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Accounting Theory and Analysis Analysis 11th Edition
Solutions Manual By Richard G. Schroeder University of North Carolina at Charlotte
Myrtle W. Clark University of Kentucky
Jack M. Cathey University of North Carolina at Charlotte
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Table of Contents &age nu%ber
'sing the Codification to Sol(e the FAS) ASC Cases
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Solutions Manual Chapter "
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Chapter ,
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Chapter
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Chapter *
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Chapter +
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Chapter 1
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Chapter 2
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Chapter "0
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Chapter ""
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Chapter ",
" "
Chapter "
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Chapter "*
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Chapter "
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Chapter "+
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Chapter "1
,+ ,
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Using the Codification to Solve the FASB ASC Cases &rior to atte%pting to use the codification $ebsite to sol(e the FAS) ASC cases! it is reco%%ended that you read 3Test 4ri(ing the Codification!5 by Carolyn Ford and C. 6illia% Tho%as! Journal of Accountancy! 4ece%ber! ,00. A(ailable at http://$$$.7ournalofaccountancy.co%/8ssues/,00/4ec/Test4ri(ingtheCodification.ht%! and re(ie$ the tutorials on the codification $ebsite. Overview of the Codification
The Financial Accounting Standards )oard codification 9FAS) ASC is organi;ed into general topics listed on the left-hand side of the ho%e page 9
ecei(ables! etc.. ?otice that each of the subtopics is identified by a three digit nu%ber. This allo$s for access (ia the go to function that $e $ill discuss later. Clicking on any of the subtopics brings up a second link to $hat are ter%ed sections and contain the content specific area of the FAS) ASC. All Subtopics ha(e a set of standard Sections unless there is nothing to include in a particular standard section! in $hich case that standard Section is left out of the Subtopic and therefore the FAS) ASC. There are siteen standard Sections for each Subtopic. Sections are indicated by a t$o digit nu%ber bet$een 00 and 22. So%e of the %ost fre=uently used sections are: , >ecognition! 0 8nitial Measure%ent Subse=uent Measure%ent! 0 4isclosure and 8%ple%entation e(enue at the left-hand side of the ho%e page! then on the landing page >e(enue >ecognition. ?et! click on the products subsection. Finally click the @8? ABB S#CT8?S tab and all of the paragraph content $ill appear. &age do$n through the %aterial and you $ill find that &aragraph ,-" contains the authoritati(e guidance for accounting for sales of products $ith a right to return. The ho%e page also gi(es other options for na(igating the FAS) ASC. T$o of these are the S#A>CH function and the < T option. 6e ha(e found that using these functions is an easy $ay to start na(igating the FAS) ASC. To use the search %ethod of na(igating the FAS) ASC! first! type the general topic in the search bo at the top right of the FAS) ASC ho%e page. This $ill gi(e you so%e references to specific FAS) ASC sections $here the topic is discussed. Choose the section that see%s %ost appropriate and type the reference nu%ber in the < T bo at the top left-hand side of the FAS) ASC ho%epage. nce you are redirected to the desired section! click co%bine sections and all of the infor%ation on the topic $ill be displayed. do$nload full file at http://testbankinstant.co%
Full file at http://testbankinstant.CH/Solution-Manual-for-FinancialAccounting-Theory-and-Analysis-Tet-and-Cases!-""th-#ditionou can then bro$se through the %aterial to find the appropriate subsection that a ddresses the case issue. BetDs use this option to find the authoritati(e literature on accounting for sales of products $ith a right to return Type 3right to return!5 in the search bo at the top right of the FAS) ASC $eb page. ou $ill get references to the place $here this issue is discussed. Se(en possibilities appear! but in re(ie$ing $e see that the criteria are contained in +0-"-,-". Type this nu%ber in the bo net to the < T link at the top left-hand side of the FAS) ASC ho%epage. This $ill redirect you to the content specific paragraph that discusses accounting for sales of products $here a right of return eists. 9?ote: in so%e searches you %ay be redirected to the section outline. 8f so! click the @8? ABB S#CT8?S tab and all of the paragraph content $ill appear. 8f the issue in(ol(es accessing a pre(ious specific pronounce%ent! it is also possible to access the topic through the cross reference function. n the ho%e page! select Cross >eference. This feature allo$s you to access the rele(ant FAS) ASC section by citing the original source. To use this feature! first access the drop do$n %enu under Standard Type. 9Standard Type refers to the authoritati(e body that originally issued the pronounce%ent. For ea%ple the Financial Accounting Standards )oards uses the acrony% FAS. A discussion of the acrony%s for the (arious standard types is contained through a link in the directions. ?et! use the drop do$n %enu under standard nu%ber and choose the appropriate nu%ber. Then click<#?