2011 McGraw-Hill Ryerson Ltd. All rights reserved

©2011 McGraw-Hill Ryerson Ltd. All rights reserved Solutions Manual to accompany Intermediate Accounting,Volume 1, 5 th edition1-1

Chapter 1: The Environment of Financial Reporting

Suggested Time Case 1-1 Milton Kidd 1-2 Metropolitan Transit Incorporated 1-3 International Fashions Inc.Assignment1-1 Chapter overview.............................................10 1-2 Chapter overview.............................................10 1-3 International comparisons................................10 1-4 Acronyms ......................................................... 5 1-5 Accounting choices..........................................10 1-6 Effect of accounting policies (*W)..................15 1-7 Reporting alternatives......................................10 1-8 Non-GAAP situations (*W).............................15 1-9 Reporting situations.........................................20 1-10 Reporting situations.........................................15 1-11 Private company reporting ...............................20 1-12 Objectives of financial reporting.....................20 1-13 Impact of differing objectives..........................20 1-14 International harmonization of accounting standards..................................................20 1-15 IASB standard-setting......................................25 1-16 Accounting policy disa greement......................15 1-17 Accounting policies and reporting objectives.. 10 1-18 Policy choice ....................................................20 *W The solution to this exercise/problem is on the text Web site and in the Study Guide. This solution is marked WEB.hzzled Intermediate Accounting Volume 1 5th Edition Beechy Solutions Manual Visit TestBankDeal.com to get complete for all chapters

©2011 McGraw-Hill Ryerson Ltd. All rights reserved 1-2 Solutions Manualto accompany Intermediate Accounting,Volume 1, 5 th edition Questions 1.A public company issues securities (debt and/or equity) to the public; a private company does not, but may raise capital through private placements. Public and publicly-accountable companies must use IFRS. Private companies (except publicly- accountableenterprises) may use IFRS , Canadian Accounting Standards for Private Enterprises (ASPE) as provided in the CICA Handbook , or a disclosed basis of accounting(DBA).

2.A control block is present when a small number of related or affiliated shareholders own a majority of the voting shares in a company. Financial reporting will often be tailored to the needs of thecontrolling shareholders, and not necessarily the minority shareholders.

3.Canadian accounting standards are set by the Accounting Standards Board, which is a unit of the Canadian Institute of Chartered Accountants. For public companies, the AcSB has chosen to comply with international accounting standards as set by the International Accounting Standards Board. For the optional use of private enterprises, the AcSB maintains Accounting Standards for Private Enterprisesin Section IIofthe CICA Handbook.

4.Canadian private companies can choose to use IFRS, Part II of the CICA Handbook , or a disclosed basis of accounting (DBA).

5.A private company would choose to use IFRS if it is competing with international firms for debt or private equity funding. By being directly comparable to public companies, IFRS -basis statements will make it easier for prospective lenders or investors to compare potential investees on a common basis. The company may be able to lower its average cost of capital as a result.

6.A disclosed basis of accounting (DBA) is a set of accounting policies specifically chosen to meet specific needs, either for private companies that are not constrained by GAAP, or as special-purpose statements intended to meet the accounting measurement requirements of specific contracts.

7.IFRS is designed to facilitate the international financial markets, particularly to permit multiple stock exchange listings. Using IFRSgoes a long way to improving thecomparability of companies based in different countries.

8.The most important objective of general purpose financial statements is to serve the information needs public companies’ suppliers of debt and equity capital who normally have no direct access to information and must rely on the company’s general purpose financial reporting. Other users such as employees, customers, and regulators will find the information useful, but they are secondary users.hzzled

©2011 McGraw-Hill Ryerson Ltd. All rights reserved Solutions Manual to accompany Intermediate Accounting,Volume 1, 5 th edition1-3 9.If an organization wishes to portray cash flows, accounting policies will be chosen that minimize inter-period allocations and provide maximum disclosure of future cash flow patterns.

10.Accounting policies that minimize revenues and maximize expenses (delay revenue recognition and speed up expense recognition) help to minimize income tax. These policies are only successful in meeting the tax minimization objective if they can be used for filing tax returns as well as financial reporting.

11.Income smoothing is the use of accountingpolicies andestimates to even out periodic fluctuations in earnin gs. Income smoothing is intended to produce a smooth record of earnings, free from peaks and valleys that imply risk. One way of accomplishing this objective is to make relatively small adjustments to accounting estimates that can, cumulatively, have a significant impact on net earnings in a particular period. The deliberate use of accounting estimates to manipulatenet earningsisanunethical practice.

12.A “big bath” occurswhen a company, in the year of an operating loss, uses the opportunity to recognizeas many losses or write -offs in that year as possible, thereby maximizing the loss. This makes it easier to report a larger net income in future years because assets are written down, reducing amortization, and because pessimistic loss provisions may be established.

13.A covenant is a provision in a debt agreement that requires a company to maintain a certain level of performance, for example, a maximum debt/equity ratio, or minimum times-interest-earned ratios . Accounting policies chosen by a company with restrictive covenants would be those that help meet the restriction, such as maximize earnings, minimize debt, etc.

14.Managers ma y be motivated by self-interest rather than a desire to maximize return for shareholders. They may wish to maximize their compensation, reputation, or keep lenders from getting edgy. Policies chosen to maximize net income are common if managers receive bonuses based on net income.

15.Minimum compliance involves disclosure of the leastamount of information possible in order to comply with the recommendations of the CICA Handbook and still get a n unqualifiedaudit report. This reporting has a lower immediate cash cost (as well as improved confidentiality) to the entity, but may result in lower share price as investors become disenchanted with the lack of information.

16.The world-wide use of IFRS may mislead investors into believing that financial statement can be compared directly between companies based in different countries.However, national practices concerning corporate debt differ between countries. In some countries, a high debt load is a bad sign; in others, a high debt load indicates that the banks and other lendershave confidence in the company and is a good sign.hzzled

©2011 McGraw-Hill Ryerson Ltd. All rights reserved 1-4 Solutions Manualto accompany Intermediate Accounting,Volume 1, 5 th edition 17.A company’s financial reporting is affected by its economic and political environment. Each company’s reporting objectives is designed to suit its local environment. For example, in countries that require tax-book conformity, accounting judgements are driven by the tax law. In countries with high inflation, asset valuation will be affected, such as with substantial asset write-ups to reflect the higher nominal value of assets.

18.The AcSB is maintaining Canada’sprivate-enterpriseGAAP in Part IIofthe CICA Handbook. In contrast, companies in other countries may use IFRS-SME, especially in developing countries that do not have their own standard-setting structure. Canada chose to follow its own accounting standards for private enterprises (ASPE)in order to simplify lif e for Canadian private companies that already are comfortable with Canadian standards and are not in international competition for funding. The AcSB’s approach also makes it feasible to provide standards that better suit the Canadian economic and business environment.hzzled