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Chapter 1: 2CA (page 23)

(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鈥� or stockholders鈥� 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.

Short Answer

Expert verified
  1. false.
  2. false.
  3. false.
  4. true.

Step by step solution

01

Meaning of financial statements

Financial statements of a business are the statements used as a medium for decision-making by the management as well as by the outsiders such as shareholders and investors, financiers and creditors, government authorities, and so on. Its basic purpose is to make rational investment, credit, and other related financial decisions and to compute future cash flow and conduct bankruptcy risk assessment.

02

Explanation for statement ‘1’

The statement is false. This is because besides supplying beneficial information about the future cash flows necessary for decision making, the management is also responsible for safeguarding the company鈥檚 financial resources and for their effective and productive use; however, this is not regarded as objective.

03

Explanation for statement ‘2’

The statement is false. This is because the purpose of financial reporting is to give accounting information about the reporting organization that is beneficial to existing and potential equity investors, creditors, as well as lenders in making decisions in their ability as capital suppliers.

04

Explanation for statement ‘3’

The statement is false. The reason behind this is the Financial Accounting Standards Board (FASB) adheres to a similar due process method for standards and interpretations.

05

Explanation for the statement ‘4’

The statement is true. This is because under the proprietary aspect, the purpose of general-purpose financial reporting is to supply financial information about the owner鈥檚 business to the owner, which implies that the reporting organization is presumed to have no substance distinct from that of its owners.

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Most popular questions from this chapter

Briefly explain the meaning of decision-usefulness in the context of financial reporting.

Briefly describe the FASB/ IASB convergence process and the principles that guide their convergence efforts.

One of the major groups that has been involved in the standard-setting process is the American Institute of Certified Public Accountants. Initially, it was the primary organization that established accounting principles in the United States. Subsequently, it relinquished its power to the FASB.

Instructions

  1. Identify the two committees of the AICPA that established accounting principles prior to the establishment of the FASB.
  2. Speculate as to why these two organizations failed. In your answer, identify steps the FASB has taken to avoid failure.
  3. What is the present role of the AICPA in the rule-making environment?

(Accounting Numbers and the Environment) Hardly a day goes by without an article appearing on the continu fallout from the financial crisis of 2008. An overheated real estate market, fueled by home purchase incentives, poor lend practices, and securitization through high-risk, mortgage-backed securities, led to a near collapse of global capital markets. a consequence, many have argued that if the financial institutions had been required to report their loans (and loan-bac: investments) at fair value instead of cost, large losses would have been reported earlier. This would have signaled regulator 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.

IFRS is comprised of:

(a) International Financial Reporting Standards and FASB Financial Reporting Standards.

(b) International Financial Reporting Standards, International Accounting Standards, and International Accounting Interpretations.

(c) International Accounting Standards and International Accounting Interpretations.

(d) FASB Financial Reporting Standards and International Accounting Standards.
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