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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 Page number
Using the Codification to Solve the FAS ASC Cases
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Using the Codification to Solve the FASB ASC Cases download full file at http://testbankinstant.com
download full file at http://testbankinstant.com Prior to attempting to use the codification website to solve the FAS ASC cases, it is recommended that -ou read est 0riving the Codification,1 b- Carol-n Ford and C. 2illiam homas, Journal of Accountancy, 0ecember, %))'. Available at http://www.3ournalofaccountanc-.com/4ssues/%))'/0ec/est0rivingtheCodification.htm, and review the tutorials on the codification website. Overview of the Codification
he Financial Accounting Standards oard codification 5FAS ASC6 is organi7ed into general topics listed on the left8hand side of the home page 59eneral Principles, Presentation, etc.6. Clicking on an- of the general topics will bring up what the FAS terms a landing page.1 ach landing page contains a list of sub topics for that link. For e;ample clicking on the general topic Assets brings up list of seven sub topics 5Cash and Cash otice that each of the subtopics is identified b- a three digit number. his allows for access via the go to function that we will discuss later. Clicking on an- of the subtopics brings up a second link to what are termed sections and contain the content specific area of the FAS ASC. All Subtopics have a set of standard Sections unless there is nothing to include in a particular standard section, in which case that standard Section is left out of the Subtopic and therefore the FAS ASC. here are si;teen standard Sections for each Subtopic. Sections are indicated b- a two digit number between )) and ++. Some of the most fre A SC4@>S tab found on each section page. For e;ample, assume we are interested in the authoritative literature on accounting for sales of products when a right to return e;ists. First, click on the topic =evenue at the left8hand side of the home page, then on the landing page =evenue =ecognition. >e;t, click on the products subsection. Finall- click the ?@4> A SC4@>S tab and all of the paragraph content will appear. Page down through the material and -ou will find that Paragraph %(8# contains the authoritative guidance for accounting for sales of products with a right to return. he home page also gives other options for navigating the FAS ASC. wo of these are the SA=CB function and the 9@ @ option. 2e have found that using these functions is an eas- wa- to start navigating the FAS ASC. o use the search method of navigating the FAS ASC, first, t-pe the general topic in the search bo; at the top right of the FAS ASC home page. his will give -ou some references to specific FAS ASC sections where the topic is discussed. Choose the section that seems most appropriate and t-pe the reference number in the 9@ @ bo; at the top left8hand side of the FAS ASC homepage. @nce -ou are redirected to the desired section, click combine sections and all of the information on the topic will be displa-ed. ou can then browse through the material to find the appropriate subsection that a ddresses the case issue. etDs use this option to find the authoritative literature on accounting for sales of products with a right to return -pe right to return,1 in the search bo; at the top right of the FAS ASC web page. ou will get references to the place where this issue is discussed. Seven download full file at http://testbankinstant.com
download full file at http://testbankinstant.com possibilities appear, but in reviewing we see that the criteria are contained in $)(8#(8%(8#. -pe this number in the bo; ne;t to the 9@ @ link at the top left8hand side of the FAS ASC homepage. his will redirect -ou to the content specific paragraph that discusses accounting for sales of products where a right of return e;ists. 5>ote: in some searches -ou ma- be redirected to the section outline. 4f so, click the ?@4> A SC4@>S tab and all of the paragraph content will appear. 4f the issue involves accessing a previous specific pronouncement, it is also possible to access the topic through the cross reference function. @n the home page, select Cross =eference. his feature allows -ou to access the relevant FAS ASC section b- citing the original source. o use this feature, first access the drop down menu under Standard -pe. 5Standard -pe refers to the authoritative bod- that originall- issued the pronouncement. For e;ample the Financial Accounting Standards oards uses the acron-m FAS. A discussion of the acron-ms for the various standard t-pes is contained through a link in the directions6. >e;t, use the drop down menu under standard number and choose the appropriate number. hen click9>=A =P@=. 