASBtosetadditionalinformand7.{S}Thebalancesheetqualifyasassetsdefine,ineffect,includesonlythoseandliabilities.Asassetsandliabilitieseconomiceventsthataccountingstandardstheydetermineforandwhichare7.{S}Thebalancesheetqualifyasassetsdefine,ineffect,includesonlythoseandliabilities.Asassetsandliabilitieseconomiceventsthataccountingstandardstheydetermineforandwhicharewhicheconomiceventsareaccountedignored.Eventsignored(suchasmanycontracts)areexcludedfromtheprocessofpreparingfinancialstatements.Therecognitionrulesalsoinfluencemanagers'decisionsregardingtheformofcontractualagreementsusedtoacquireassetsandincurliabilities,therebyaffectingthepreparationoffinancialstatements.

{S}Liabilitiesrepresenttheassetsofthefirmfundedbytradeandfinancialcreditors.Equityrepresentsthecapitalofthefirm, andis theresidualliabilitieshavebeensatisfied.Thusthedistinctionbetweenliabilitiesandequityisthedifferencebetweenpriorclaimsandpermanentcapital.Misclassificationwillunderstatethefirm'sleverage reporteddebtandtheorfinancialrisk.permanentafterallover-ordegreeofpermanentafterallover-ordegreeofassumptionsandestimates.However,generalairneflatiloenssandreliable astheymayspecificpricechangesmakehistoricalcostslessuseful(relevant)astimepasses.Marketvaluesrelevanceastheyrepresentthecurrentvalueofthefirm'sresources.Thenatureof alwayshaveaffectsthereliabilityofthevalues{S}Contraaccountsaccountsthat(suchaaresdaecdcumctiuolnastefdromassetdepreciation)andreducetheasascectuomrulialabtielitvyaalucactuiomnuolarteotherframeworksecuritiesexample,orliabilityadjustmentsaccounttoits"netadjustmentsasfaircvearltuaeinSFAS115)affectsthereliabilityofthevalues{S}Contraaccountsaccountsthat(suchaaresdaecdcumctiuolnastefdromassetdepreciation)andreducetheasascectuomrulialabtielitvyaalucactuiomnuolarteotherframeworksecuritiesexample,orliabilityadjustmentsaccounttoits"netadjustmentsasfaircvearltuaeinSFAS115)anddiscountsaccountsa(sreucohftenreportedseparately.underpremiumsamount.outsideAdjunctaccountstheadjustmentshistoricalcostandotherdebtformarketableonadjustments(forissues).Adjunct{S}Revenuesandexpensesresultactivities;gainsandfrolomssressultthefirm'soperatingothernon-operatingevents.thenormalactivitiesTohfethlaetterfromarevaluation andtofirmand,therefore,shouldbeseparatedforanalytic peripheralpurposes.{S}Comprehensiveincomeincludesallchangesinthantransactions equityotherwithstockholders.Itoperatingearnings,"non-recurring"items,encompassesadjustments,andthecumulativeeffectofchanges.Asitincludesall valuationchangesinstockholders'equityaccounting(excludingtransactionswithowners),comprehensiveincomeismorecompletethan"incomefromcontinuingoperations"(mostusefulforearningsforecasting).{S}Recurring incomereferstoincomefrom continuingoperations, thebestmeasureoftheoperating profitsofthefirmforthattimeperiod,andthereforethebestbaseforforecastingandvaluation.Non-recurringitemsareunusualand/orinfrequentinnature,andusuallyresultfromnon-operatingfactors.{S}Theclassificationofcashflowsintothreecategorieshighlightstheirdifferingnatures.Cashfromoperationsreportsthecashgeneratedorusedbythefirm'soperatingactivities.Cashforinvestmentmeasurestheoutflowforinvestmentsincapacity,foracquisitions,orforIong-terminvestments.Cashfromfinancingindicatesthesource(debtorequity)ofanyfinancingrequiredbythefirmaswellasdistributionstopreferredandcommonstockholders.viewedandovertimeassolvency.TheisespeciallyTheseindicatorsrelationshipimportant.classificationsofthefirm'samongtheseshouldbeliquidityclassifications15.{S}Footnotesareanintegralpartofthefinancialstatementsandareaudited.Theysupplydetailsthataugmentfinancialstatementdata(e.g.employeebenefitplandata).Supplementaryschedulesmaybeincludedwithinthefinancialstatements(e.g.oilandgasdisclosures)butmaynotbeaudited.16.