#>AT# >#&>T. 6hen the results appear! click on the first paragraph nu%ber at the far right side. ?et! click on the digit topic at the top under Table of Contents. 6hen the results appear! click and epand and all of the subtopics $ill appear. Choose the subtopic you $ish to (ie$ and then co%bine sections and the rele(ant authoritati(e literature $ill be d isplayed. For ea%ple! to ans$er case 2-! choose FAS fro% the drop do$n Standard Type %enu. Then choose "* fro% the standard nu%ber drop do$n %enu. (Please note that the standard number for asset retirement obligations was misidentified in the case. t should be !"# not !""$. Click on <#?#>AT# >#&>T and $hen the results appear! click on 0-* on the first line under paragraph nu%ber. 6hen the results appear! click *"0 Asset >etire%ent and #n(iron%ental bligations. 6hen the results appear! the %ost appropriate section see%s to be ,0 Asset >etire%ent bligations. Select it and then click the @8? ABB S#CT8?S tab and all of the paragraph content $ill appear. Finding original source material still contained in the Codification
Se(eral of the FAS) ASC cases ask for #8TF pronounce%ents related to a particular topic. 8n order to find original source %aterial fro% the #8TF or any other authoritati(e body use the follo$ing steps: ". Find the rele(ant topic in the FAS) ASC ,. Click epand for the rele(ant subtopic . Click the @8? ABB S#CT8?S tab *. Fro% the menu
Pa ePrint functions
select Printer%friendl& with sources
. &age through the %aterial to find content originally sourced fro% the #8TF
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CHATER 1 Case l%! a. The FAS) had three pri%ary goals in de(eloping the Codification: ". Si%plify user access by codifying all authoritati(e 'S
b. The Codification is epected to i%pro(e accounting practice by: ". >educing the a%ount of ti%e and effort re=uired to sol(e an accounting research issue ,. Mitigating the risk of nonco%pliance through i%pro(ed usability of the literature . &ro(ide accurate infor%ation $ith real-ti%e updates as Accounting Standards 'pdates are released *. Assisting the FAS) $ith the research and con(ergence efforts. c. The FAS) ASC is co%posed of the follo$ing literature issued by (arious standard setters: ". Financial Accounting Standards )oard 9FAS) a. State%ents 9FAS b. 8nterpretations 9F8? c. Technical )ulletins 9FT) d. Staff &ositions 9FS& e. Staff 8%ple%entation esearch )ulletins 9A>) +. Accounting 8nterpretations 9A8? 1. A%erican 8nstitute of Certified &ublic Accountants 9A8C&A a. State%ents of &osition 9S& b. Audit and Accounting e(enue >ecognition Additionally! in an effort to increase the utility of the FAS) ASC for public co%panies! rele(ant portions of authoritati(e content issued by the S#C and selected S#C staff interpretations and ad%inistrati(e guidance ha(e been included for reference in the Codification! such as: ". ,. .
>egulation S- 9S Financial >eporting >eleases 9F>>/Accounting Series >eleases 9AS> 8nterpreti(e >eleases 98> do$nload full file at http://testbankinstant.co%
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S#C Staff guidance in: a. Staff Accounting )ulletins 9SA) b. #8TF Topic 4 and S#C Staff bser(er co%%ents d. The FAS) ASC contains all current authoritati(e accounting literature. Ho$e(er! if the guidance for a particular transaction or e(ent is not specified $ithin it! the first source to consider is accounting principles for si%ilar transactions or e(ents $ithin a source of authoritati(e
&ractices that are $idely recogni;ed and pre(alent either generally or in the industry FAS) Concepts State%ents A%erican 8nstitute of Certified &ublic Accountants 9A8C&A 8ssues &apers 8nternational Financial >eporting Standards of the 8nternational Accounting Standards )oard &ronounce%ents of professional associations or regulatory agencies (. Technical 8nfor%ation Ser(ice 8n=uiries and >eplies included in A8C&A Technical &ractice Aids (i. Accounting tetbooks! handbooks! and articles Case !%)
a.
8nclusion or o%ission of infor%ation that %aterially affects net inco%e har%s particular stakeholders. Accountants %ust recogni;e that their decision to i%ple%ent 9or delay reporting re=uire%ents $ill ha(e i%%ediate conse=uences for so%e stakeholders.
b.
es. )ecause the FAS) standard results in a fairer presentation! it should be i%ple%ented as soon as possible--regardless of its i%pact on net inco%e.
c.
The accountantIs responsibility is to pro(ide financial state%ents that present fairly the financial condition of the co%pany. )y ad(ocating early i%ple%entation! Hoger fulfills this task.
d.
&otential lenders and in(estors! $ho read the financial state%ent and rely on its fair representation of the financial condition of the co%pany! ha(e the %ost to gain by early i%ple%entation. A stockholder $ho is considering the sale of stock %ay be har%ed by early i%ple%entation that lo$ers net inco%e 9and %ay lo$er the (alue of the stock.
Case !%#
a.