2hen the results appear, click on the first paragraph number at the far right side. >e;t, click on the & digit topic at the top under able of Contents. 2hen the results appear, click and e;pand and all of the subtopics will appear. Choose the subtopic -ou wish to view and then combine sections and the relevant authoritative literature will be d ispla-ed. For e;ample, to answer case +8&, choose FAS from the drop down Standard -pe menu. hen choose #!& from the standard number drop down menu. (Please note that the standard number for asset retirement obligations was misidentified in the case. t should be !"# not !""$. Click on 9>=A =P@= and when the results appear, click on )(8! on the first line under paragraph number. 2hen the results appear, click !#) Asset =etirement and nvironmental @bligations. 2hen the results appear, the most appropriate section seems to be %) Asset =etirement @bligations. Select it and then click the ?@4> A SC4@>S tab and all of the paragraph content will appear. Finding original source material still contained in the Codification
Several of the FAS ASC cases ask for 4F pronouncements related to a particular topic. 4n order to find original source material from the 4F or an- other authoritative bod- use the following steps: #. Find the relevant topic in the FAS ASC %. Click e;pand for the relevant subtopic &. Click the ?@4> A SC4@>S tab !. From the menu
Pa ePrint functions
select Printer%friendl& with sources
(. Page through the material to find content originall- sourced from the 4F
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CHATER 1 Case l%! a. he FAS had three primar- goals in developing the Codification: #. Simplif- user access b- codif-ing all authoritative US 9AAP in one spot. %. nsure that the codified content accuratel- represented authoritative US 9AAP as of ?ul-#, %))+. &. Create a codification research s-stem that is up to date for the released results of standard8setting activit- .
b. he Codification is e;pected to improve accounting practice b-: #. =educing the amount of time and effort re6 c. echnical ulletins 5F6 d. Staff Positions 5FSP6 e. Staff 4mplementation 9uides 5EA6 f. Statement >o. #&' ;amples. %. merging 4ssues ask Force 54F6 a. Abstracts b. opic 0. &. 0erivative 4mplementation 9roup 50496 4ssues !. Accounting Principles oard 5AP6 @pinions (. Accounting =esearch ulletins 5A=6 $. Accounting 4nterpretations 5A4>6 *. American 4nstitute of Certified Public Accountants 5A4CPA6 a. Statements of Position 5S@P6 b. Audit and Accounting 9uides 5AA96Gonl- incremental accounting guidance c. Practice ulletins 5P6, including the >otices to Practitioners elevated to Practice ulletin status b- Practice ulletin # d. echnical 4n
=egulation S8H 5SH6 Financial =eporting =eleases 5F==6/Accounting Series =eleases 5AS=6 4nterpretive =eleases 54=6 SC Staff guidance in: a. Staff Accounting ulletins 5SA6 download full file at http://testbankinstant.com
download full file at http://testbankinstant.com b. 4F opic 0 and SC Staff @bserver comments d. he FAS ASC contains all current authoritative accounting literature. Bowever, if the guidance for a particular transaction or event is not specified within it, the first source to consider is accounting principles for similar transactions or events within a source of authoritative 9AAP. 4f no similar transactions are discovered, nonauthoritative guidance from other sources ma- be considered. Accounting and financial reporting practices not included in the Codification are nonauthoritative. Sources of nonauthoritative accounting guidance and literature include, for e;ample, the following: i. ii. iii. iv.
Practices that are widel- recogni7ed and prevalent either generall- or in the industrFAS Concepts Statements American 4nstitute of Certified Public Accountants 5A4CPA6 4ssues Papers 4nternational Financial =eporting Standards of the 4nternational Accounting Standards oard Pronouncements of professional associations or regulatoragencies v. echnical 4nformation Service 4n
a.
4nclusion or omission of information that materiall- affects net income harms particular stakeholders. Accountants must recogni7e that their decision to implement 5or dela-6 reporting re
b.
es. ecause the FAS standard results in a fairer presentation, it should be implemented as soon as possible88regardless of its impact on net income.
c.
he accountantIs responsibilit- is to provide financial statements that present fairl- the financial condition of the compan-. - advocating earl- implementation, Boger fulfills this task.
d.
