Solution Manual For Intermediate Accounting, Volume 1, 5th edition Kin Lo, George Fisher Chapter 1-10 With Appendix (A B C)
Chapter 1 Fundamentals of Financial Accounting Theory I. Problems P1-1. Suggested solution: People need to make decisions under uncertainty, which creates the demand for information to reduce that uncertainty, allowing them to make better decisions. However, if everyone had access to the same information at the same time, no one would be able to supply any information useful to anyone else (since they already have it). Thus, an asymmetric distribution of information is necessary for the supply of information from those who have relatively more of it to those who have relatively less. P1-2. Suggested solution: An IPO is a sale of a part of the entrepreneur’s company to other investors. Inherently, there is uncertainty about the future success of this company and the value of the company’s shares in the future. Potential investors demand information to reduce this uncertainty. If the entrepreneur is able to supply information that reduces the potential investor’s perceptions of uncertainty, she is likely to be able to obtain a higher stock price in the IPO. The entrepreneur has intimate knowledge of her company’s operations, which is likely to be far superior to the information available to potential buyers of the IPO shares—there is information asymmetry between the entrepreneur and potential investors. P1-3. Suggested solution: A borrowing/lending transaction involves an advance of funds from the bank to the company in exchange for promises of future repayment from the company to the bank. There is, of course, uncertainty regarding the ability of the company to repay the bank in the future. The corporation’s management has better information about the company’s prospects in comparison to bank staff. To reduce this information asymmetry, the bank demands information such as audited financial statements. The corporation is willing to supply this information in order to obtain the most favourable borrowing terms (e.g., a low interest rate).