CA&. The Co%%ittee on Accounting &rocedure! CA&! $hich $as in eistence fro% "22 to "22! $as a natural outgro$th of A8C&A 9then A8A co%%ittees! $hich $ere in eistence during the period "2 to "2. The co%%ittee $as for%ed in direct response to the criticis% recei(ed by the accounting profession during the financial crisis of "2,2 and the years thereafter. The authori;ation to issue pronounce%ents on %atters of accounting principles and procedures $as based on the belief that the A8C&A had the responsibility to establish practices that $ould beco%e generally accepted by the profession and by corporate %anage%ent. do$nload full file at http://testbankinstant.co%
Full file at http://testbankinstant.CH/Solution-Manual-for-FinancialAccounting-Theory-and-Analysis-Tet-and-Cases!-""th-#ditionAs a general rule! the CA& directed its attention! al%ost entirely! to resol(ing specific accounting proble%s and topics rather than to the de(elop%ent of generally accepted accounting principles. The co%%ittee (oted on the acceptance of specific Accounting >esearch )ulletins published by the co%%ittee. A t$o-thirds %a7ority $as re=uired to issue a particular research bulletin. The CA& did not ha(e the authority to re=uire acceptance of the issued bulletins by the general %e%bership of the A8C&A! but rather recei(ed its authority only upon general acceptance of the pronounce%ent by the %e%bers. That is! the bulletins set forth nor%ati(e accounting procedures that Jshould beJ follo$ed by the accounting profession! but $ere not Jre=uiredJ to be follo$ed. 8t $as not until $ell after the de%ise of the CA&! in "2+*! that the Council of the A8C&A adopted reco%%endations that departures fro% effecti(e CA& )ulletins should be disclosed in financial state%ents or in audit reports of %e%bers of the A8C&A. The de%ise of the CA& could probably be traced by four distinct factors: 9" the narro$ nature of the sub7ects co(ered by the bulletins issued by the CA&! 9, the lack of any theoretical ground$ork in establishing the procedures presented in the bulletins! 9 the lack of any real authority by the CA& in prescribing adherence the procedures described by the bulletins! and 9* the lack of any for%al representation on the CA& of interest groups such as corporate %anagers! go(ern%ental agencies! and security analysts. A&). The ob7ecti(es of the A&) $ere for%ulated %ainly to correct the deficiencies of the CA& as described abo(e. The A&) $as thus charged $ith the responsibility of de(eloping $ritten epression of generally accepted accounting principles through consideration of the research done by other %e%bers of the A8C&A in preparing Accounting >esearch Studies. The co%%ittee $as in turn gi(en substantial authoritati(e standing in that all opinions of the A&) $ere to constitute substantial authoritati(e support for generally accepted accounting principles. 8f an indi(idual %e%ber of the A8C&A decided that a principle of procedure outside of the official pronounce%ents of the A&) had substantial authoritati(e support! the %e%ber had to disclose the departure fro% the official A&) opinion in the financial state%ents of the fir% in =uestion. The %e%bership of the co%%ittee co%prising the A&) $as also etended to include representation fro% industry! go(ern%ent! and acade%e. The opinions $ere also designed to include %inority dissents by %e%bers of the board. #posure drafts of the proposed opinions $ere readily distributed. The de%ise of the A&) occurred pri%arily because the purposes for $hich it $as created $ere not being acco%plished. )road generally accepted accounting principles $ere not being de(eloped. The research studies supposedly being undertaken in support of subse=uent opinions to be epressed by the A&) $ere often ignored. The co%%ittee in essence beca%e a si%ple etension of the original CA& in that only (ery specific proble% areas $ere being addressed. 8nterest groups outside of the accounting profession =uestioned the appropriateness and desirability of ha(ing the A8C&A directly responsible for the establish%ent of
Full file at http://testbankinstant.CH/Solution-Manual-for-FinancialAccounting-Theory-and-Analysis-Tet-and-Cases!-""th-#ditionthe FAS) through their %e%bership on the )oard. 8ndependence is facilitated through the funding of the organi;ation and pay%ent of the %e%bers of the )oard. Full-ti%e %e%bers are paid by the organi;ation and the organi;ation itself is funded solely through contributions. Thus! no one interest group has a (ested interest in the FAS). Conclusion. The e(olution of the current FAS) certainly does represent Jincreasing politici;ation of accounting standard setting.J Many of the efforts etended by the A8C&A can be directly attributed to the desire to satisfy the interests of %any groups $ithin our society. The FAS) represents! perhaps! 7ust another step in this e(olutionary process. b.
c.
Argu%ents for politici;ation of the accounting rule-%aking process: ".
Accounting depends in large part on public confidence for its success. Conse=uently! the critical issues are not solely technical! so all those ha(ing a bona fide interest in the output of accounting should ha(e so%e influence on that output.
,.
There are nu%erous conflicts bet$een the (arious interest groups. 8n the face of this! co%pro%ise is necessary! particularly since the critical issues in accounting are (alue 7udg%ents! not the type $hich are sol(able! as $e ha(e traditionally assu%ed! using deter%inistic %odels. nly in this $ay 9reasonable co%pro%ise $ill the financial co%%unity ha(e confidence in the fairness and ob7ecti(ity of accounting rule %aking.
.
(er the years! accountants ha(e been unable to establish! on the basis of technical accounting ele%ents! rules! $hich $ould bring about the desired unifor%ity and acceptability. This inability itself indicates rule setting is pri%arily consensual in nature.
*.
The public accounting profession! through bodies such as the Accounting &rinciples )oard! %ade rules $hich business enterprises and indi(iduals JhadJ to follo$. For %any years! these businesses and indi(iduals had little say as to $hat the rules $ould be! in spite of the fact that their econo%ic $ell being $as influenced to a substantial degree by those rules. 8t is only natural that they $ould try to influence or control the factors that deter%ine their econo%ic $ell being.
Argu%ents against the politici;ation of the accounting rule-%aking process: ".
Many accountants feel that accounting is pri%arily technical in nature. Conse=uently! they feel that substanti(e! basic research by ob7ecti(e! independent and fair-%inded researchers ulti%ately $ill result in the best solutions to critical issues! such as the concepts of inco%e and capital! e(en if it is accepted that there isnIt necessarily a single JrightJ solution.
,.
#(en if it is accepted that there are no Jabsolute truthsJ as far as critical issues are concerned! %any feel that professional accountants! taking into account the di(erse interests of the (arious groups using accounting infor%ation! are in the best position! because of their independence! education! training! and ob7ecti(ity! to decide $hat generally accepted accounting principles ought to be.
.
The co%ple situations that arise in the business $orld re=uire that trained accountants de(elop the appropriate accounting principles. do$nload full file at http://testbankinstant.co%
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The use of consensus to de(elop accounting principles $ould decrease the professional status of the accountant.
