Q-2

Instructor Manual

“Assuming all other things equal, it is possible that the lower-of-cost-or-market method can result in any
given year in higher income than would be the case under the same inventory costing method without
the use of lower-of-cost-or-market. If so, then lower-of-cost-or-market cannot be classified as a
conservative method.” Do you agree with this statement? Discuss.

The first statement is true because beginning inventory may be lower as a result of a lower-of cost-or-
market write-down. If the ending inventory write-down is less than the beginning inventory write-down,
a higher income will occur under lower-of-cost-or-market than would be the case without it. However,
we would still classify it as conservative. Cumulative income must be equal or lower using lower-of-cost-
or-market and the balance sheet valuation of assets is equal or lower in any given year. Therefore, we
believe it is conservative in terms of the definition given in the chapter.

Q-4

Using different studies at different times it still appears to be the case that financial executives have a
higher threshold for materiality than either certified public accountants or financial analysts who, in
turn, have a higher materiality threshold than users. Why do you think this ordering exists?

Since financial executives are responsible for preparing financial statements, the higher mean for
materiality judgments gives them a greater latitude for error by declaring an item as being nonmaterial.
Financial analysts as users and certified public accountants as auditors (who, at some point, might be
subject to a lawsuit) would prefer lower materiality thresholds.

Q-6

Why do you think the equity theories are less important today than they were, say, 50 years ago?

Empirically testable hypotheses are much richer in terms of providing insights than the deductively
derived equity theories. The equity theories provide interesting outlooks, but they are simply too
narrow in scope to provide extensive insights into complicated problems. However, they do have their
uses. See the discussion of stock options in Chapter 12.

Q-7

Four postulates (going concern, time period, accounting entity, and monetary unit) were discussed as
part of the basic concepts underlying historical costing. Can any of the principles discussed under the
same general category be deduced or logically derived from these postulates?

This question does present some interesting possibilities for discussion. We believe that these
postulates are too broad and general to serve as a foundation for the development of accounting
principles without the addition of some very specific objectives that pertain to defining users and their
information needs.

Q-9

Does the entity theory or the proprietary theory provide a better description of the relationship existing
between the large modern corporation and its owners?

The entity theory provides a better description of this relationship because stockholders are largely
absentee owners in the large modern corporation. The firm is indeed separate from the owners.

Chapter 7

3. The primary purpose of the Conceptual Framework was to assist the IASB in the development of
future IFRSs and in its review of existing IFRSs. The Conceptual Framework may also assist preparers of
financial statements in developing accounting policies for transactions or events not covered by existing
standards

5. How does earnings as discussed in SFAC No 5 differ from net income?

a. One of the principal concerns of SFAC No. 5 was the format and presentation of changes in
owners' equity that do not arise from transactions with owners. “Earnings” would replace net
income and would differ from the latter by excluding the cumulative effect on prior years of a
change in accounting principle

8 Framework for Financial Reporting. Are Statements of Financial Accounting Concepts

(SFAC) GAAP or part of the Codification? ... No, they are issued by FASB. The SFAC provide
the framework for writing rules, essentially the rules for writing the rules, and are not
authoritative and not GAAP

What is the objective of general purpose financial reporting definition according to SFAC 8?
To provide financial information about the reporting entity that is useful to existing and potential
investors, lenders, and other creditors in making decisions about providing resources to the entity
(SFAC 8)

1) Information that is useful to potential/existing investors, lenders, and creditors (primary users)
2) Information about the reporting entity's assets (economic resources) and claims (liabilities).
3) Changes in economic resources (assets) and claims (liabilities).
4) Financial performance reflected by accrual accounting and past cash flow
5) Changes in economic resources (assets) and claims (liabilities) not resulting from financial
performance

Chapter 10

Question
What does harmonization of accounting standards mean ?
Answer
Harmonization is the minimization of the differences in accounting standards between countries . It can
also be described as when different countries agree on one similar accounting standard except that the
implementation does n't follow the standard and should be disclosed on mutually agreed standards

Question
1. What is convergence and how does it differ from harmonization ?

Answer
Convergence is the merging of IFRS and GAAP into one while harmonization is attempting to minimize
the differences . Convergence merges them together to create one set of standards that apply all over
while with harmonization , they stayed two separate entities .

Question
3 The EU opted to use exclusively IASB standards for consolidated financial statements beginning in
2005 . What drove this decision ?

Answer
While the Fourth and Seventh Directives improved harmonization , the pace was not fast enough ,
particularly since many firms needed access to major capital equity sources . As a result , the IASB 's
body of accounting standards allowed for a significantly faster harmonization of financial reporting

Question
5 What are the different conceptions of the true and fair view ?

Answer
The true and fair view , which is an abstract concept to begin with , appears to be subject to individual
interpretation within each of the EU nations according to their own needs . Note that this term has
drawn particularly strong responses from the UK accounting profession . The IASB - FASB