Potential lenders and investors, who read the financial statement and rel- on its fair representation of the financial condition of the compan-, have the most to gain b- earlimplementation. A stockholder who is considering the sale of stock ma- be harmed b- earlimplementation that lowers net income 5and ma- lower the value of the stock6.
Case !%#
a.
CAP. he Committee on Accounting Procedure, CAP, which was in e;istence from #+&+ to #+(+, was a natural outgrowth of A4CPA 5then A4A6 committees, which were in e;istence during the period #+&& to #+&'. he committee was formed in direct response to the criticism received b- the accounting profession during the financial crisis of #+%+ and the -ears thereafter. he authori7ation to issue pronouncements on matters of accounting principles and procedures was based on the belief that the A4CPA had the responsibilit- to establish practices that would become generall- accepted b- the profession and b- corporate management. As a general rule, the CAP directed its attention, almost entirel-, to resolving specific accounting problems and topics rather than to the development of generall- accepted accounting principles. he committee voted on the acceptance of specific Accounting =esearch ulletins published bdownload full file at http://testbankinstant.com
download full file at http://testbankinstant.com the committee. A two8thirds ma3orit- was re
download full file at http://testbankinstant.com Conclusion. he evolution of the current FAS certainl- does represent Jincreasing politici7ation of accounting standard setting.J "an- of the efforts e;tended b- the A4CPA can be directl- attributed to the desire to satisf- the interests of man- groups within our societ-. he FAS represents, perhaps, 3ust another step in this evolutionar- process. b.
c.
Arguments for politici7ation of the accounting rule8making process: #.
Accounting depends in large part on public confidence for its success. Conse
%.
here are numerous conflicts between the various interest groups. 4n the face of this, compromise is necessar-, particularl- since the critical issues in accounting are value 3udgments, not the t-pe which are solvable, as we have traditionall- assumed, using deterministic models. @nl- in this wa- 5reasonable compromise6 will the financial communit- have confidence in the fairness and ob3ectivit- of accounting rule making.
&.
@ver the -ears, accountants have been unable to establish, on the basis of technical accounting elements, rules, which would bring about the desired uniformit- and acceptabilit-. his inabilit- itself indicates rule setting is primaril- consensual in nature.
!.
he public accounting profession, through bodies such as the Accounting Principles oard, made rules which business enterprises and individuals JhadJ to follow. For man-ears, these businesses and individuals had little sa- as to what the rules would be, in spite of the fact that their economic well being was influenced to a substantial degree bthose rules. 4t is onl- natural that the- would tr- to influence or control the factors that determine their economic well being.
Arguments against the politici7ation of the accounting rule8making process: #.
"an- accountants feel that accounting is primaril- technical in nature. Conse
%.
ven if it is accepted that there are no Jabsolute truthsJ as far as critical issues are concerned, man- feel that professional accountants, taking into account the diverse interests of the various groups using accounting information, are in the best position, because of their independence, education, training, and ob3ectivit-, to decide what generall- accepted accounting principles ought to be.
&.
he comple; situations that arise in the business world re
!.
he use of consensus to develop accounting principles would decrease the professional status of the accountant.
(
his approach would lead to Jlobb-ingJ b- various parties to influence the establishment of accounting principles. download full file at http://testbankinstant.com
download full file at http://testbankinstant.com Case !%"
a.
he term Jaccounting principlesJ in the auditorIs report includes not onl- accounting principles but alsoKpractices and the methods of appl-ing them. Although the term either is the term Jaccounting principlesJ necessaril- s-non-mous with accounting theor-. Accounting theor- is the broad area of in
b.
