CHAPTER 1

REGULATORY ENVIRONMENT OF
FINANCIAL REPORTING
CHAPTER LEARNING OBJECTIVES
1. Describe the global financial markets and their relation to financial reporting.
2. Explain the objective of financial reporting.
3. Identify the major policy-setting bodies and their role in the standard-setting process.
4. Discuss the challenges facing financial reporting.
Workbook International Accounting 1 – Chapter 1: Regulatory environment of financial reporting

TRUE-FALSE—Conceptual
1. Financial statements are the principal means through which financial information is
communicated to those outside an enterprise.(LO: 1.1)

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2. The major financial statements used under International Financial Reporting Standards
(IFRS) include the statement of changes in financial position and the statement of
stockholders’ equity. (LO 1.1)

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3. General-purpose financial statements are not considered cost-effective because, while they
provide useful information, the cost to provide the information is quite high. (LO 1.2)

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4. Investors and creditors are considered the primary user group of general-purpose financial
reporting. (LO 1.2)
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5. The passage of a new International Financial Reporting Standard requires the support of
ten of the thirteen board members.
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6. The overriding requirement of IFRS is that financial statements provide an error-free and
comprehensive presentation of a company’s financial position.

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7. The IFRS Foundation appoints members, reviews effectiveness, and helps in the
fundraising efforts of the IASB, IFRS Advisory Council, and IFRS Interpretations
Committee.

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 Financial Reporting and Accounting Standards 1-3

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8. The IASB has a regulatory mandate that is enforced by the European Union member
countries.
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9. The two major standard-setting organizations in the world are the International Accounting
Standards Board (IASB) and International Organization of Securities Commission (IOSCO).
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10. The International Organization of Securities Commissions (IOSCO) sets accounting standards
for those countries which have not yet adopted IFRS.
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11. A unanimous vote by all Board members is needed to issue a new International Financial
Reporting Standard (IFRS).
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12. The International Accounting Standards Board (IASB) is comprised of 14 volunteer

members and each member of the IASB must come from a different country.
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13. Financial reports in the early 21st century were generally prepared to be forward-looking
and were provided real-time.
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14. IFRS are a product of careful logic or empirical findings and are not influenced by political
action.
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15. The expectations gap is caused by what the public thinks accountants should be doing and
what accountants think they can do.
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Workbook International Accounting 1 – Chapter 1: Regulatory environment of financial reporting

MULTIPLE CHOICE
16. The financial statements most frequently prepared by companies include all of the following
except the
a. statement of financial position.
b. income statement.
c. statement of cash flows.
d. statement of retained earnings.
17. Which of the following is representative of managerial accounting?
a. Users of the financial information include investors.
b. Management uses the financial information to plan and control a company’s
operations.
c. The financial reports are used by both internal and external parties.
d. Government agencies are likely to use the financial information.
18. How does accounting help the capital allocation process attract investment capital?
a. Provides timely, relevant information.
b. Encourages innovation.
c. Promotes productivity.
d. Fosters changes in equity.
19. An effective capital allocation process
a. promotes productivity.
b. encourages innovation.
c. provides an efficient market for buying and selling securities.
d. All of these answers are correct.
20. Which of the following are elements of a single, widely accepted set of high-quality
accounting standards?
a. Common delivery systems and common high-quality auditing standards.
b. Common laws and common application of accounting standards.
c. Common boards of directors and common enforcement.
d. Common education of market participants and common currency.
21. What is the major objective of financial reporting?
a. Provide information that is useful to management in making decisions.
b. Provide information that clearly portrays nonfinancial transactions.
c. Provide information that is useful to present and potential equity investors, lenders,
and other creditors in making decisions.
d. Provide information that excludes claims to the resources.
22. A company is viewed as separate and distinct from its owners when a(n) ________
perspective is adopted.
a. proprietary
b. stewardship
c. entity
d. governance
23. Accrual accounting is used because
a. cash flows are considered less important.
b. it provides a better indication of ability to generate cash flows than the cash basis.
c. it recognizes revenues when cash is received and expenses when cash is paid.
d. None of these answers are correct.
24. The IASB's standard-setting structure includes all of the following except:
a. IFRS Interpretations Committee
b. IFRS Advisory Council
c. IFRS Comparison Committee
 Financial Reporting and Accounting Standards 1-5

d. Trustees
25. The purpose of the International Accounting Standards Board is to
a. issue enforceable standards which regulate the financial accounting and reporting of
multinational corporations.
b. develop a uniform currency in which the financial transactions of companies through-
out the world would be measured.
c. develop a single set of high-quality IFRS.
d. arbitrate accounting disputes between auditors and international companies.
26. The International Organization of Securities Commissions (IOSCO)
a. is an association of organizations that regulate the world’s securities markets.
b. does not set accounting standards.
c. supports the development and use of IFRS.
d. All of these answer choices are correct.
27. The International Accounting Standards Board (IASB) follows specific steps in developing
International Financial Reporting Standards (IFRS). Place the following steps in the correct
order:
1) Research and analysis conducted; preliminary views of pros and cons
issued.
2) Topics identified and placed on the agenda.
3) Board evaluates responses, final standard issued.
4) Public hearing on proposed standard
5) Board evaluates research, issues exposure draft.
a. 1, 2, 3, 4, 5
b. 2, 1, 4, 5, 3
c. 1, 2, 5, 4, 3
d. 1, 2, 5, 3, 4
28. Which of the following has the highest authoritative support?
a. International Financial Reporting Standards.
b. International Accounting Standards.
c. Interpretations issued by the IFRS Interpretations Committee.
d. Conceptual Framework for Financial Reporting.
29. Significant financial reporting issues facing global financial reporting and efficient capital
allocation include all of the following except:
a. How to provide backward-looking information.
b. How to report nonfinancial measures such as customer satisfaction.
c. How to provide forward-looking information.
d. How to provide real-time financial statement information.
30. Which of the following is considered a non-financial measurement?
a. backlog information.
b. customer satisfaction indexes.
c. reject rates on goods purchased.
d. All of the choices are non-financial measurements.