CHAPTER 1

FinancialAccounting and Accounting Standards

SOLUTIONS TO CODIFICATION EXERCISES

There is no answer to this requirement as it asks the studentto register to use the Codification.

CE1-2

(a)    TheCodification Overview module illustrates three items (1) the topic structure(2) different methods of accessing and viewing content, and (3) asummary of the unique features of the Codification Research System.

(b)    The Codification is intended to (1) becomethe single source of U.S. accounting standards and
(2) supersede all of the non-SEC documents used to populate the Codification.

CE1-3

The “What’s New” page provides links to Codification contentthat has been recently issued. During the verification phase, updates mayresult from either the issuance of Codification update instructions thataccompany new Standards or from changes to the Codification due toincorporation of constituent feedback.

1.   Financialaccounting measures, classifies, and summarizes in report form those activitiesand that information which relate to the enterprise as a whole for use byparties both internal and external to a business enterprise. Managerialaccounting also measures, classifies, and summarizes in report form enterpriseactivities, but the communication is for the use of internal, managerialparties, and relates more to subsystems of the entity. Managerial accounting ismanagement decision oriented and directed more toward product line, division,and profit center reporting.

2.   Financialstatements generally refer to the four basic financial statements: balancesheet, income statement, statement of cash flows, and statement of changes inowners’ or stockholders’ equity. Financial reporting is a broader concept; it includes the basicfinancial statements and any other means of communicating financial andeconomic data to interested external parties. Examples of financial reportingother than financial statements are annual reports, prospectuses, reports filedwith the government, news releases, management forecasts or plans, anddescriptions of an enterprise’ssocial or environmental impact.

3.   If acompany’s financial performance ismeasured accurately, fairly, and on a timely basis, the right managers andcompanies are able to attract investment capital. To provide unreliable andirrelevant information leads to poor capital allocation which adversely affectsthe securities market.

4.   Theobjective of general purpose financial reporting is to provide financialinformation about the reporting entity that is useful to present and potentialequity investors, lenders, and other creditors in decisions about providingresources to the entity through equity investments and loans or other forms ofcredit. Information that is decision-useful to capital providers (investors)may also be useful to other users of financial reporting who are not investors.

5.   Investors are interested in financialreporting because it provides information that is useful for making decisions(referred to as the decision-usefulnessapproach).When making these decisions, investors are interested in assessing thecompany’s (1) ability to generate net cash inflows and (2) management’s abilityto protect and enhance the capital providers’ investments. Financial reportingshould therefore help investors assess the amounts, timing, and uncertainty ofprospective cash inflows from dividends or interest, and the proceeds from thesale, redemption, or maturity of securities or loans. In order for investors tomake these assessments, the economic resources of an enterprise, the claims tothose resources, and the changes in them must be understood.

6.   A common set of standards applied by allbusinesses and entities provides financial statements which are reasonablycomparable. Without a common set of standards, each enterprise could, andwould, develop its own theory structure and set of practices, resulting innoncomparability among enterprises.

7.   General-purpose financial statements are notlikely to satisfy the specific needs of all interested parties. Since the needsof interested parties such as creditors, managers, owners, governmentalagencies, and financial analysts vary considerably, it is unlikely that one setof financial statements is equally appropriate for these varied uses.

QuestionsChapter 1(Continued)

8.   The SEChas the power to prescribe, in whatever detail it desires, the accountingpractices and principles to be employed by the companies that fall within itsjurisdiction. Because the SEC receives audited financial statements from nearlyall companies that issue securities to the public or are listed on the stockexchanges, it is greatly interested in the content, accuracy, and credibilityof the statements. For many years the SEC relied on the AICPA to regulate theprofession and develop and enforce accounting principles. Lately, the SEC hasassumed a more active role in the develop-ment of accounting standards,especially in the area of disclosure requirements. In December 1973, in ASR No.150, the SEC said the FASB’sstatements would be presumed to carry substantial authoritative support andanything contrary to them to lack such support. It thereby supports thedevelopment of accounting principles in the private sector.

9.   TheCommittee on Accounting Procedure was a special committee of the AmericanInstitute of CPAs that, between the years of 1939 and 1959, issued 51 Accounting Research Bulletins dealingwith a wide variety of timely accounting problems. These bulletins providedsolutions to immediate problems and narrowed the range of alternativepractices. But, the Committee’sproblem-by-problem approach failed to provide a well-defined and well-structuredbody of accounting theory that was so badly needed. The Committee on AccountingProcedure was replaced in 1959 by the Accounting Principles Board.

10.   The creation of the AccountingPrinciples Board was intended to advance the written expression
of accounting principles, to determine appropriate practices, and to narrow thedifferences and inconsistencies in practice. To achieve its basic objectives,its mission was to develop an overall conceptual framework to assist in theresolution of problems as they became evident and to do substantive research onindividual issues before pronouncements were issued.

11.   AccountingResearch Bulletinswere pronouncements on accounting practice issued by the Committee onAccounting Procedure between 1939 and 1959; since 1964 they have beenrecognized as accepted accounting practice unless superseded in part or inwhole by an opinion of the APB or an FASB standard. APB Opinions were issued by the Accounting Principles Board duringthe years 1959 through 1973 and, unless superseded by FASB Statements, arerecognized as accepted practice and constitute the requirements to be followedby all business enterprises. FASB Statements are pronouncements of the Financial Accounting Standards Board andcurrently represent the accounting profession’s authoritativepronouncements on financial accounting and reporting practices.