Intermediate Accounting Volume 1, 13th Canadian Edition by Donald E. Kieso Test bank
Investors and creditors might be considered “traditional” statement users.
Difficulty: Easy
Learning Objective: Understand the financial reporting environment.
Section Reference: Financial Statements and Financial Reporting
CPA: Communication
CPA: Financial Reporting
CPA: Strategy & Governance
Bloomcode: Comprehension
AACSB: Communication
Ex. 1-58 Imperfection of the stakeholder financial reporting environment
The financial reporting environment is a system that provides checks and balances to ensure that the people with capital—investors and creditors—have good information to use when deciding where best to invest and allocate capital. However, the system does not always work. Explain why this is the case.
Solution 1-58
The financial reporting environment (Illustration 1-3) does not always provide perfect information for people with capital because it involves people, and human behaviour is an unpredictable variable. People often act in their own self-interest rather than in the best interest of the capital marketplace, and by extension, the economy.
Difficulty: Easy
Learning Objective: Understand the financial reporting environment.
Section Reference: Financial Statements and Financial Reporting
CPA: Communication
CPA: Financial Reporting
CPA: Strategy & Governance
Bloomcode: Comprehension
AACSB: Communication
Ex. 1-59 User needs
Explain why providing information to users is a challenging task.
Solution 1-59
Firstly, users have very different knowledge levels. Some users have accounting designations or have worked in the finance industry for several years. Others have limited knowledge of how the information is gathered and reported. Secondly, users have very different needs. Some users are institutional investors who hold a large percentage of equity shareholdings and generally devote significant resources to managing their investment portfolios. Others are credit managers at banks or credit unions who deal mainly with small business or personal loans. Still others are labour negotiators whose knowledge of financial reporting is limited to periodic reviews of financial information for the purpose of negotiations.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. 1-60 Merits of accrual vs. cash-basis accounting
Investors are interested in assessing a company’s ability to generate net cash inflows, as well as its ability to protect and enhance capital investments. Briefly explain how each of the accrual and cash-basis methods, respectively, might enhance these objectives.
Solution 1-60
Cash-basis accounting provides better information for assessing the timing and amounts of cash flows, which assist with the first objective. The second objective, concerning long-term performance of the company, may be better served by accrual-based accounting, which generally provides better information about future ability to generate favourable cash flows. It also ties operations to events and the surrounding environment, which are better indicators of performance, and the company’s ability to continue operating as a going concern.
Difficulty: Easy
Learning Objective: Understand the financial reporting environment.
Section Reference: Financial Statements and Financial Reporting
CPA: Communication
CPA: Financial Reporting
CPA: Management Accounting
Bloomcode: Comprehension
AACSB: Communication
Ex. 1-61 Information asymmetry
What is information asymmetry and how is it created? In markets where information asymmetry exists, there can be adverse selection and moral hazard. Explain what these terms mean and how this contributes to market asymmetry