1
,Chapter l1
Introduction lto lFinancial lReporting
QUESTIONS
1- l1. a. The lAICPA lis lan lorganization lof lCPAs lthat lprior lto l1973 laccepted lthe
lprimary lresponsibility lfor lthe ldevelopment lof lgenerally laccepted
laccounting lprinciples. lTheir lrole lwas lsubstantially lreduced lin l1973 lwhen
lthe lFinancial lAccounting lStandards lBoard lwas lestablished. l Their lrole
lwas lfurther lreduced lwith lthe lestablishment lof lthe lPublic lCompany
lAccounting lOversight lBoard lwas lestablished lin l2002.
b. The lFinancial lAccounting lStandards lBoard lreplaced lthe lAccounting lPrinciples
lBoard las lthe lprimary lrule-making lbody lfor laccounting lstandards. lIt lis lan
lindependent lorganization land lincludes lmembers lother lthan lpublic
laccountants.
c. The lSEC lhas lthe lauthority lto ldetermine lgenerally laccepted laccounting
lprinciples land lto lregulate lthe laccounting lprofession. lThe lSEC lhas
lelected lto lleave lmuch lof lthe ldetermination lof lgenerally laccepted
laccounting lprinciples lto lthe lprivate lsector. l The lFinancial lAccounting
lStandards lBoard lhas lplayed lthe lmajor lrole lin lestablishing laccounting
lstandards lsince l1973. l Regulation lof lthe laccounting lprofession lwas
lsubstantially lturned lover lto lthe lPublic lCompany lAccounting lOversight
lBoard lin l2002.
1- l2. l l Consistency lis lobtained lthrough lthe lapplication lof lthe lsame laccounting
lprinciple lfrom lperiod lto lperiod. l A lchange lin lprinciple lrequires lstatement
ldisclosure.
1
,1- l3. The lconcept lof lhistorical lcost ldetermines lthe lbalance lsheet lvaluation lof lland.
lThe lrealization lconcept lrequires lthat la ltransaction lneeds lto loccur lfor lthe lprofit
lto lbe lrecognized.
1- l4. a. l Entity e. l Historical lcost
b. Realization f. l Historical lcost
c. Materiality g. l Disclosure
d. Conservatism
1- l5. Entity lconcept
1- l6. l Generally laccepted laccounting lprinciples ldo lnot lapply lwhen la lfirm ldoes lnot
lappear lto lbe la lgoing lconcern. l If lthe ldecision lis lmade lthat lthis lis lnot la lgoing
lconcern, lthen lthe luse lof lGAAP lwould lnot lbe lappropriate.
1- l7. With lthe ltime lperiod lassumption, linaccuracies lof laccounting lfor lthe lentity,
lshort lof lits lcomplete llife lspan, lare laccepted. lThe lassumption lis lmade lthat lthe
lentity lcan lbe laccounted lfor lreasonably laccurately lfor la lparticular lperiod lof
ltime. l In lother lwords, lthe ldecision lis lmade lto laccept lsome linaccuracy
lbecause lof lincomplete linformation labout lthe lfuture lin lexchange lfor lmore
ltimely lreporting. l The lstatements lare lconsidered lto lbe lmeaningful lbecause
lmaterial linaccuracies lare lnot lacceptable.
1- 8. l l It lis ltrue lthat lthe lonly laccurate lway lto laccount lfor lthe lsuccess lor lfailure lof lan
lentity lis lto laccumulate lall ltransactions lfrom lthe lopening lof lbusiness luntil lthe
lbusiness leventually lliquidates. l But lit lis lnot lnecessary lthat lthe lstatements lbe
lcompletely laccurate lin lorder lfor lthem lto lbe lmeaningful.
2
, 1- 9. a. A lyear lthat lends lwhen loperations lare lat la llow lebb lfor lthe lyear.
b. The laccounting ltime lperiod lis lended lon lDecember l31.
c. A ltwelve-month laccounting lperiod lthat lends lat lthe lend lof la lmonth lother lthan
lDecember l31.
1-10. Money.
1-11. When lmoney ldoes lnot lhold la lstable lvalue, lthe lfinancial lstatements lcan llose
lmuch lof ltheir lsignificance. l To lthe lextent lthat lmoney ldoes lnot lremain lstable, lit
lloses lusefulness las lthe lstandard lfor lmeasuring lfinancial ltransactions.
1-12. No. l There lis la lproblem lwith ldetermining lthe lindex lin lorder lto ladjust lthe
lstatements. l The litems lthat lare lincluded lin lthe lindex lmust lbe lrepresentative.
lIn laddition, lthe lprices lof litems lchange lbecause lof lvarious lfactors, lsuch las
lquality, ltechnology, land linflation.
Yes. lA lreasonable ladjustment lto lthe lstatements lcan lbe lmade lfor linflation.
1-13. False. l An larbitrary lwrite-off lof linventory lcannot lbe ljustified lunder lthe
lconservatism lconcept. l The lconservatism lconcept lcan lonly lbe lapplied lwhere
lthere lare lalternative lmeasurements land leach lof lthese lalternative
lmeasurements lhas lreasonable lsupport.
1-14. Yes, linventory lthat lhas la lmarket lvalue lbelow lthe lhistorical lcost lshould lbe
lwritten ldown lin lorder lto lrecognize la lloss. l This lis ldone lbased lupon lthe
lconcept lof lconservatism. l Losses lthat lcan lbe lreasonably lanticipated lshould
lbe ltaken lin lorder lto lreflect lthe lleast lfavorable leffect lon lnet lincome lof lthe
lcurrent lperiod.
