Chapter 16

Question 1

Standard-setting bodies

Answer 1

are professional organizations of accountants and auditors that establish financial reporting standards.

The two primary standard-setting bodies are the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). In the United States, the FASB sets forth Generally Accepted Accounting Principles (GAAP). Outside the United States, the IASB establishes International Financial Reporting Standards (IFRS).

Question 2

Regulatory authorities

Answer 2

are government agencies that have the legal authority to enforce compliance with financial reporting standards.

Regulatory authorities, such as the Securities and Exchange Commission (SEC) in the United States and the Financial Conduct Authority in the United Kingdom, are established by national governments.

Question 3

International Organization of Securities Commissions (IOSCO)

Answer 3

IOSCO is not a regulatory body, but its members work together to make national regulations and enforcement more uniform around the world.

Question 4

Form S-1

Answer 4

Registration statement filed prior to the sale of new securities to the public.

Question 5

Form 10-K

Answer 5

Required annual filing that includes information about the business and its management, audited financial statements and disclosures, and disclosures about legal matters involving the firm.

Question 6

Form 10-Q

Answer 6

U.S. firms are required to file this form quarterly, with updated financial statements (unlike Form 10-K, these statements do not have to be audited) and disclosures about certain events such as significant legal proceedings or changes in accounting policy. Non-U.S. companies are typically required to file the equivalent Form 6-K semiannually.

Question 7

Form DEF-14A

Answer 7

When a company prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote, it also files the statement with the SEC as Form DEF-14A.

Question 8

Form 8-K

Answer 8

Companies must file this form to disclose material events including significant asset acquisitions and disposals, changes in management or corporate governance, or matters related to its accountants, its financial statements, or the markets in which its securities trade.

Question 9

Form 144

Answer 9

A company can issue securities to certain qualified buyers without registering the securities with the SEC but must notify the SEC that it intends to do so.

Question 10

Forms 3, 4, and 5

Answer 10

involve the beneficial ownership of securities by a company’s officers and directors. Analysts can use these filings to learn about purchases and sales of company securities by corporate insiders.

Question 11

There are two fundamental characteristics that make financial information useful:

Answer 11

relevance and faithful representation

Question 12

There are four characteristics that enhance relevance and faithful representation

Answer 12

comparability, verifiability, timeliness, and understandability

Question 13

International Accounting Standard (IAS) No. 1 required financial statements

Answer 13

• Balance sheet (statement of financial position).
• Statement of comprehensive income.
• Cash flow statement.
• Statement of changes in owners’ equity.
• Explanatory notes, including a summary of accounting policies.

Question 14

The general features for preparing financial statements are stated in IAS No. 1:

Answer 14

• Fair presentation
• Going concern basis
• Accrual basis
• Consistency
• Materiality
• Aggregation
• No offsetting
• Reporting frequency
• Comparative information