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Unformatted text preview: CONTENTS Preface to the Instructor Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Chapter 20 Chapter 21 Chapter 22 Chapter 23 Chapter 24 Financial Accounting and Accounting Standards Conceptual Framework Underlying Financial Accounting The Accounting Information System Income Statement and Related Information Balance Sheet and Statement of Cash Flows Accounting and the Time Value of Money Cash and Receivables Valuation of Inventories: A Cost Basis Approach I n v e n t o r i e s : Additional Valuation Issues Acquisition and Disposition of Property, Plant, and Equipment Depreciation, Impairments, and Depletion Intangible Assets Current Liabilities and Contingencies Long-Term Liabilities Stockholders’ Equity Dilutive Securities and Earnings Per Share Investments Revenue Recognition Accounting for Income Taxes Accounting for Pensions and Postretirement Benefits Accounting for Leases Accounting Changes and Error Analysis Statement of Cash Flows Full Disclosure in Financial Reporting
iii PREFACE—TO THE INSTRUCTOR The presentation of the subject matter in each of the chapters in I n t e r m e d i a t e A c c o u n t i n g, 12e is followed by questions, brief exercises, exercises, problems, and concepts for analysis. Another section entitled “Using Your Judgment” is also provided (financial reporting, financial statement analysis, comparative analysis, research, international reporting, professional research and professional simulation). Note that writing, group, and ethics cases have been integrated into the exercises, problems, and concepts for analysis and are identified with icons in the text margins. This manual contains complete solutions to all exercises, problems, and cases in the “Using Your Judgment” section as well as suggested answers to the questions and concepts for analysis. Assignment Classification Table (Topic and Learning Objective). A unique feature of our Solutions Manual is a table that categorizes four types of end-of-chapter items (questions, exercises, problems, and concepts for analysis) by key topics in the chapter. New to Intermediate Accounting, 12e is a classification table organizing solutions by textbook learning objective. Assignment Characteristics Table. Each chapter of this manual contains a table offering: (1) a short description of each exercise, problem, and case, (2) an indication of the level of difficulty (simple, moderate, or complex), and (3) the estimated time in minutes. An estimated average minimum and maximum time (in minutes) is given for each exercise, problem, and case in the text. Although many of the estimated times are based on actual classroom experience, it should be recognized that they are only averages. On any given problem or case even a superior student may encounter difficulty because of a mechanical error or misinterpretation of the problem and spend more time than on other problems of similar difficulty. The estimated time to complete each exercise is also indicated at the right of each exercise number. For problems and cases the estimated time also appears with the list of “purposes” that precedes each set of problems and each set of cases. We hope these classifications, descriptions, and times will prove helpful to instructors in tailoring homework assignments to the capacities of their students and to the time available. P u r p o s e . A statement of the purpose of each problem and each case appears in a list preceding the sets of problems and cases in each chapter. Q u e s t i o n s . The questions at the end of the chapter provide a basis for classroom discussion of the topics presented in the chapter and serve as an aid to the students in testing their understanding of the text material. They deal with both conceptual and procedural matters. The sequence of questions generally corresponds to the topical coverage in the text. Full and complete answers to these questions are presented in this manual. Brief Exercises. Each brief exercise focuses on one concept or procedure. Because these brief exercises are straightforward and simple, they build the student’s confidence and test basic skills. E x e r c i s e s . Generally, the exercises cover a specific topic and require less time and effort to solve than the problems. In addition to serving as supplemental assignment material, the exercises may be used for class discussion and for examination purposes. iv P r o b l e m s . Whereas the goal of the exercises is brevity of solution time and coverage of essential principles or methodology with minimum difficulty, the problems are designed to develop a professional level of achievement and, therefore, are generally more challenging to solve. We have arranged the problems, as much as possible, from least to most difficult in the same order as the discussion in the chapter. Some of the problems are routine and can be solved by following procedures that are illustrated in the textbook. The more difficult problems may blend a diversity of principles into a single situation requiring a series of steps, computations, or solutions and demand interpretation, analysis, and judgment. Many of the problems (indicated by AICPA, CMA, or CIA Adapted) have been adapted from the Uniform CPA, CMA, or CIA Examinations. In most instances, the solutions to these problems include all the information from the unofficial CPA, CMA, or CIA examination solution. Generally, the students will not furnish a solution in the same detail. Additionally, a far greater number of problems has been provided than the instructor can reasonably use in a single offering of the course. Concepts For Analysis. The concepts for analysis, many of which are adoptions from the Uniform CPA Examination, generally require essay as opposed to quantitative solutions. They are intended to confront the student with situations, frequently unstructured, calling for in-depth analysis and the exercise of judgment in identifying problems and evaluating alternatives. Using Your Judgment. This section of assignment material has been greatly expanded and revised for this 12th edition. The financial reporting problems have been adapted to the Annual Report financial information found in the text. Many of the financial statement analysis cases (using real-world companies), the comparative analysis cases, and the research cases (many of which require either library research or Internet research), have been