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

 
Difficulty: Easy
Learning Objective: Discuss some of the challenges and opportunities for accounting.
Section Reference: Challenges and Opportunities for the Accounting Profession
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

 
PROBLEMS
 
 
P1-77 Information Asymmetry
Gable Fire Systems hired an operations manager at the beginning of the current fiscal year. The manager’s compensation package included a 30%-year end bonus on net income before taxes. It is now the year end and the manager has asked the accounts receivable department to recognize revenues for any signed contracts in the current period and in advance of the provision of services. Is this appropriate? Why or why not? What is the operations manager’s motivation to make this request? If the accounts receivable department recognizes the revenue as requested, does this create any type of information asymmetry? If so, what type and why?
 
Solution 1-77
The operations manager is asking the accounts receivable department to recognize revenues that have not yet been earned, since services have not been provided to the customer. This is not appropriate as it  will overstate revenues and thus net income. The operations manager’s request is the result of the compensation structure and as a result there is management bias. This results in information asymmetry, more specifically moral hazard. The manager is operating in his own best interest at the expense of other users of the financial statements and the bias is taking the form of an overstatement of net income.
 
Difficulty: Hard
Learning Objective: Understand the financial reporting environment.
Section Reference: Financial Statements and Financial Reporting
CPA: Communication
CPA: Financial Reporting
CPA: Strategy & Governance
Bloomcode: Synthesis
AACSB: Communication
 
 
P1-78 U,S. GAAP on Canadian GAAP
Explain why U.S. GAAP has and will continue to have a significant impact on GAAP in Canada.
 
Solution 1-78
U.S. GAAP has and will continue to have a significant impact on GAAP in Canada for three reasons:

1. First, because ASPE is  based on principles and is fairly open to interpretation, accounting professionals have often (in past) relied on the more prescriptive, specific guidance provided in U.S. GAAP.
2. Second, many public Canadian companies are also listed on U.S. stock markets, such as NASDAQ and the NYSE. To be listed on a U.S. exchange, these companies must follow U.S. GAAP or IFRS. As we move toward international harmonization in accounting standards, the U.S. standards will continue to influence Canadian and international standards due to the significant capital pool of these markets.
3. Third, the United States has not adopted IFRS and may never do so. Nonetheless it has representation on the IASB, and thus, influence.

Difficulty: Easy
Learning Objective: Explain the need for accounting standards and identify the major entities that influence standard setting and financial reporting.
Section Reference: Standard Setting
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
 
 
P1-79 Challenges facing financial reporting
In North America, the financial reporting environment is changing at a very rapid pace. Briefly describe the challenges related to oversight, ethics, standard setting and a principles-based system. Make sure to illustrate the current impact of these challenges on  the accounting profession.
 

Solution 1-79

1.     Oversight in the capital marketplace. The Sarbanes-Oxley Act (SOX) instituted the Public Company Accounting Oversight Board (PCAOB) mandating stronger independence rules for auditors, reporting on the effectiveness of the financial reporting internal control system, and disclosure of a code of ethics for senior financial officers.
        Canada has followed suit and developed the Canadian Public Accountability Board (CPAB). As well, the Canadian Securities Administrators (CSA) requires company management to take responsibility for the appropriateness and fairness of the financial statements, public companies to have independent audit committees, and public accounting firms to be subject to the CPAB. The CSA also requires much greater disclosures. The overall impact of these financial reforms has been to put more emphasis on government regulation and less on self-regulation.
2.     Centrality of ethics. Accountants are central in making the capital marketplace efficient and effective. However, ethical dilemmas are common, often precipitated by management bias. It is not always easy to “do the right thing.” Pressure to “bend the rules,” “play the game,” or “just ignore it” are often present. There is no consensus (yet) among accounting professionals as to what a comprehensive ethical system is, and so it is up to the individual accountant to maintain a high standard of ethics at all times.