Intermediate Accounting Chapter 1

Financial statements are important tools that provide valuable information about a company's financial performance and position. They include the balance sheet, income statement, cash flow statement, and statement of changes in equity. The purpose of these statements is to assist stakeholders, such as investors, creditors, and management, in making informed decisions. By analyzing the financial statements, stakeholders can evaluate the company's profitability, liquidity, solvency, and overall financial health. This information helps them determine whether to invest in the company, extend credit, or make other financial decisions. Therefore, the purpose of financial statements is to aid in decision-making.

The primary users of general-purpose financial statements are creditors and investors. Creditors use these statements to assess the financial position of a company and determine its ability to repay debts. Investors, on the other hand, rely on financial statements to make informed decisions about investing in a company and assessing its potential for future profitability. Both creditors and investors rely on these statements to evaluate the financial health and performance of a company before making any financial decisions.

Financial accounting is the process of recording, summarizing, and reporting financial transactions of a business. The purpose of financial accounting is to provide information for external use. This includes stakeholders such as investors, creditors, suppliers, and government agencies who rely on financial statements to make decisions about the company. External users are interested in the financial performance, position, and cash flows of the business to assess its profitability, solvency, and liquidity. Therefore, financial accounting serves the purpose of providing relevant and reliable financial information to external users for decision-making purposes.

Congress does not help set accounting standards. The responsibility for setting accounting standards in the United States lies with the Financial Accounting Standards Board (FASB), which is an independent private-sector organization. The American Institute of Certified Public Accountants (AICPA) is a professional organization of accountants, and the Securities and Exchange Commission (SEC) is a government agency that regulates the securities industry. However, Congress has the power to pass laws that may impact accounting standards, but they do not directly set them.

Soft assets can indeed lose their value at any time. This is because their value is often dependent on factors such as market conditions, competition, and technological advancements. An example of a soft asset is a patent, which is a legal protection for an invention or innovation. Soft assets are intangible in nature, meaning they do not have a physical form and cannot be touched or seen. Therefore, all of the statements mentioned in the options are correct about soft assets.

Cash is not a component of shareholder's equity because it represents the actual physical currency or funds held by a company. Shareholder's equity, on the other hand, represents the residual interest in the assets of a company after deducting liabilities. It includes components such as retained earnings, AOCI (accumulate other comprehensive income), and paid-in capital, which are all related to the company's financial performance and investments, rather than the actual cash held by the company.

Auditors ensure that information is "fairly" presented. This means that auditors strive to provide an unbiased and accurate representation of the financial statements and other information they are auditing. They assess whether the information is presented in accordance with the relevant accounting principles and regulations, without any material misstatements or omissions that could mislead users of the information. The auditor's role is to provide assurance to stakeholders that the information is presented fairly and can be relied upon for decision-making purposes.

Financial accounting gathers relevant information. This means that only information that is pertinent and useful for decision-making purposes is collected and recorded. Irrelevant information that does not impact financial decisions or performance is not included in financial accounting. By focusing on relevant information, financial accounting provides a clear and accurate picture of a company's financial position and performance, enabling stakeholders to make informed decisions.

The purpose of the Sarbanes-Oxley Act is to curb fraud. This legislation was enacted in response to major corporate scandals such as Enron and WorldCom, which involved fraudulent accounting practices. The act aims to improve corporate governance and financial reporting to ensure accuracy and transparency in financial statements. It establishes stricter regulations and requirements for public companies, including the establishment of independent audit committees and the implementation of internal controls to detect and prevent fraud. By curbing fraud, the Sarbanes-Oxley Act aims to protect investors and restore confidence in the financial markets.

The expectations gap exists between the public and accountants because the public often has unrealistic expectations of what accountants can deliver. The public expects accountants to detect and prevent all fraud, ensure accurate financial reporting, and provide reliable financial advice. However, accountants have limitations and cannot guarantee these outcomes. This gap arises due to a lack of understanding of the complexities and limitations of the accounting profession by the public. Accountants strive to meet these expectations, but it is important for the public to have a realistic understanding of what they can truly deliver.

The EITF (Emerging Issues Task Force) is a type of statement that would deal with an emerging issue involving a new form of online transaction. The EITF is responsible for addressing emerging accounting issues that are not yet addressed by existing accounting standards. It provides guidance and recommendations on how to account for and report these emerging issues, ensuring that financial reporting remains accurate and relevant in the face of new developments in the business environment.

Accountants are responsible for analyzing financial data and providing accurate information to stakeholders. Timeliness is a challenge for accountants as they need to ensure that financial reports are prepared and delivered in a timely manner. Providing non-financial information can also be a challenge as accountants primarily focus on financial data. Soft assets, such as intellectual property or brand value, can be difficult to quantify and include in financial statements. However, backward-looking information is not a challenge for accountants as it refers to historical financial data which is readily available and can be easily analyzed.

The given answer suggests that by the year 2016, GAPP (Generally Accepted Accounting Principles) will be phased out for iGAPP (International Generally Accepted Accounting Principles). This implies that iGAPP will replace GAPP as the preferred set of accounting standards.

FASAC, which stands for Financial Accounting Standards Advisory Council, is the organization that works under the Financial Accounting Foundation and FASB (Financial Accounting Standards Board). FASAC plays a crucial role in consulting on major policy issues related to financial accounting.

Fin Acct Concepts is not a FASB pronouncement that establishes GAAP. FASB pronouncements, such as Stds. Interps Staff Pos and EITF, are authoritative guidelines that define and govern Generally Accepted Accounting Principles (GAAP). However, Financial Accounting Concepts (Fin Acct Concepts) is a series of conceptual frameworks and guidelines developed by the FASB to provide a theoretical foundation for the development of GAAP. While important in guiding the development of accounting standards, Fin Acct Concepts itself does not establish GAAP.

The Committee on Accounting Procedure was the first accounting standards organization. It was established in 1939 by the American Institute of Accountants (now known as the American Institute of Certified Public Accountants). The committee aimed to provide guidance on accounting principles and practices in order to promote consistency and comparability in financial reporting. The Committee on Accounting Procedure played a significant role in the development of accounting standards in the United States before it was replaced by the Accounting Principles Board in 1959.

The Sarbanes-Oxley Act, also known as SOX, was enacted in response to corporate accounting scandals. It includes various provisions to improve corporate governance and financial reporting. One of the key components of SOX is the requirement for CEOs and CFOs to personally sign statements, ensuring accountability for the accuracy of financial information. Another component is the establishment of the Public Company Accounting Oversight Board (PCAOB), which oversees the auditing profession. Additionally, companies are required to present financial information accurately and auditors have a limit of 5 years before they must rotate. Board members must also be independent and possess financial expertise. Therefore, the statement that is NOT a component of the Sarbanes-Oxley Act is that statements must be prepared in a timely fashion.