This approach $ould lead to JlobbyingJ by (arious parties to influence the establish%ent of accounting principles.
Case !%"
a.
The ter% Jaccounting principlesJ in the auditorIs report includes not only accounting principles but alsoKpractices and the %ethods of applying the%. Although the ter% =uite naturally e%phasi;es the pri%ary or funda%ental character of so%e principles! it includes general rules adopted or professed as guides to action in practice. The ter% does not ho$e(er! %ean rules fro% $hich there can be no de(iation. 8n so%e cases the =uestion is $hich of se(eral partially rele(ant principles has deter%ining applicability. ?either is the ter% Jaccounting principlesJ necessarily synony%ous $ith accounting theory. Accounting theory is the broad area of in=uiry de(oted to the definition of ob7ecti(es to be ser(ed by accounting! the de(elop%ent and elaboration of rele(ant concepts! the pro%otion of consistency through logic! the eli%ination of faulty reasoning! and the e(aluation of accounting practice.
b.
c.
The auditorDs report states that a co%panyDs financial state%ents present 3fairly!5 in all %aterial respects! its financial position! based on his or her 7udg%ent as to $hether the accounting principles selected and applied ha(e general acceptance and that the accounting principles selected are appropriate gi(en the circu%stances. This state%ent is necessary because there are %any areas $here co%panies %ake choices a%ong and bet$een accounting principles 94epreciation %ethod! in(entory cost flo$ assu%ptions! etc. Therefore!! it is epected that financial reports are prepared in a %anner that reflects the underlying econo%ic e(ents and acti(ities of the reporting entity. This epectation $as stressed in SAS No. 90 $hich stated! J8n each S#C engage%ent! the auditor should discuss $ith the audit co%%ittee the auditorIs 7udg%ents about the =uality! not 7ust the acceptability! of the entityIs accounting principles applied in its financial reporting. The discussion should also include ite%s that ha(e a significant i%pact on the representational faithfulness! (erifiability! and neutrality of the accounting infor%ation included in the financial state%ents. 3 As a conse=uence! the choices of accounting principles %ade by one co%pany are often different than those %ade by another co%pany.
Case !%*
A factor that influenced the de(elop%ent of accounting during the "2th century $as the e(olution of 7oint (entures into business corporations in #ngland. The fact that %any indi(iduals! eternal to the business! needed infor%ation about the corporationIs acti(ities created the do$nload full file at http://testbankinstant.co%
Full file at http://testbankinstant.CH/Solution-Manual-for-FinancialAccounting-Theory-and-Analysis-Tet-and-Cases!-""th-#ditionnecessity for periodic reports. Additionally! the e%erging eistence of corporations created the need to distinguish bet$een capital and inco%e. The statutory establish%ent of corporations in #ngland in "* sti%ulated the de(elop%ent of accounting standards! and la$s $ere subse=uently passed that $ere designed to safeguard shareholders against i%proper actions by corporate officers. 4i(idends $ere re=uired to be paid fro% profits! and accounts $ere re=uired to be kept and audited by persons other than the directors. Ho$e(er! initially anyone could clai% to be an accountant! as there $ere no organi;ed professions or standards of =ualifications. The industrial re(olution and the succession of Co%panies Acts in #ngland also ser(ed to increase the need for professional standards and accountants. 8n the later part of the "2th century! the industrial re(olution arri(ed in the 'nited States! and $ith it ca%e the need for %ore for%al accounting procedures and standards. This period $as also characteri;ed by $idespread speculation in the securities %arkets! $atered stocks! and large %onopolies that controlled seg%ents of the 'nited States econo%y. 8n the "2th century the progressi(e %o(e%ent $as established in the 'nited States! and in "2 the 8ndustrial Co%%ission $as for%ed to in(estigate and report on =uestions relating to i%%igration! labor! agriculture! %anufacturing! and business. Although no accountants $ere either on the Co%%ission or used by the Co%%ission! a preli%inary report issued in "200 suggested that an independent public accounting profession should be established in order to curtail obser(ed corporate abuses. Although %ost accountants did not necessarily subscribe to the desirability of the progressi(e refor%s! the progressi(e %o(e%ent conferred specific social obligations on accountants. As a conse=uence accountants generally ca%e to accept three general le(els of progressi(eness: 9" a funda%ental faith in de%ocracy! a concern for %orality and 7ustice and a broad acceptance of the efficiency of education as a %a7or tool in social a%eliorationL 9, an increased a$areness of the social obligation of all seg%ents of society and introduction of the idea of accountability to the public of business and political leadersL and 9 an acceptance of prag%atis% as the %ost rele(ant operati(e philosophy of the day. The %a7or concern of accounting during the early "200s $as the de(elop%ent of a theory that could cope $ith corporate abuses that $ere occurring at that ti%e! and capital %aintenance e%erged as a concept. This concept e(ol(ed fro% %aintaining in(ested capital intact! to the %aintenance of the physical producti(e capacity of the fir%! to the %aintenance of real capital. 8n essence this last (ie$ of capital %aintenance $as an etension of the econo%ic concept of inco%e 9see Chapter that there could be no increase in $ealth unless the stockholder or the fir% $ere better off at the end of the period than at the beginning. 4uring the period "200-"2" the concept of inco%e deter%ination $as not $ell de(eloped. There $as! ho$e(er! a debate o(er $hich financial state%ent should be (ie$ed as %ost i%portant! the balance sheet or the inco%e state%ent. 8%plicit in this debate $as the (ie$ that either the balance sheet or the inco%e state%ent %ust be (ie$ed as funda%ental and the other residual! and that rele(ant (alues could not be disclosed in both state%ents. The "20* 8nternational Congress of Accountants %arked the initial de(elop%ent of the organi;ed accounting profession in the 'nited States! although there had been earlier atte%pts to organi;e and se(eral states had state societies. At this %eeting! the A%erican Association of do$nload full file at http://testbankinstant.co%