{S}TheexplainbalMaoeg^maDtiscussiatements.aiTheAMD&Aisshoisdncomeiistandaent,andtodiscusstreddangesckhSegncthaKteendS)ectedlo\tarepnirnMfeinthethereforehelpthesefuture.ThisdiscussoemeouidaicCthelprecltaDtionofifertusecash financialflowsandearnings. users interpret17.{S}Globalaccountingstandards offerthepossibilityofcomparability,asallcompaniesstawouldberequiredtopreparemethod?nndards usingthesameaccounting⑴(ii)(iii)Theremayalsobethefollowingdisadvantages:Lackofcomparability ifthereisnoempoweredtoenforceuniformapplicationofglobalstandards.Lossof thefromanonheriampostantaspectssfandmdstobodyDifferentrequireexample,primarily⑴(ii)(iii)Theremayalsobethefollowingdisadvantages:Lackofcomparability ifthereisnoempoweredtoenforceuniformapplicationofglobalstandards.Lossof thefromanonheriampostantaspectssfandmdstobodyDifferentrequireexample,primarilyinformation providedonesetofwhich accountingsometimes'soperations.highlightandsocialaccountingstructures maystandards.ForcomesissuaneebyeconomicdifferinginfromnenvironmentwherethanstOinancingbanksratheraccondardstothenhrougheedsofshares,appropriatelynggearedratherthanequityholders.ofwouldbecreditors18.{S}(i)The opinionshouldreport anychanges inaccoprinciplesusedandmayrefertothefootnoteprovidi untingngadditionalinformationonthechange.(ii)Changesinaccountingtheauditor'sopinion.estimates arenotreferredtoin(iii)Theauditor'sreportmustdescribeuncertainwhetheyarematerialtothefirm'sfinancialpositicntiesnii■(iv)While theauditor'sopinionprovides!noreasonableassuranee thattherearematerialerrorsintheagafinancial statements,it isnotaguarainsterrororevenfraud.nteeStatement onAuditingto Stan(SAS)82(1997),requiresauditorsstatementassess dardsriskoffinancialfraud.thetheanalystmaydrawincorrectconclusionsabouttrendswithintheenterpriseovertime.Comparisonswithotherb.20.{S}Thecompaniesmayalsobeinaccountinmadtethodsrotoctingesareignored. theeffectsChangesintheauditorusersthataccountingsignificanteffectsonreporteadrianting'sopinionyear-to-yearchangesthatmethodsshouldbetoinformcomparabilityRocheadoptedpreparergathersfinancialprinciplesandestirdatb.20.{S}Thecompaniesmayalsobeinaccountinmadtethodsrotoctingesareignored. theeffectsChangesintheauditorusersthataccountingsignificanteffectsonreporteadrianting'sopinionyear-to-yearchangesthatmethodsshouldbetoinformcomparabilityRocheadoptedpreparergathersfinancialprinciplesandestirdates，ifdifferencesofaccountinghighlightedstatementfinancialisabsent.The2000havechooses accountingandfinancialstatementsusingthosemethodsandesssatesesthedataintoTheauditorexamineschecksthatthepermissibleunderandfinancialstatementsusingthosemethodsandesssatesesthedataintoTheauditorexamineschecksthatthepermissibleunderconsistentlyovertime.thefinancialaccountingGAAPandstatementsmethodsandwhethertheyhaveforassemptions andconsistentlyovertime.thefinancialaccountingGAAPandstatementsmethodsandwhethertheyhaveforassemptions andbeenappliedare21.{S}CompaniesgenerallyaccountingpprepplessecdiriteDialastatementsusingtheforeignjurisdiction,theymaybereqpiitfeelitoipriep<untry.Whensellingsupplementaryfinancialaccountingstandardsofthatcountry.inconvenienceofthisextraworkmaydissuadeth&tatementsusingthesellingsecuritiesinthatcountry,thusdeprivingthat21.{S}CompaniesgenerallyaccountingpprepplessecdiriteDialastatementsusingtheforeignjurisdiction,theymaybereqpiitfeelitoipriep<untry.Whensellingsupplementaryfinancialaccountingstandardsofthatcountry.inconvenienceofthisextraworkmaydissuadeth&tatementsusingthesellingsecuritiesinthatcountry,thusdeprivingthatcountry'sinvestorsoftheopportunitytoinvest.Ontheotherhand,investorsmustchoosebetweenthatfirm'ssecuritiesandthoseofhomecountryfirmsusinglocalaccountingprinciples.Iftheforeignfirmusesdifferentaccountingprinciples,investorsmaymakepoorfirmfromThecostandinvestmentdecisionsbecauseoftheirinabilitytoseparaterealdifferencesbetweenfirmsfromalternativeaccountingdifferences causedbyprinciples.22.{S}a. Becausetheprobabilityoflossoneintenthousand),issolow(lessthanBonny