1.

6
Explain the importance of the notes to the financial statements.
There are lot of importance of notes to the financial statement. It provides summary of the firms
accounting policies. It gives information about changing in accounting procedure during a
reported period; it will show in financial statement note. There are other notes which provide
information about notes such as inventory, plant and machinery, investment, long-term debt, and
equity accounts.
These notes also give information about such as income tax, leasing arrangement, the maturity of
debt, operating segments, pending legal proceeding, shows the major acquisition or divestiture
during accounting period.

1.7
What causes an auditor’s report to be qualified? adverse? a disclaimer of opinion?
unqualified with explanatory language?
An unqualified report presents the information regarding the financial statements, financial
condition, operating activities, and cash flows for the accounting period of the company in parity
with GAAP. However, there are some situations, which demand for justified reports rather than
unqualified report. Such types of reports known to be
“Qualified reports”.
When the financial statements presented by the company are not matching or not in accordance
with GAAP, then it results for an adverse opinion. When the auditor is unable to evaluate the
quality of the financial statement and gives no opinion, then auditor’s report is known to be
“Disclaimer of Opinion. “Unqualified opinion with explanatory language” is due to the
uncertainty in future events like disputes and lawsuits or events where the author finds both
business and going concern risks.
1.8
Why is the management discussion and analysis useful to the financial analyst?
The management discussion and analysis are very useful to financial analyst because it provides
useful clues to future financial performance. It has also information about any favorable or
unfavorable trends, about liquidity, capital resources, and result of operations. The analyst also
finds different information as follows:
• They get information about internal and external sources of liquidity.
• There is anticipated change in the financial resources.
• They also get commitments for capital expenditure and expected sources of funding.
• The material deficiency in liquidity.
• Increase in sales and volume components.
1.10
What are the intangible factors that are important in evaluating a company’s financial
position and performance but are not available in the annual report?
There are some intangible factors which are not available in the financial statements as follows:
• Employee relations with management.
• The morale and efficiency of employee.
• The reputation of the firm with its customers.
• The firms prestige in the community,
• The effectiveness of the management,
• Provision for management succession,
• Potential exposure to change in regulations such as environment or food and drug enforcement.
1.13
Internet Problem
Access the FASB website: http://www.fasb.org. Locate information about projects that the
FASB and IASB are working on related to international convergence. Write a short essay
outlining the topics that the FASB and IASB are currently working on and the progress
made to date.

Financial reporting should provide information that is useful to present and potential investors
and creditors and other users in making rational investment, credit, and similar decisions.
The information should be comprehensible to those who have a reasonable understanding of
business and economic activities and are willing to study the information with reasonable
diligence.
Financial reporting should provide information to help present and potential investors and
creditors and other users to assess the amounts, timing, and uncertainty of prospective cash
receipts.
Since investors’ and creditors’ cash flows are related to enterprise cash flows, financial reporting
should provide information to help assess the amounts, timing, and uncertainty of prospective net
cash inflows to the related enterprise.
Financial reporting should provide information about the economic resources of an enterprise;
the claims to those resources (obligations); and the effects of transactions, events, and
circumstances that cause changes in resources and claims to those resources.
These are sources, direct or indirect, of future cash inflows and cash outflows