Full file at http://testbankinstant.CH/Solution-Manual-for-FinancialAccounting-Theory-and-Analysis-Tet-and-Cases!-""th-#dition&ublic Accountants $as for%ed as the professional organi;ation of accountants in the 'nited States. 8n "2"+! after a decade of bitter interfactional disputes! this group $as reorgani;ed into the A%erican 8nstitute of Accountants 9A8A. The A%erican Association of the 'ni(ersity 8nstructors in Accounting $as also for%ed in "2"+. 8nitially this group focused on %atters of curriculu% de(elop%ent! and it $as not until %uch later that it atte%pted to beco%e in(ol(ed in the de(elop%ent of accounting theory. 6orld 6ar 8 changed the publicIs attitude to$ard the business sector. Many people belie(ed that the successful co%pletion of the $ar could be! at least partially! attributed to the ingenuity of A%erican businesses. As a conse=uence! the public percei(ed that business had refor%ed! and eternal regulation $as no longer necessary. The accountantIs role changed fro% a protector of third parties to the protector of business interests. Critics of accounting theory during the "2,0s suggested that accountants abdicated the ste$ardship role! placed too %uch e%phasis on the needs of %anage%ent! and per%itted too %uch fleibility in financial reporting. 4uring this ti%e financial state%ents $ere (ie$ed as the representations of %anage%ent! and accountants did not ha(e the ability to re=uire businesses to use accounting principles they did not $ish to e%ploy.
Case !%+ a.
Historically! accounting has been considered a highly trust$orthy profession. &ublic accounting fir%s trained ne$ accountants in the audit function $ith o(ersight fro% senior partners $ho belie(ed that their fir%Ds integrity rode on e(ery engage%ent. That is! ne$ auditors $ere assigned client responsibility after %ini%al for%al audit training. Most of the training of ne$ accountants took place on-site! and the effecti(eness of the ne$ auditor depended on the effecti(eness of the instructor. C&A fir%s ha(e al$ays called their custo%ers 3clients5 and ha(e $orked hard to culti(ate the%. &artners routinely entertained clients at sporting e(ents! country clubs! and restaurants! and %any C&A fir% e%ployees later %o(ed on to $ork in their clientsD fir%s. Any conflicts in these relationships $ere! at least partially! offset by the C&A fir%Ds co%%it%ent to professional ethics. These relationships changed as infor%ation technology ad(isory ser(ices gre$ in the late "210s and early D0s. Also in the %id-"20s! the A8C&A lifted its ban on ad(ertising. As a result! re(enue generation beca%e %ore critical to partnersD co%pensation. Thereafter! the profit structure of C&A fir%s changed dra%atically and in "222! re(enues for %anage%ent consulting accounted for %ore than 0 percent of the then )ig Fi(eDs re(enue. As a result! the audit function e(ol(ed into a loss leader that public accounting fir%s offered in con7unction $ith (astly %ore lucrati(e consulting engage%ents. )ut as pubic accounting fir%s co%peted %ore aggressi(ely on price for audit engage%ents! they $ere forced by cost considerations to reduce the nu%ber of procedures perfor%ed for each client engage%ent. This resulted in increased test of controls and statistical %odels! and fe$er of the basic! ti%econsu%ing tests of transactions that increase the likelihood of detecting fraud. 8n addition! 7unior auditors $ere fre=uently assigned the crucial o(ersight roles usually filled by senior partners! $ho $ere other$ise engaged in %arketing acti(ities to prospecti(e clients. This reduced the effecti(eness of the instructorne$ accountant training process. do$nload full file at http://testbankinstant.co%
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". Arthur Andersen! for%erly one the )ig Fi(e audit fir%s! has gone out of business. ,. 8n @uly ,00,! &resident
Case !%, a.
The structure of the FAS) is as follo$s. A board of trustees no%inated by organi;ations $hose %e%bers ha(e special kno$ledge and interest in financial reporting is selected. The organi;ations originally chosen to select the trustees $ere the A%erican Accounting AssociationL the A8C&AL the Financial #ecuti(es 8nstituteL the ?ational Association of Accountants 9The ?AADs na%e $as later changed to 8nstitute of Manage%ent Accountants in "22" and the Financial Analysts Federation. 8n "221 the )oard of Trustees added four %e%bers fro% public interest organi;ations. The board that go(erns the FAS) is the Financial Accounting Foundation 9FAF. The FAF appoints the Financial Accounting Standards Ad(isory Council 9FASAC! $hich ad(ises the FAS) on %a7or policy issues! the selection of task forces! and the agenda of topics. The nu%ber of %e%bers on the FASAC (aries fro% year to year. The byla$s call for at least t$enty %e%bers to be appointed. Ho$e(er! the actual nu%ber of %e%bers has gro$n to about thirty in recent years to obtain representation fro% a $ider group of interested parties. The FAF appoints the Financial Accounting Standards Ad(isory Council! $hich ad(ises the FAS) on %a7or policy issues! the selection of task forces! and the agenda of topics. The FAF is also responsible for appointing the se(en %e%bers of the FAS) and raising the funds to operate the FAS). The FAF currently collects in ecess of N, %illion a year to support the acti(ities of the FAS).
b.