updated for this edition. This edition also includes updated and expanded international reporting cases and a new feature called “Professional Research”. The professional simulations are patterned after the computerized CPA exam, which was introduced in 2004. SUMMARY The solutions have been painstakingly prepared, reviewed, and tested to provide instructors error-free materials. To the extent that we have not, we invite the users of our textbook to inform us directly of the reactions and suggested improvements. All solutions manuals are available at no cost for use by instructors adopting the textbook. ACKNOWLEDGMENTS We sincerely thank the following individuals for their expert assistance in reviewing and checking the material contained in this Solutions Manual: John Borke, University of Wisconsin—Platteville; Jack Cathey, University of North Carolina – Charlotte; Robert Derstine, Villanova University; Gregory Dold, Southwestern College; James M. Emig, Villanova University; Larry Falcetto, Emporia State University; Paul Robertson, Henderson State University; Alice Sineath, Forsyth Technical Community College; Dick Wasson, Southwestern College. We thank development editor, Ann Torbert, Ed Brislin of John Wiley & Sons, and Alicia Gmeiner of Elm Street Publishing Services for preparing this manual for publication. Donald E. Kieso Jerry J. Weygandt Terry D. Warfield
v CHAPTER 1
Financial Accounting and Accounting Standards
ASSIGNMENT CLASSIFICATION TABLE
Topics 1. Subject matter of accounting. 2. Environment of accounting. 3. Role of principles, objectives, standards, and accounting theory. 4. Historical development of accounting standards. 5. Authoritative pronouncements and standards-setting bodies. 6. Role of pressure groups. 7. International accounting. 8. Ethical issues. Questions 1 2, 3, 4 5, 6, 7 8, 9, 10, 11 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23 23, 24, 25, 26, 27, 28 29, 30 31 Cases 1 3, 4 2 5, 16 6, 7, 8, 9, 10, 11, 12, 15 17, 18 14 13, 16 1-1 ASSIGNMENT CHARACTERISTICS TABLE
Item CA1-1 CA1-2 CA1-3 CA1-4 CA1-5 CA1-6 CA1-7 CA1-8 CA1-9 CA1-10 CA1-11 CA1-12 CA1-13 CA1-14 CA1-15 CA1-16 CA1-17 CA1-18 Description Financial accounting. Objectives of financial reporting. Accounting numbers and the environment. Need for accounting standards. AICPA’s role in standards setting. FASB role in standards setting. Government role in standards setting. Politicalization of standards setting. Models for setting accounting standards. Standards-setting terminology. Accounting organizations and documents issued. Accounting pronouncements. Issues involving standards setting. Securities and Exchange Commission. Standards-setting process. History of standards-setting organizations. Economic consequences. Standards-setting process, economic consequences. Level of Difficulty Simple Moderate Simple Simple Simple Simple Simple Complex Simple Moderate Simple Simple Complex Moderate Moderate Moderate Moderate Moderate Time (minutes) 15–20 20–25 10–15 15–20 20–25 20–25 10–15 30–40 15–20 30–40 15–20 10–15 20–25 30–40 25–35 25–35 25–35 25–35 1-2 ANSWERS TO QUESTIONS
1. Financial accounting measures, classifies, and summarizes in report form those activities and that information which relate to the enterprise as a whole for use by parties both internal and external to a business enterprise. Managerial accounting also measures, classifies, and summarizes in report form enterprise activities, but the communication is for the use of internal, managerial parties, and relates more to subsystems of the entity. Managerial accounting is management decision oriented and directed more toward product line, division, and profit center reporting. Financial statements generally refer to the four basic financial statements: balance sheet, income statement, statement of cash flows, and statement of changes in owners’ or stockholders’ equity. Financial reporting is a broader concept; it includes the basic financial statements and any other means of communicating financial and economic data to interested external parties. Examples of financial reporting other than financial reports are annual reports, prospectuses, reports filed with the government, news releases, management forecasts or plans, and descriptions of an enterprise’s social or environmental impact. If a company’s financial performance is measured accurately, fairly, and on a timely basis, the right managers and companies are able to attract investment capital. To provide unreliable and irrelevant information leads to poor capital allocation which adversely affects the securities market. Some major challenges facing the accounting profession relate to the following items: Non-financial measurement – how to report significant key performance measurements such as customer satisfaction indexes, backlog information and reject rates on goods purchased. Forward-looking information – how to report more future oriented information. Soft assets – how to report on intangible assets, such as market know-how, market dominance, and well-trained employees. Timeliness – how to report more real-time information. In general, the objectives of financial reporting are to provide (1) information that is useful in investment and credit decisions, (2) information that is useful in assessing cash flow prospects, and (3) information about enterprise resources, claims to those resources, and changes in them. More specifically these objectives state that financial reporting should provide information: a. that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence. b. to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans. Since investors and creditors’ cash flows are related to enterprise cash flows, financial reporting should provide information to help investors, creditors, and other users assess the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise. c. about the economic resources of an enterprise, the claims to those resources (obligations of the enterprise to transfer resources to other entities), owners’ equity, and the effects of transactions, events, and circumstances that change its resources and claims to those resources. A common set of standards applied by all businesses and entities provides financial statements which are reasonably comparable. Without a common set of standards, each enterprise could, and would, develop its own theory structure and set of practices, resulting in noncomparability among enterprises. 2. 3. 4. 5. 6. 