9enerall- accepted accounting principles are those principles 5whether or not the- have onllimited usage6 that have substantial authoritative support. 2hether a given principle has authoritative support is a
c.
he auditorDs report states that a compan-Ds financial statements present fairl-,1 in all material respects, its financial position, based on his or her 3udgment as to whether the accounting principles selected and applied have general acceptance and that the accounting principles selected are appropriate given the circumstances. his statement is necessar- because there are man- areas where companies make choices among and between accounting principles 50epreciation method, inventor- cost flow assumptions, etc6. herefore,, it is e;pected that financial reports are prepared in a manner that reflects the underl-ing economic events and activities of the reporting entit-. his e;pectation was stressed in SAS No. 90 which stated, J4n each SC engagement, the auditor should discuss with the audit committee the auditorIs 3udgments about the
Case !%*
A factor that influenced the development of accounting during the #+th centur- was the evolution of 3oint ventures into business corporations in ngland. he fact that man- individuals, e;ternal to the business, needed information about the corporationIs activities created the necessit- for periodic reports. Additionall-, the emerging e;istence of corporations created the need to distinguish between capital and income. he statutor- establishment of corporations in ngland in #'!( stimulated the development of accounting standards, and laws were subse
download full file at http://testbankinstant.com directors. Bowever, initiall- an-one could claim to be an accountant, as there were no organi7ed professions or standards of
download full file at http://testbankinstant.com 2orld 2ar 4 changed the publicIs attitude toward the business sector. "an- people believed that the successful completion of the war could be, at least partiall-, attributed to the ingenuit- of American businesses. As a conse
Case !%+ a.
Bistoricall-, accounting has been considered a highl- trustworth- profession. Public accounting firms trained new accountants in the audit function with oversight from senior partners who believed that their firmDs integrit- rode on ever- engagement. hat is, new auditors were assigned client responsibilit- after minimal formal audit training. "ost of the training of new accountants took place on8site, and the effectiveness of the new auditor depended on the effectiveness of the instructor. CPA firms have alwa-s called their customers clients1 and have worked hard to cultivate them. Partners routinel- entertained clients at sporting events, countr- clubs, and restaurants, and manCPA firm emplo-ees later moved on to work in their clientsD firms. An- conflicts in these relationships were, at least partiall-, offset b- the CPA firmDs commitment to professional ethics. hese relationships changed as information technolog- advisor- services grew in the late #+*)s and earl- D')s. Also in the mid8#+')s, the A4CPA lifted its ban on advertising. As a result, revenue generation became more critical to partnersD compensation. hereafter, the profit structure of CPA firms changed dramaticall- and in #+++, revenues for management consulting accounted for more than () percent of the then ig FiveDs revenue. As a result, the audit function evolved into a loss leader that public accounting firms offered in con3unction with vastl- more lucrative consulting engagements. ut as pubic accounting firms competed more aggressivel- on price for audit engagements, the- were forced b- cost considerations to reduce the number of procedures performed for each client engagement. his resulted in increased test of controls and statistical models, and fewer of the basic, time8 consuming tests of transactions that increase the likelihood of detecting fraud. 4n addition, 3unior auditors were fre
b.
#. Arthur Andersen, formerl- one the ig Five audit firms, has gone out of business. %. 4n ?ul- %))%, President 9eorge 2. ush signed into law the Sarbanes8@;le- ill, which imposes a number of corporate governance rules on publicl- traded companies &. stablishment of PCA@.
Case !%, a.
he structure of the FAS is as follows. A board of trustees nominated b- organi7ations whose members have special knowledge and interest in financial reporting is selected. he download full file at http://testbankinstant.com
download full file at http://testbankinstant.com organi7ations originall- chosen to select the trustees were the American Accounting AssociationL the A4CPAL the Financial ;ecutives 4nstituteL the >ational Association of Accountants 5he >AADs name was later changed to 4nstitute of "anagement Accountants in #++#6 and the Financial Anal-sts Federation. 4n #++* the oard of rustees added four members from public interest organi7ations. he board that governs the FAS is the Financial Accounting Foundation 5FAF6. he FAF appoints the Financial Accounting Standards Advisor- Council 5FASAC6, which advises the FAS on ma3or polic- issues, the selection of task forces, and the agenda of topics. he number of members on the FASAC varies from -ear to -ear. he b-laws call for at least twent- members to be appointed. Bowever, the actual number of members has grown to about thirt- in recent -ears to obtain representation from a wider group of interested parties. he FAF appoints the Financial Accounting Standards Advisor- Council, which advises the FAS on ma3or polic- issues, the selection of task forces, and the agenda of topics. he FAF is also responsible for appointing the seven members of the FAS and raising the funds to operate the FAS. he FAF currentl- collects in e;cess of N%& million a -ear to support the activities of the FAS. b.
he members of the Financial Accounting Foundation are nominated b- electors from nine organi7ations that support the activities of the FAS. hese nine organi7ations are the A4CPA, the Financial ;ecutives 4nstitute, the >ational Association of Accountants, the Financial Anal-sts Federation, the American Accounting Association, the Securit- 4ndustr- Association, and three not8for8profit organi7ations.