The %e%bers of the Financial Accounting Foundation are no%inated by electors fro% nine organi;ations that support the acti(ities of the FAS). These nine organi;ations are the A8C&A! the Financial #ecuti(es 8nstitute! the ?ational Association of Accountants! the Financial Analysts Federation! the A%erican Accounting Association! the Security 8ndustry Association! and three not-for-profit organi;ations.
FASB ASC !%! -ariable nterest ntities (-s$
Special purpose entities are accounted for by using the re=uire%ents for (ariable interest entities 9O8#s. The infor%ation for this =uestion is found by searching the topic 3(ariable interest entities.5 ". The definition of (ariable interest entities is contained in FAS) ASC "0-"0-,-,0 ,. The guidance of the consolidation of O8#s is contained in "0-"0-0- to ".
FASB ASC !%) Status of A/Bs
First search the glossary for the three ter%s >e(enue recognition topic +0 Treasury stock topic 0-0 do$nload full file at http://testbankinstant.co%
Full file at http://testbankinstant.CH/Solution-Manual-for-FinancialAccounting-Theory-and-Analysis-Tet-and-Cases!-""th-#ditionCo%parati(e financial state%ents topic ,0 Then Search A>) * in cross reference Book for topic +0 9re(enue in the results Treasury Stock Search A>) * in cross reference Book for topic 0- 0 9treasury stock in the results Co%parati(e Financial State%ents Search A>) * in cross reference Book for topic ,0 9co%parati(e financial state%ents in the results
,0-"0-* 'se print function printer friendly $ith sources
FASB ASC !%# Accounting for the nvestment Ta0 Credit
Search in(est%ent ta credit Found at 1*0-"0-,- * 1 *+ 1*0-"0-*1-,1 , FASB ASC !%" SC Comments
". Search re(enue recognition Found under custo%er pay%ent and incenti(es +0-0-S22-"
Co%%ents Made by S#C bser(er at #%erging 8ssues Task Force 9#8TF Meetings ,. Search debt $ith con(ersions and other options Found under *10-,0 -S22 Co%%ents Made by S#C bser(er at #%erging 8ssues Task Force 9#8TF Meetings . Search soft$are cost of sales and ser(ices Found under 2-10-S22 do$nload full file at http://testbankinstant.co%
Full file at http://testbankinstant.CH/Solution-Manual-for-FinancialAccounting-Theory-and-Analysis-Tet-and-Cases!-""th-#ditionCo%%ents Made by S#C bser(er at #%erging 8ssues Task Force 9#8TF Meetings FASB ASC !%* 1AAP 1uidelines
Search 3generally accepted accounting principles.5 Found under "0-"0 /oom for 2ebate 2ebate !%!
This =uestion has no one correct ans$er. 8t is %eant to get students talking about so%ething that they probably ha(enDt thought about before. Students in fa(or of the S#C being the rule %aking body could argue that the FAS) has failed to ensure that financial state%ents fairly present the results of operations. They could then cite the recent scandals. They could argue that the S#C has the po$er to regulate and they donDt see $hy the profession should then need to be self regulated. They could also argue that under the FAS) there is too %uch fleibility and too %uch reliance on %anagerial intent! thereby allo$ing %anage%ent to %anage earnings and other$ise %anipulate its financial state%ents. Moreo(er! lack of eercise of go(ern%ent direct o(ersight could result in di%inishing the effecti(eness of accountants to audit due to a potential erosion of independence. They could point to Sarbanesley. Students in fa(or of the FAS) %aking the rules could argue against big go(ern%ent. They could point out that go(ern%ent sets accounting standards in countries that are not capitalistic. The result in those countries is a cookie cutter approach to financial state%ents and lack of fleibility that lea(es no roo% for professional 7udg%ent. 6hereas! the standards pro(ided by the FAS) are ai%ed to pro(ide financial state%ents that fairly present financial state%ents! taking into consideration the circu%stances in $hich a co%pany operates. They could also argue that accountants! not go(ern%ent officials! best understand their role and ho$ best to %easure and report financial infor%ation. 2ebate !%) Should the sco3e of accounting standards be narrowed further4
Tea% ". This =uestion should pro%pt the student to in(estigate ho$ %anage%ent %ight benefit fro% alternati(e accounting choices. They can go to the $eb and find out that accounting choices pro(ide %anagerial incenti(es that are either inco%e increasing or inco%e decreasing. They %ay also find instances that %anage%ent can choose %ethods of presenting financial infor%ation that %ake the co%pany appear less risky. 8nco%e-increasing choices afford %anage%ent the ability to paint a better picture of co%pany perfor%ance. Manage%ent %ay be inclined to select inco%e increasing policies because they belie(e the stock %arket $ill react fa(orably and their o$n personal $ealth and position in the fir% %ay be %ore secure. their bonus %ay be tied to the botto% line. •
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The co%pany %ay appear better able to pay suppliers and thus %ay be in a better position to negotiate fa(orable ter%s $ith suppliers The co%pany %ay appear better able to repay debt and thus look good to a lender. Students can cite real-$orld ea%ples! eg.! 6orld Co% capitali;ed epenses
8nco%e-decreasing choices %ay be selected by co%panies that Are highly regulated! such as utility co%panies. &oor perfor%ance can support the notion that the co%pany deser(es a rate increase 8f a co%pany is ha(ing a bad year! it %ay choose to load up the inco%e state%ent $ith epenses and losses so that it $ill appear better off in future years. Ha(e labor unions hope to fare better in negotiations for labor contracts •
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Co%panies ha(e used off-balance sheet financing to i%pro(e the perception of a co%panyDs riskiness. #nron is a pri%e ea%ple. #nron used special purpose entities to hide debt fro% in(estors. The student can also argue that accounting choice can be used to pro(ide %ore rele(ant financial state%ents. For ea%ple! SFAS "" pro(ides choices that are intended to result in financials that better disclose the results of %anage%ent in(est%ent choices. Tea% ,. All of the abo(e can be used as argu%ents against the proliferation of accounting choices. ?arro$ing accounting choices has been a goal of accounting professionals for %any years. For ea%ple! one of the ob7ecti(es of the A&) $as to narro$ areas of difference in
a.
