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Unformatted text preview: Intermediate Accounting ACC2100 Chapter Two Solutions Q2-2 The most general objective is that financial reporting should provide useful information for present and potential investors, creditors, and other external users in making rational investment, credit, and similar decisions. Investors include both equity security holders (stockholders) and debt security holders (bondholders), while creditors include suppliers, customers and employees with claims, individual lenders, and lending institutions. Q2-3 The &quot;derived external user objective&quot; is to provide information that is useful to external users in assessing the amounts, timing, and uncertainty of prospective cash receipts. This objective is important because individuals and institutions make cash outflows for investing and lending activities primarily to increase their cash inflows. Financial information is needed to help establish expectations about the timing and amount of prospective cash receipts (e.g., dividends, interest, proceeds from resale or repayment) and assess the risk involved. Q2-4 The &quot;derived company objective&quot; is to provide information to help investors, creditors, and others in assessing the amounts, timing, and uncertainty of prospective net cash inflows to the related company. Information about (1) a company's economic resources, obligations, and owners' equity; (2) a company's comprehensive income and its components; and (3) a company's cash flows should be reported to satisfy the &quot;derived company objective.&quot; Q2-6 The terms are defined as follows: (a) return on investment provides a measure of overall company performance, (b) risk is the uncertainty or unpredictability of the future results of a company, (c) financial flexibility is the ability of a company to use its financial resources to adapt to change, (d) liquidity refers to how quickly a company can convert its assets into cash to pay its bills, and (e) operating capability refers to the ability of a company to maintain a given physical level of operations....
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This note was uploaded on 02/25/2009 for the course ACC 101 taught by Professor Fried during the Spring '09 term at Coastline Community College.
- Spring '09