Solution Manual For Financial Statement Analysis,
13th Edition
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
, Chapter 1
Introduction to Financial Reporting
QUESTIONS
1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the
primary responsibility for the development of generally accepted
accounting principles. Their role was substantially reduced in 1973 when
the Financial Accounting Standards Board was established. Their role
was further reduced with the establishment of the Public Company
Accounting Oversight Board was established in 2002.
b. The Financial Accounting Standards Board replaced the Accounting
Principles Board as the primary rule-making body for accounting
standards. It is an independent organization and includes members
other than public accountants.
c. The SEC has the authority to determine generally accepted accounting
principles and to regulate the accounting profession. The SEC has
elected to leave much of the determination of generally accepted
accounting principles to the private sector. The Financial Accounting
Standards Board has played the major role in establishing accounting
standards since 1973. Regulation of the accounting profession was
substantially turned over to the Public Company Accounting Oversight
Board in 2002.
1- 2. Consistency is obtained through the application of the same accounting
principle from period to period. A change in principle requires statement
disclosure.
1- 3. The concept of historical cost determines the balance sheet valuation of land.
The realization concept requires that a transaction needs to occur for the profit
to be recognized.
1- 4. a. Entity e. Historical cost
b. Realization f. Historical cost
c. Materiality g. Disclosure
d. Conservatism
1- 5. Entity concept
,1- 6. Generally xaccepted xaccounting xprinciples xdo xnot xapply xwhen xa xfirm
xdoes xnot xappear xto xbe xa xgoing xconcern. x If xthe xdecision xis xmade xthat
xthis xis xnot xa xgoing xconcern, xthen xthe xuse xof xGAAP xwould xnot xbe
xappropriate.
1- x7. With xthe xtime xperiod xassumption, xinaccuracies xof xaccounting xfor xthe
xentity, xshort xof xits xcomplete xlife xspan, xare xaccepted. xThe xassumption xis
xmade xthat xthe xentity xcan xbe xaccounted xfor xreasonably xaccurately xfor xa
xparticular xperiod xof xtime. x In xother xwords, xthe xdecision xis xmade xto
xaccept xsome xinaccuracy xbecause xof xincomplete xinformation xabout xthe
xfuture xin xexchange xfor xmore xtimely xreporting. x The xstatements xare
xconsidered xto xbe xmeaningful xbecause xmaterial xinaccuracies xare xnot
xacceptable.
1- 8. x x It xis xtrue xthat xthe xonly xaccurate xway xto xaccount xfor xthe xsuccess xor
xfailure xof xan xentity xis xto xaccumulate xall xtransactions xfrom xthe xopening xof
xbusiness xuntil xthe xbusiness xeventually xliquidates. x But xit xis xnot xnecessary
xthat xthe xstatements xbe xcompletely xaccurate xin xorder xfor xthem xto xbe
xmeaningful.
1- 9. a. A xyear xthat xends xwhen xoperations xare xat xa xlow xebb xfor xthe xyear.
b. The xaccounting xtime xperiod xis xended xon xDecember x31.
c. A xtwelve-month xaccounting xperiod xthat xends xat xthe xend xof xa xmonth
xother xthan xDecember x31.
1-10. Money.
1-11. x x When xmoney xdoes xnot xhold xa xstable xvalue, xthe xfinancial xstatements xcan
xlose xmuch xof xtheir xsignificance. x To xthe xextent xthat xmoney xdoes xnot
xremain xstable, xit xloses xusefulness xas xthe xstandard xfor xmeasuring
xfinancial xtransactions.
1-12. No. x There xis xa xproblem xwith xdetermining xthe xindex xin xorder xto xadjust
xthe xstatements. x The xitems xthat xare xincluded xin xthe xindex xmust xbe
xrepresentative. xIn xaddition, xthe xprices xof xitems xchange xbecause xof
xvarious xfactors, xsuch xas xquality, xtechnology, xand xinflation.
Yes. xA xreasonable xadjustment xto xthe xstatements xcan xbe xmade xfor xinflation.
1-13. False. x An xarbitrary xwrite-off xof xinventory xcannot xbe xjustified xunder xthe
xconservatism xconcept. x The xconservatism xconcept xcan xonly xbe xapplied
xwhere xthere xare xalternative xmeasurements xand xeach xof xthese
xalternative xmeasurements xhas xreasonable xsupport.
1-14. Yes, xinventory xthat xhas xa xmarket xvalue xbelow xthe xhistorical xcost
, xshould xbe xwritten xdown xin xorder xto xrecognize xa xloss. x This xis xdone
xbased xupon xthe xconcept xof xconservatism. x Losses xthat xcan xbe
xreasonably xanticipated xshould xbe xtaken xin xorder xto xreflect xthe xleast
xfavorable xeffect xon xnet xincome xof xthe xcurrent xperiod.