The Securities and #change Co%%ission 9S#C $as created by the Securities Act of "2 and the Securities #change Act of "2*! The S#C $as created to ad%inister (arious securities acts. 'nder po$ers pro(ided by Congress! the S#C $as gi(en the authority to prescribe accounting principles and reporting practices. ?e(ertheless! because the S#C has generally acted as an do$nload full file at http://testbankinstant.co%
Full file at http://testbankinstant.CH/Solution-Manual-for-FinancialAccounting-Theory-and-Analysis-Tet-and-Cases!-""th-#ditiono(erseer and allo$ed the pri(ate sector to de(elop accounting principles! and this authority has seldo% been used. Ho$e(er! the S#C has eerted pressure on the accounting profession and has been especially interested in narro$ing areas of difference in accounting practice. 8n "2+ the A8C&ADs Co%%ittee on Accounting &rocedure 9CA& $as for%ed. This co%%ittee had the authority to issue pronounce%ents on %atters of accounting practice and procedure in order to establish generally accepted practices. The $orks of the CA& $ere originally published in the for% of Accounting Research Bulletins 9 ARBsL ho$e(er! these pronounce%ents did not dictate %andatory practice and recei(ed authority only fro% their general acceptance. The ARBs $ere consolidated in "2 into Accounting Terminology Bulletin No. 1 ! 3>e(ie$ and >esu%e!5 and ARB No. 43. ARBs No. 44 through No. 51 $ere published fro% "2 until "22. The reco%%endations of these bulletins that ha(e not been superseded are contained in the FAS) Accounting Standards Codification 9FAS) ASCL discussed belo$ and referenced throughout this tet $here the specific topics co(ered by the ARBs are discussed. )y "22 the %ethods of for%ulating accounting principles $ere being =uestioned as not arising fro% research or based on theory. . The A8C&A responded to the alleged shortco%ings of the CA& by for%ing the Accounting &rinciples )oard 9A&). The ob7ecti(es of this body $ere to ad(ance the $ritten epression of generally accepted accounting principles 9
This ter%! initially proposed by Car%an )lough! the first chief accountant of the S#C! is %eant to %ean authority of Isubstantial $eightI or i%portance! and not necessarily a %a7ority (ie$. Thus there %ight be three authoritati(e positions all of $hich are appropriate at a point in ti%e before so%e standard is established. The %a7ority %ay ha(e gone in one direction! but the %inority $ho $ere also considered Iauthoritati(eI and could be used.
c.
The S#C and the A8C&A ha(e been the sources of authority for co%pliance $ith accounting standards. The S#C has indicated that financial state%ents confor%ing to standards set by the FAS) $ill be presu%ed to ha(e authoritati(e support. The A8C&A! in >ule ,0 of the Code of &rofessional #thics! re=uires that %e%bers prepare financial state%ents in accordance $ith ule ,0 can lead to the loss of a C&ADs license to practice.
Case !%7
a.
CA&. The Co%%ittee on Accounting &rocedure! CA&! $hich $as in eistence fro% "22 to "22! $as a natural outgro$th of A8C&A co%%ittees $hich $ere in eistence during the period "2 to "2. The co%%ittee $as for%ed in direct response to the criticis% recei(ed by the accounting profession during the financial crisis of "2,2 and the years thereafter. The authori;ation to issue pronounce%ents on %atters of accounting principles and procedures $as based on the belief that the A8C&A had the responsibility to establish practices that $ould beco%e generally accepted by the profession and by corporate %anage%ent . do$nload full file at http://testbankinstant.co%
Full file at http://testbankinstant.CH/Solution-Manual-for-FinancialAccounting-Theory-and-Analysis-Tet-and-Cases!-""th-#ditionAs a general rule! the CA& directed its attention! al%ost entirely! to resol(ing specific accounting proble%s and topics rather than to the de(elop%ent of generally accepted accounting principles. The co%%ittee (oted on the acceptance of specific Accounting >esearch )ulletins published by the co%%ittee. A t$o-thirds %a7ority $as re=uired to issue a particular research bulletin. The CA& did not ha(e the authority to re=uire acceptance of the issued bulletins by the general %e%bership of the A8C&A! but rather recei(ed its authority only upon general acceptance of the pronounce%ent by the %e%bers. That is! the bulletins set forth nor%ati(e accounting procedures that 3should be5 follo$ed by the accounting profession! but $ere not 3re=uired5 to be follo$ed. 8t $as not until $ell after the de%ise of the CA&! in "2+*! that the Council of the A8C&A adopted reco%%endations that departures fro% effecti(e CA& )ulletins should be disclosed in financial state%ents or in audit reports of %e%bers of the A8C&A. The de%ise of the CA& could probably be traced to four distinct factors: 9" the narro$ nature of the sub7ects co(ered by the bulletins issued by the CA&! 9, the lack of any theoretical ground$ork in establishing the procedures presented in the bulletins! 9 the lack of any real authority by the CA& in prescribing adherence to the procedures described by the bulletins! and 9* the lack of any for%al representation on the CA& of interest groups such as corporate %anagers! go(ern%ental agencies! and security analysts. A&). The ob7ecti(es of the A&) $ere for%ulated %ainly to correct the deficiencies of the CA& as described abo(e. The A&) $as thus charged $ith the responsibility of de(eloping $ritten epression of generally accepted accounting principles through consideration of the research done by other %e%bers of the A8C&A in preparing Accounting >esearch Studies. The co%%ittee $as in turn gi(en substantial authoritati(e standing in that all opinions of the A&) $ere to constitute substantial authoritati(e support for generally accepted accounting principles. 