3
,Chapter l1
Introduction lto lFinancial lReporting
QUESTIONS
1- l1. a. The lAICPA lis lan lorganization lof lCPAs lthat lprior lto l1973 laccepted lthe
lprimary lresponsibility lfor lthe ldevelopment lof lgenerally laccepted
laccounting lprinciples. lTheir lrole lwas lsubstantially lreduced lin l1973 lwhen
lthe lFinancial lAccounting lStandards lBoard lwas lestablished. l Their lrole
lwas lfurther lreduced lwith lthe lestablishment lof lthe lPublic lCompany
lAccounting lOversight lBoard lwas lestablished lin l2002.
b. The lFinancial lAccounting lStandards lBoard lreplaced lthe lAccounting lPrinciples
lBoard las lthe lprimary lrule-making lbody lfor laccounting lstandards. lIt lis lan
lindependent lorganization land lincludes lmembers lother lthan lpublic
laccountants.
c. The lSEC lhas lthe lauthority lto ldetermine lgenerally laccepted laccounting
lprinciples land lto lregulate lthe laccounting lprofession. lThe lSEC lhas
lelected lto lleave lmuch lof lthe ldetermination lof lgenerally laccepted
laccounting lprinciples lto lthe lprivate lsector. l The lFinancial lAccounting
lStandards lBoard lhas lplayed lthe lmajor lrole lin lestablishing laccounting
lstandards lsince l1973. l Regulation lof lthe laccounting lprofession lwas
lsubstantially lturned lover lto lthe lPublic lCompany lAccounting lOversight
lBoard lin l2002.
1- l2. l l Consistency lis lobtained lthrough lthe lapplication lof lthe lsame laccounting
lprinciple lfrom lperiod lto lperiod. l A lchange lin lprinciple lrequires lstatement
ldisclosure.
1
,1- l3. The lconcept lof lhistorical lcost ldetermines lthe lbalance lsheet lvaluation lof lland.
lThe lrealization lconcept lrequires lthat la ltransaction lneeds lto loccur lfor lthe lprofit
lto lbe lrecognized.
1- l4. a. l Entity e. l Historical lcost
b. Realization f. l Historical lcost
c. Materiality g. l Disclosure
d. Conservatism
1- l5. Entity lconcept
1- l6. l Generally laccepted laccounting lprinciples ldo lnot lapply lwhen la lfirm ldoes lnot
lappear lto lbe la lgoing lconcern. l If lthe ldecision lis lmade lthat lthis lis lnot la lgoing
lconcern, lthen lthe luse lof lGAAP lwould lnot lbe lappropriate.
1- l7. With lthe ltime lperiod lassumption, linaccuracies lof laccounting lfor lthe lentity,
lshort lof lits lcomplete llife lspan, lare laccepted. lThe lassumption lis lmade lthat lthe
lentity lcan lbe laccounted lfor lreasonably laccurately lfor la lparticular lperiod lof
ltime. l In lother lwords, lthe ldecision lis lmade lto laccept lsome linaccuracy
lbecause lof lincomplete linformation labout lthe lfuture lin lexchange lfor lmore
ltimely lreporting. l The lstatements lare lconsidered lto lbe lmeaningful lbecause
lmaterial linaccuracies lare lnot lacceptable.
1- 8. l l It lis ltrue lthat lthe lonly laccurate lway lto laccount lfor lthe lsuccess lor lfailure lof lan
lentity lis lto laccumulate lall ltransactions lfrom lthe lopening lof lbusiness luntil lthe
lbusiness leventually lliquidates. l But lit lis lnot lnecessary lthat lthe lstatements lbe
lcompletely laccurate lin lorder lfor lthem lto lbe lmeaningful.
2
, 1- 9. a. A lyear lthat lends lwhen loperations lare lat la llow lebb lfor lthe lyear.
b. The laccounting ltime lperiod lis lended lon lDecember l31.
c. A ltwelve-month laccounting lperiod lthat lends lat lthe lend lof la lmonth lother lthan
lDecember l31.
1-10. Money.
1-11. When lmoney ldoes lnot lhold la lstable lvalue, lthe lfinancial lstatements lcan llose
lmuch lof ltheir lsignificance. l To lthe lextent lthat lmoney ldoes lnot lremain lstable, lit
lloses lusefulness las lthe lstandard lfor lmeasuring lfinancial ltransactions.
1-12. No. l There lis la lproblem lwith ldetermining lthe lindex lin lorder lto ladjust lthe
lstatements. l The litems lthat lare lincluded lin lthe lindex lmust lbe lrepresentative.
lIn laddition, lthe lprices lof litems lchange lbecause lof lvarious lfactors, lsuch las
lquality, ltechnology, land linflation.
Yes. lA lreasonable ladjustment lto lthe lstatements lcan lbe lmade lfor linflation.
1-13. False. l An larbitrary lwrite-off lof linventory lcannot lbe ljustified lunder lthe
lconservatism lconcept. l The lconservatism lconcept lcan lonly lbe lapplied lwhere
lthere lare lalternative lmeasurements land leach lof lthese lalternative
lmeasurements lhas lreasonable lsupport.
1-14. Yes, linventory lthat lhas la lmarket lvalue lbelow lthe lhistorical lcost lshould lbe
lwritten ldown lin lorder lto lrecognize la lloss. l This lis ldone lbased lupon lthe
lconcept lof lconservatism. l Losses lthat lcan lbe lreasonably lanticipated lshould
lbe ltaken lin lorder lto lreflect lthe lleast lfavorable leffect lon lnet lincome lof lthe
lcurrent lperiod.
3