FASB ASC !%! -ariable nterest ntities (-s$
Special purpose entities are accounted for b- using the re
FASB ASC !%) Status of A/Bs
First search the glossar- for the three terms =evenue recognition topic $)( reasur- stock topic ()(8&) Comparative financial statements topic %)( hen Search A= !& in cross reference ook for topic $)( 5revenue6 in the results reasur- Stock download full file at http://testbankinstant.com
download full file at http://testbankinstant.com Search A= !& in cross reference ook for topic ()(8 &) 5treasur- stock6 in the results Comparative Financial Statements Search A= !& in cross reference ook for topic %)( 5comparative financial statements 6 in the results
%)(8#)8!( Use print function printer friendl- with sources
FASB ASC !%# Accounting for the nvestment Ta0 Credit
Search investment ta; credit Found at *!)8#)8%(8 !( * !$ *!)8#)8!*8%* %' FASB ASC !%" SC Comments
#. Search revenue recognition Found under customer pa-ment and incentives $)(8()8S++8#
Comments "ade b- SC @bserver at merging 4ssues ask Force 54F6 "eetings %. Search debt with conversions and other options Found under !*)8%) 8S++ Comments "ade b- SC @bserver at merging 4ssues ask Force 54F6 "eetings &. Search software cost of sales and services Found under +'(8*)(8S++ Comments "ade b- SC @bserver at merging 4ssues ask Force 54F6 "eetings FASB ASC !%* 1AAP 1uidelines
Search generall- accepted accounting principles.1 Found under #)(8#) /oom for 2ebate 2ebate !%! download full file at http://testbankinstant.com
download full file at http://testbankinstant.com his
eam #. his
• •
• •
4ncome8decreasing choices ma- be selected b- companies that Are highl- regulated, such as utilit- companies. Poor performance can support the notion that the compan- deserves a rate increase 4f a compan- is having a bad -ear, it ma- choose to load up the income statement with e;penses and losses so that it will appear better off in future -ears. Bave labor unions hope to fare better in negotiations for labor contracts •
•
•
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download full file at http://testbankinstant.com Companies have used off8balance sheet financing to improve the perception of a compan-Ds riskiness. nron is a prime e;ample. nron used special purpose entities to hide debt from investors. he student can also argue that accounting choice can be used to provide more relevant financial statements. For e;ample, SFAS ##( provides choices that are intended to result in financials that better disclose the results of management investment choices. eam %. All of the above can be used as arguments against the proliferation of accounting choices. >arrowing accounting choices has been a goal of accounting professionals for man- -ears. For e;ample, one of the ob3ectives of the AP was to narrow areas of difference in 9AAP. Critics maintain that management is allowed too much leewa- in the selection of the accounting procedures used in corporate financial reports. hese criticisms revolve around two issues 5#6 ;ecutive compensation is fre
a.
