The Analysis and Use of Financial Statements, 3rd Edition, Gerald I. White, Ashwinpaul C. Sondhi, Dov Fried
Chapter 1 - Solutions
Overview: Problem Length {S} [M] 1.{S}(i) Problem #s 1 to 23 24
Short-term lenders are concerned primarily with liquidity. Accounting standards would focus primarily on near-term cash flows and might include cash flow forecasting. Performance reporting would likely emphasize cash-based measures.
(ii) Long-term equity investors are primarily concerned with the earning power of the firm. Income measurement would be the focus of standards for such users. (iii)Tax authorities are concerned with the generation of tax revenue. Accounting standards might limit the ability of firms to shift income from one period to another and place strict controls on the recognition and timing (accrual) of both revenues and deductible expenditures. (iv) Corporate managers seek to control their reported earnings, to cast the best possible light on their stewardship. Accounting standards set by managers would be highly flexible, with little supplementary information and footnote disclosure. 2.{S}The matching principle states that revenues should be matched with the expenses that generate them. As the revenues and related expenditures may be incurred in different accounting periods, accrual accounting is required to recognize them in the same period. 3.{S}The going concern assumption states that the enterprise will continue operating in a normal fashion. This assumption permits financial statements to record assets and liabilities based on the cash flows that they will generate as the firm operates. If this assumption were absent, all assets and liabilities would have to be evaluated on a liquidation basis. Accrual accounting could not be used, as the assumption that expenditures would produce future revenues could no longer be made. 1-1
4.{S}Public companies must provide current investors with detailed financial statements, mandated by the FASB and the SEC. Because of SEC filing requirements, annual and quarterly financial data are publicly available to
Overview: Problem Length {S} [M] 1.{S}(i) Problem #s 1 to 23 24
Short-term lenders are concerned primarily with liquidity. Accounting standards would focus primarily on near-term cash flows and might include cash flow forecasting. Performance reporting would likely emphasize cash-based measures.
(ii) Long-term equity investors are primarily concerned with the earning power of the firm. Income measurement would be the focus of standards for such users. (iii)Tax authorities are concerned with the generation of tax revenue. Accounting standards might limit the ability of firms to shift income from one period to another and place strict controls on the recognition and timing (accrual) of both revenues and deductible expenditures. (iv) Corporate managers seek to control their reported earnings, to cast the best possible light on their stewardship. Accounting standards set by managers would be highly flexible, with little supplementary information and footnote disclosure. 2.{S}The matching principle states that revenues should be matched with the expenses that generate them. As the revenues and related expenditures may be incurred in different accounting periods, accrual accounting is required to recognize them in the same period. 3.{S}The going concern assumption states that the enterprise will continue operating in a normal fashion. This assumption permits financial statements to record assets and liabilities based on the cash flows that they will generate as the firm operates. If this assumption were absent, all assets and liabilities would have to be evaluated on a liquidation basis. Accrual accounting could not be used, as the assumption that expenditures would produce future revenues could no longer be made. 1-1
4.{S}Public companies must provide current investors with detailed financial statements, mandated by the FASB and the SEC. Because of SEC filing requirements, annual and quarterly financial data are publicly available to