1-3 Questions Chapter 1 (Continued) 7. General-purpose financial statements are not likely to satisfy the specific needs of all interested parties. Since the needs of interested parties such as creditors, managers, owners, governmental agencies, and financial analysts vary considerably, it is unlikely that one set of financial statements is equally appropriate for these varied uses. The SEC has the power to prescribe, in whatever detail it desires, the accounting practices and principles to be employed by the companies that fall within its jurisdiction. Because the SEC receives audited financial statements from nearly all companies that issue securities to the public or are listed on the stock exchanges, it is greatly interested in the content, accuracy, and credibility of the statements. For many years the SEC relied on the AICPA to regulate the profession and develop and enforce accounting principles. Lately, the SEC has assumed a more active role in the development of accounting standards, especially in the area of disclosure requirements. In December 1973, in ASR No. 150, the SEC said the FASB’s statements would be presumed to carry substantial authoritative support and anything contrary to them to lack such support. It thereby supports the development of accounting principles in the private sector. The Committee on Accounting Procedure was a special committee of the American Institute of CPAs that, between the years of 1939 and 1959, issued 51 Accounting Research Bulletins dealing with a wide variety of timely accounting problems. These bulletins provided solutions to immediate problems and narrowed the range of alternative practices. But, the Committee’s problem-by-problem approach failed to provide a well-defined and well-structured body of accounting theory that was so badly needed. The Committee on Accounting Procedure was replaced in 1959 by the Accounting Principles Board. 8. 9. 10. The creation of the Accounting Principles Board was intended to advance the written expression of accounting principles, to determine appropriate practices, and to narrow the differences and inconsistencies in practice. To achieve its basic objectives, its mission was to develop an overall conceptual framework to assist in the resolution of problems as they became evident and to do substantive research on individual issues before pronouncements were issued. 11. Accounting Research Bulletins were pronouncements on accounting practice issued by the Committee on Accounting Procedure between 1939 and 1959; since 1964 they have been recognized as accepted accounting practice unless superseded in part or in whole by an opinion of the APB or an FASB standard. APB Opinions were issued by the Accounting Principles Board during the years 1959 through 1973 and, unless superseded by FASB Statements, are recognized as accepted practice and constitute the requirements to be followed by all business enterprises. FASB Statements are pronouncements of the Financial Accounting Standards Board and currently represent the accounting profession’s authoritative pronouncements on financial accounting and reporting practices. 12. The explanation should note that generally accepted accounting principles or standards have “substantial authoritative support.” They consist of accounting practices, procedures, theories, concepts, and methods which are recognized by a large majority of practicing accountants as well as other members of the business and financial community. Bulletins issued by the Committee on Accounting Procedure, opinions rendered by the Accounting Principles Board, and statements issued by the Financial Accounting Standards Board constitute “substantial authoritative support.” 13. It was believed that FASB Statements would carry greater weight than APB Opinions because of significant differences between the FASB and the APB, namely: (1) The FASB has a smaller membership of full-time compensated members; (2) the FASB has greater autonomy and increased independence; and (3) the FASB has broader representation than the APB. 14. The technical staff of the FASB conducts research on an identified accounting topic and prepares a “discussion memorandum” that is released by the Board for public reaction. The Board analyzes and evaluates the public response to the discussion memorandum, deliberates on the issues, and 1-4 Questions Chapter 1 (Continued) issues an “exposure draft” for public comment. The discussion memorandum merely presents all facts and alternatives related to a specific topic or problem, whereas the exposure draft is a tentative “statement.” After studying the public’s reaction to the exposure draft, the Board may reevaluate its position, revise the draft, and vote on the issuance of a final statement. 15. Statements of financial accounting standards constitute generally accepted accounting principles and dictate acceptable financial accounting and reporting practices as promulgated by the FASB. The first standards statement was issued by the FASB in 1973. Statements of financial accounting concepts do not establish generally accepted accounting principles. Rather, the concepts statements set forth fundamental objectives and concepts that the FASB intends to use as a basis for developing future standards. The concepts serve as guidelines in solving existing and emerging accounting problems in a consistent, sound manner. Both the standards statements and the concepts statements may develop through the same process from discussion memorandum, to exposure draft, to a final approved statement. 16. Rule 203 of the Code of Professional Conduct prohibits a member of the AICPA from expressing an opinion that financial statements conform with GAAP if those statements contain a material departure from an accounting principle promulgated by the FASB, or its predecessors, the APB and the CAP, unless the member can demonstrate that because of unusual circumstances the financial statements would otherwise have been misleading. Failure to follow Rule 203 can lead to a loss of a CPA’s license to practice. This rule is extremely important because it requires auditors to follow FASB standards. 17. FASB Standards, FASB Technical Bulletins, AICPA Practice Bulletins. 18. The chairman of the FASB was indicating that too much attention is put on the bottom line and not enough on the development of quality products. Managers should be less concerned with shortterm resul...
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