13th Edition
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
, Chapter 1
Introduction to Financial Reporting
QUESTIONS
1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the
primary responsibility for the development of generally accepted
accounting principles. Their role was substantially reduced in 1973 when
the Financial Accounting Standards Board was established. Their role
was further reduced with the establishment of the Public Company
Accounting Oversight Board was established in 2002.
b. The Financial Accounting Standards Board replaced the Accounting
Principles Board as the primary rule-making body for accounting
standards. It is an independent organization and includes members
other than public accountants.
c. The SEC has the authority to determine generally accepted accounting
principles and to regulate the accounting profession. The SEC has
elected to leave much of the determination of generally accepted
accounting principles to the private sector. The Financial Accounting
Standards Board has played the major role in establishing accounting
standards since 1973. Regulation of the accounting profession was
substantially turned over to the Public Company Accounting Oversight
Board in 2002.
1- 2. Consistency is obtained through the application of the same accounting
principle from period to period. A change in principle requires statement
disclosure.
1- 3. The concept of historical cost determines the balance sheet valuation of land.
The realization concept requires that a transaction needs to occur for the profit
to be recognized.
1- 4. a. Entity e. Historical cost
b. Realization f. Historical cost
c. Materiality g. Disclosure
d. Conservatism
1- 5. Entity concept
,1- 6. Generally xaccepted xaccounting xprinciples xdo xnot xapply xwhen xa xfirm
xdoes xnot xappear xto xbe xa xgoing xconcern. x If xthe xdecision xis xmade xthat
xthis xis xnot xa xgoing xconcern, xthen xthe xuse xof xGAAP xwould xnot xbe
xappropriate.
1- x7. With xthe xtime xperiod xassumption, xinaccuracies xof xaccounting xfor xthe
xentity, xshort xof xits xcomplete xlife xspan, xare xaccepted. xThe xassumption xis
xmade xthat xthe xentity xcan xbe xaccounted xfor xreasonably xaccurately xfor xa
xparticular xperiod xof xtime. x In xother xwords, xthe xdecision xis xmade xto
xaccept xsome xinaccuracy xbecause xof xincomplete xinformation xabout xthe
xfuture xin xexchange xfor xmore xtimely xreporting. x The xstatements xare
xconsidered xto xbe xmeaningful xbecause xmaterial xinaccuracies xare xnot
xacceptable.
1- 8. x x It xis xtrue xthat xthe xonly xaccurate xway xto xaccount xfor xthe xsuccess xor
xfailure xof xan xentity xis xto xaccumulate xall xtransactions xfrom xthe xopening xof
xbusiness xuntil xthe xbusiness xeventually xliquidates. x But xit xis xnot xnecessary
xthat xthe xstatements xbe xcompletely xaccurate xin xorder xfor xthem xto xbe
xmeaningful.
1- 9. a. A xyear xthat xends xwhen xoperations xare xat xa xlow xebb xfor xthe xyear.
b. The xaccounting xtime xperiod xis xended xon xDecember x31.
c. A xtwelve-month xaccounting xperiod xthat xends xat xthe xend xof xa xmonth
xother xthan xDecember x31.
1-10. Money.
1-11. x x When xmoney xdoes xnot xhold xa xstable xvalue, xthe xfinancial xstatements xcan
xlose xmuch xof xtheir xsignificance. x To xthe xextent xthat xmoney xdoes xnot
xremain xstable, xit xloses xusefulness xas xthe xstandard xfor xmeasuring
xfinancial xtransactions.
1-12. No. x There xis xa xproblem xwith xdetermining xthe xindex xin xorder xto xadjust
xthe xstatements. x The xitems xthat xare xincluded xin xthe xindex xmust xbe
xrepresentative. xIn xaddition, xthe xprices xof xitems xchange xbecause xof
xvarious xfactors, xsuch xas xquality, xtechnology, xand xinflation.
Yes. xA xreasonable xadjustment xto xthe xstatements xcan xbe xmade xfor xinflation.
1-13. False. x An xarbitrary xwrite-off xof xinventory xcannot xbe xjustified xunder xthe
xconservatism xconcept. x The xconservatism xconcept xcan xonly xbe xapplied
xwhere xthere xare xalternative xmeasurements xand xeach xof xthese
xalternative xmeasurements xhas xreasonable xsupport.
1-14. Yes, xinventory xthat xhas xa xmarket xvalue xbelow xthe xhistorical xcost
, xshould xbe xwritten xdown xin xorder xto xrecognize xa xloss. x This xis xdone
xbased xupon xthe xconcept xof xconservatism. x Losses xthat xcan xbe
xreasonably xanticipated xshould xbe xtaken xin xorder xto xreflect xthe xleast
xfavorable xeffect xon xnet xincome xof xthe xcurrent xperiod.