8f an indi(idual %e%ber of the A8C&A decided that a principle or procedure outside of the official pronounce%ents of the A&) had substantial authoritati(e support! the %e%ber had to disclose the departure fro% the official A&) opinion in the financial state%ents of the fir% in =uestion. The %e%bership of the co%%ittee co%prising the A&) $as also etended to include representation fro% industry! go(ern%ent! and acade%e. The opinions $ere also designed to include %inority dissents by %e%bers of the board. #posure drafts of the proposed opinions $ere readily distributed. The de%ise of the A&) occurred pri%arily because the purposes for $hich it $as created $ere not being acco%plished. )road generally accepted accounting principles $ere not being de(eloped. The research studies supposedly being undertaken in support of subse=uent opinions to be epressed by the A&) $ere often ignored. The co%%ittee in essence beca%e a si%ple etension of the original CA& in that only (ery specific proble% areas $ere being addressed. 8nterest groups outside of the accounting profession =uestioned the appropriateness and desirability of ha(ing the A8C&A directly responsible for the establish%ent of
Full file at http://testbankinstant.CH/Solution-Manual-for-FinancialAccounting-Theory-and-Analysis-Tet-and-Cases!-""th-#ditionthe FAS) through their %e%bership on the )oard. 8ndependence is facilitated through the funding of the organi;ation and pay%ent of the %e%bers of the )oard. Full-ti%e %e%bers are paid by the organi;ation and the organi;ation itself is funded solely through contributions. Thus! no one interest group has a (ested interest in the FAS). Conclusion. The e(olution of the current FAS) certainly does represent 3increasing politici;ation of accounting standards setting.5 Many of the efforts etended by the A8C&A can be directly attributed to the desire to satisfy the interests of %any groups $ithin our society. The FAS) represents! perhaps! 7ust another step in this e(olutionary process. b.
Argu%ents for politicali;ation of the accounting rule-%aking process: ". Accounting depends in large part on public confidence for its success. Conse=uently! the critical issues are not solely technical! so all those ha(ing a bona fide interest in the output of accounting should ha(e so%e influence on that output. ,. There are nu%erous conflicts bet$een the (arious interest groups. 8n the face of this! co%pro%ise is necessary! particularly since the critical issues in accounting are (alue 7udg%ents! not the type $hich are sol(able! as $e ha(e traditionally assu%ed! using deter%inistic %odels. nly in this $ay 9reasonable co%pro%ise $ill the financial co%%unity ha(e confidence in the fairness and ob7ecti(ity of accounting rule-%aking. . (er the years! accountants ha(e been unable to establish! on the basis of technical accounting ele%ents! rules $hich $ould bring about the desired unifor%ity and acceptability. This inability itself indicates rule-setting is pri%arily consensual in nature. *. The public accounting profession! through bodies such as the Accounting &rinciples )oard! %ade rules $hich business enterprises and indi(iduals 3had5 to follo$. For %any years! these businesses and indi(iduals had little say as to $hat the rules $ould be! in spite of the fact that their econo%ic $ell-being $as influenced to a substantial degree by those rules. 8t is only natural that they $ould try to influence or control the factors that deter%ine their econo%ic $ell-being.
c.
Argu%ents against the politicali;ation of the accounting rule-%aking process: ". Many accountants feel that accounting is pri%arily technical in nature. Conse=uently! they feel that substanti(e! basic research by ob7ecti(e! independent and fair-%inded researchers ulti%ately $ill result in the best solutions to critical issues! such as the concepts of inco%e and capital! e(en if it is accepted that there isnDt necessarily a single 3right5 solution. ,. #(en if it is accepted that there are no 3absolute truths5 as far as critical issues are concerned! %any feel that professional accountants! taking into account the di(erse interests of the (arious groups using accounting infor%ation! are in the best position! because of their independence! education! training! and ob7ecti(ity! to decide $hat generally accepted accounting principles ought to be. . The co%ple situations that arise in the business $orld re=uire that trained accountants de(elop the appropriate accounting principles. *. The use of consensus to de(elop accounting principles $ould decrease the professional status of the accountant. . This approach $ould lead to 3lobbying5 by (arious parties to influence the establish%ent of ac-counting principles.
Case !%!8
The ans$er to this case re=uires an analysis of the financial state%ents of the t$o co%panies at the ti%e it is assigned. do$nload full file at http://testbankinstant.co%
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The ans$er to this case re=uires a (isit to the Microsoft CorporationDs ho%epage at the ti%e it is assigned. Financial Analysis Case
The solutions to the financial analysis case depend upon the co%pany and year selected.
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