Exam 1: Financial Reporting

Panelco Company is a medium-sized company that produces wall paneling. Panelco is a wholly-owned subsidiary of a holding company called United, Inc. Both Panelco and United are owned by the same individuals as principal shareholders. Panelco has fallen on hard times due to a downturn in the construction industry in the primary market area the company serves. Sales of the company have declined and net losses have occurred for each of the last three years. The company is in dire need of cash but the owners of the United and Panelco know that additional financing from a bank or other source is unlikely due to the company's weakened financial condition. The owners of United and Panelco believe that the downturn in construction will eventually reverse and that Panelco will return to profitability when conditions improve. Based on these beliefs, the owners have proposed to the independent auditors a plan whereby the holding company (United) would obtain a loan from a bank and then make an intercompany loan to Panelco. Under this plan, the owners would sell their personal residences to United. Lease agreements between United and the owners would be drafted. These lease agreements would allow the owners to continue to occupy their homes. Title to the homes would pass to United. United would become involved in property management in addition to holding the stock of Panelco. United would have no additional properties other than the personal residences of the owners. The acquisition of additional properties by United is unlikely. Required: Assume that you are the partner in the public accounting firm performing the audit of United and Panelco. Prepare your response to the owners of United and Panelco regarding the plan to obtain additional financing. Include references to the Conceptual Framework and underlying assumptions of accounting in your response.

Generally accepted accounting principles

Which of the following is not a purpose of the conceptual framework of accounting?

The branch of accounting that is concerned with providing information to present and potential creditors of an enterprise is

Disclosure requirements for financial reporting are strictest in

The process of establishing financial accounting standards is

The mission statement of the Financial Accounting Standards Board includes a goal of promoting international comparability of accounting standards. Furthermore, the International Accounting Standards Board has begun over the last 20 years to issue international accounting standards designed to create a common set of international accounting and reporting standards. Identify reasons why such a set of international accounting standards would be desirable.

Which of the following is true about international accounting standards?

The harmonization of world accounting standards is viewed by many accountants, analysts, standard setters, and others as being among the most important issues facing business throughout the world. Advocates of harmonization seek to establish a common set of international accounting and reporting standards. Such a task has proven formidable, however. Identify factors that would hinder the process of harmonization of accounting standards.

Accountants prepare financial statements at arbitrary points in time during a company's lifetime in accordance with the accounting concept of

Recording the purchase price of a pencil sharpener (with an estimated useful life of 10 years) as an expense of the current period is justified by the

Once the FASB has established an accounting standard, the

Which of the following is an internal user of a company's financial information?

The branch of accounting that is concerned primarily with providing information for internal users is called

The going-concern assumption holds that the business entity will continue its operations long enough to realize its projects, commitments, and ongoing activities. The assumption is that the entity is not expected to be liquidated in the foreseeable future or that the entity will continue for an indefinite period of time. Explain the relationship between the going-concern assumption and the historical cost principle and the amortization of assets.

The Governmental Accounting Standards Board

According to the FASB's conceptual framework, which of the following relates to both relevance and reliability? $\quad\quad\text { Consistency } \underline{\text { Verifiability }}$ A. Yes Yes B. Yes No C. No Yes D. No No

The responsibility to review the work of the accountants and issue opinions as to the fairness of the financial statements rests with

Members of the Financial Accounting Standards Board are appointed by the

The singularly unique function performed by certified public accountants in United States is