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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’ or stockholders’ 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’s 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’s 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

Presented below are three models for setting GAAP.

  1. The purely political approach, where national legislative action decrees GAAP.
  2. The private, professional approach, where GAAP is set and enforced by private professional actions only.
  3. The public/ private mixed approach, where GAAP is basically set by private-sector bodies that behave as though they were public agencies and whose standards to a great extent are enforced through governmental agencies.

Instructions

  1. Which of these three models best describes standard-setting in the United States? Provide justification for your answer.
  2. Why do companies, financial analysts, labor unions, industry trade associations, and others take such an active interest in standard-setting?
  3. Cite an example of a group other than the FASB that attempts to establish accounting standards. Speculate as to why another group might wish to set its own standards.

How are financial accountants challenged in their work to make ethical decisions? Is technical mastery of GAAP not sufficient to the practice of financial accounting?

CA1-7 WRITING (Need for GAAP) Some argue that having various organizations establish accounting principles is wasteful and inefficient. Rather than mandating accounting rules, each company could voluntarily disclose the type of information it considered important. In addition, if an investor wants additional information, the investor could contact the company and pay to receive the additional information desired.InstructionsComment on the appropriateness of this viewpoint.

Some accountants have politicization in the development and acceptance of generally accepted accounting principles (i.e., rule-making) is taking place. Some use the term “politicization” in a narrow sense to mean the influence by governmental agencies, particularly the securities and Exchange Commission, on the development of generally accepted accounting principles. Others use it more broadly to mean the compromise that results when the bodies responsible for developing generally accepted accounting principles are pressured by interest groups (SEC, American Accounting Association, businesses through their various organizations, Institute of Management Accountants, financial analysts, bankers, lawyers, and so on).Instructions

(a) The Committee on Accounting Procedure of the AICPA was established in the mid-to late 1930s and functioned until 1959, at which time the Accounting Principles Board came into existence. In 1973, the Financial Accounting Standards Board was formed and the APB went out of existence. Do the reasons these groups were formed, their methods of operation while in existence, and the reasons for the demise of the first two indicate an increasing politicization (as the term is used in the broad sense) of accounting standard setting? Explain your answer by indicating how the CAP, the APB, and the FASB operated or operate. Cite specific developments that tend to support your answer.

(b) What arguments can be raised to support the “politicization” of accounting rule-making?

(c) What arguments can be raised against the “politicization” of accounting rule-making?

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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