Act Subject

Chapter 5

Communicating and Interpreting Accounting Information

ANSWERS TO QUESTIONS

1. The primary responsibility for the accuracy of the financial records and conformance with Generally Accepted Accounting Principles (GAAP) of the information in the financial statements rests with management, normally the CEO and CFO. Independent auditors or CPAs are responsible for conducting an examination of the statements in accordance with Generally Accepted Auditing Standards (for private companies) and PCAOB Auditing Standards (for public companies), and based on that examination, attesting to the fairness of the financial presentations in accordance with GAAP. Both management and the auditors assume a financial responsibility to users of the statements. 2. Financial analysts, who normally work for brokerage and investment banking houses, mutual funds, and investment advisory services, gather extensive financial and nonfinancial information about a company, on which they base forecasts and stock purchase and sale recommendations. Private investors include individuals who purchase shares in companies, often on the basis of recommendations from financial analysts. Institutional investors are managers of pension, mutual, endowment, and other funds that invest on behalf of others. 3. Information services provide a wide variety of financial and nonfinancial information to analysts and investors, often on-line or on CD-ROM. These services are normally the first source where important financial information such as quarterly earnings announcements are available. 4. Material amounts are amounts that are large enough to influence a user’s decision. 5. a. Income statement--Accrual basis required by GAAP. b. Balance sheet--Accrual basis required by GAAP. c. Statement of cash flows--Cash basis required by GAAP. 6. Private companies normally issue quarterly and annual reports, both of which are normally simple photocopied reports. The quarterly reports normally present unaudited...