he Securities and ;change Commission 5SC6 was created b- the Securities Act of #+&& and the Securities ;change Act of #+&!, he SC was created to administer various securities acts. Under powers provided b- Congress, the SC was given the authorit- to prescribe accounting principles and reporting practices. >evertheless, because the SC has generall- acted as an overseer and allowed the private sector to develop accounting principles, and this authorit- has seldom been used. Bowever, the SC has e;erted pressure on the accounting profession and has been especiall- interested in narrowing areas of difference in accounting practice. 4n #+&$ the A4CPADs Committee on Accounting Procedure 5CAP6 was formed. his committee had the authorit- to issue pronouncements on matters of accounting practice and procedure in order to establish generall- accepted practices. he works of the CAP were originall- published in the form of Accounting Research Bulletins 5 ARBs6L however, these pronouncements did not dictate mandator- practice and received authorit- onl- from their general acceptance. he ARBs were consolidated in #+(& into Accounting Terminology Bulletin No. 1 , =eview and =esume,1 and ARB No. 43. ARBs No. 44 through No. 51 were published from #+(& until #+(+. he recommendations of these bulletins that have not been superseded are contained in the FAS Accounting Standards Codification 5FAS ASCL discussed below6 and referenced throughout this te;t where the specific topics covered b- the ARBs are discussed. download full file at http://testbankinstant.com
download full file at http://testbankinstant.com - #+(+ the methods of formulating accounting principles were being
his term, initiall- proposed b- Carman lough, the first chief accountant of the SC, is meant to mean authorit- of Isubstantial weightI or importance, and not necessaril- a ma3orit- view. hus there might be three authoritative positions all of which are appropriate at a point in time before some standard is established. he ma3orit- ma- have gone in one direction, but the minorit- who were also considered IauthoritativeI and could be used.
c.
he SC and the A4CPA have been the sources of authorit- for compliance with accounting standards. he SC has indicated that financial statements conforming to standards set b- the FAS will be presumed to have authoritative support. he A4CPA, in =ule %)& of the Code of Professional thics, re
Case !%7
a.
CAP. he Committee on Accounting Procedure, CAP, which was in e;istence from #+&+ to #+(+, was a natural outgrowth of A4CPA committees which were in e;istence during the period #+&& to #+&'. he committee was formed in direct response to the criticism received b- the accounting profession during the financial crisis of #+%+ and the -ears thereafter. he authori7ation to issue pronouncements on matters of accounting principles and procedures was based on the belief that the A4CPA had the responsibilit- to establish practices that would become generall- accepted b- the profession and b- corporate management .
As a general rule, the CAP directed its attention, almost entirel-, to resolving specific accounting problems and topics rather than to the development of generall- accepted accounting principles. he committee voted on the acceptance of specific Accounting =esearch ulletins published bthe committee. A two8thirds ma3orit- was re
download full file at http://testbankinstant.com to the procedures described b- the bulletins, and 5!6 the lack of an- formal representation on the CAP of interest groups such as corporate managers, governmental agencies, and securitanal-sts. AP. he ob3ectives of the AP were formulated mainl- to correct the deficiencies of the CAP as described above. he AP was thus charged with the responsibilit- of developing written e;pression of generall- accepted accounting principles through consideration of the research done b- other members of the A4CPA in preparing Accounting =esearch Studies. he committee was in turn given substantial authoritative standing in that all opinions of the AP were to constitute substantial authoritative support for generall- accepted accounting principles. 4f an individual member of the A4CPA decided that a principle or procedure outside of the official pronouncements of the AP had substantial authoritative support, the member had to disclose the departure from the official AP opinion in the financial statements of the firm in
Arguments for politicali7ation of the accounting rule8making process: #. Accounting depends in large part on public confidence for its success. Conse
download full file at http://testbankinstant.com 3udgments, not the t-pe which are solvable, as we have traditionall- assumed, using deterministic models. @nl- in this wa- 5reasonable compromise6 will the financial communit- have confidence in the fairness and ob3ectivit- of accounting rule8making. &. @ver the -ears, accountants have been unable to establish, on the basis of technical accounting elements, rules which would bring about the desired uniformit- and acceptabilit-. his inabilit- itself indicates rule8setting is primaril- consensual in nature. !. he public accounting profession, through bodies such as the Accounting Principles oard, made rules which business enterprises and individuals had1 to follow. For man- -ears, these businesses and individuals had little sa- as to what the rules would be, in spite of the fact that their economic well8being was influenced to a substantial degree b- those rules. 4t is onl- natural that the- would tr- to influence or control the factors that determine their economic well8being. c.
Arguments against the politicali7ation of the accounting rule8making process: #. "an- accountants feel that accounting is primaril- technical in nature. Conse
Case !%!8
he answer to this case re
he answer to this case re
he solutions to the financial anal-sis case depend upon the compan- and -ear selected.
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