Intermediate Accounting Volume 1, 13th Canadian Edition by Donald E. Kieso Test bank

Bloomcode: Knowledge
AACSB: Communication
 
 
Ex. 1-54 Stakeholders in the financial reporting environment
Briefly describe the much-publicized subprime lending crisis in the United States, and identify the stakeholders and how they were affected.
 

Solution 1-54

At the centre of this issue were securitized mortgage assets that were sold to investors. These assets were based on mortgages that had been extended to high-risk borrowers who could no longer afford their mortgage payments once interest rates rose. This led to a flooded housing market as borrowers walked away from their houses (and debt). The primary stakeholders were the lenders, borrowers, and investors. Lenders (acting in their own self-interest) sold these investments to investors who may not have fully understood the high-risk nature of their investment. Borrowers lost homes they could no longer afford, and investors suffered large losses due to the defaulted loans.
 
Difficulty: Easy
Learning Objective: Understand the financial reporting environment.
Section Reference: Financial Statements and Financial Reporting
CPA: Communication
CPA: Finance
CPA: Strategy & Governance
Bloomcode: Comprehension
AACSB: Communication
 
 
Ex. 1-55 Sources of capital and stages of company growth
Briefly describe how the sources of capital a company relies upon for funding might vary according to their stage of growth.
 
Solution 1-55
As per Illustration 1-2, in the early project/idea stage a company will acquire its initial capital from founders, family, and friends. As they progress to the research and development or prototype stage, private and public venture capital may be introduced, this  include capital provided by angel investors, venture capitalists, and public exchanges such as the TSX Venture Exchange or TSX. Venture capitalists and these public exchanges become the dominant source of capital  as greater amounts of capital are required and as a company progresses through commercialization and into stable production.
 
Difficulty: Easy
Learning Objective: Understand the financial reporting environment.
Section Reference: Financial Statements and Financial Reporting
CPA: Communication
CPA: Finance
CPA: Strategy & Governance
Bloomcode: Knowledge
AACSB: Communication
 
 
Ex. 1-56 Objectives of financial reporting
What is the objective of general-purpose financial statements? How is this objective supported (or not) by the entity perspective and proprietary perspective?
 

Solution 1-56

The objective of financial reporting is to provide financial information about the reporting entity that is useful to current and potential equity investors, lenders and other creditors in making decisions in their capacity as lenders, this is known as the decision usefulness approach.
The entity perspective views companies as separate and distinct from their owners, e.g., corporate assets are viewed as assets of the company and not of a specific creditor or shareholder. Investors and creditors have liability or equity claims. On the other hand, the proprietary perspective holds that financial reporting should focus only on the needs of the shareholders and is not considered appropriate. The entity perspective is adopted as part of the objective of general-purpose financial reporting.
 
Difficulty: Easy
Learning Objective: Understand the financial reporting environment.
Section Reference: Financial Statements and Financial Reporting
CPA: Communication
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Communication
 
 
Ex 1-57 Traditional users vs. others
Identify the six major  categories of stakeholders as outlined in the textbook. For each category, indicate what is at stake. Which of these might be considered “traditional” financial statement users?
 
Solution 1-57
Refer to Illustration 1-4.

Stakeholder	What is at Stake
Investors / Creditors	Investment / Loan
Management	Job, bonus, reputation, salary increase, access to capital markets by company
Securities commissions and stock exchanges	Reputation, effective and efficient capital marketplace
Analysts and credit rating agencies	Reputation, profits
Auditors	Reputation, profits (companies are their clients)
Standard setters	Reputation