Solution Manual for Financial Statement Analysis, 13th Edition By Charles H. Gibson

Solution Manual For Financial Statement Analysis,
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13th Edition
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By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
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, Chapter 1 v



v Introduction to Financial Reporting v v v




QUESTIONS

1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the
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primary responsibility for the development of generally accepted
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accounting principles. Their role was substantially reduced in 1973 when
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the Financial Accounting Standards Board was established. Their role
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was further reduced with the establishment of the Public Company
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Accounting Oversight Board was established in 2002.
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b. The Financial Accounting Standards Board replaced the Accounting
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Principles Board as the primary rule-making body for accounting
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standards. It is an independent organization and includes members
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other than public accountants.
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c. The SEC has the authority to determine generally accepted accounting
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principles and to regulate the accounting profession. The SEC has
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elected to leave much of the determination of generally accepted
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accounting principles to the private sector. The Financial Accounting
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Standards Board has played the major role in establishing accounting
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standards since 1973. Regulation of the accounting profession was
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substantially turned over to the Public Company Accounting Oversight
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Board in 2002.
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1- 2.
v Consistency is obtained through the application of the same accounting
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principle from period to period. A change in principle requires statement
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disclosure.
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1- 3.
v The concept of historical cost determines the balance sheet valuation of land.
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The realization concept requires that a transaction needs to occur for the profit to
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be recognized.
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1- 4.
v a. Entity
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b. Realization f. Historical cost
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c. Materiality g. Disclosure v




d. Conservatism

1- 5.
v Entity concept v

,1- 6.
v Generally accepted accounting principles do not apply when a firm does not
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appear to be a going concern. If the decision is made that this is not a going
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concern, then the use of GAAP would not be appropriate.
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1- 7.
v With the time period assumption, inaccuracies of accounting for the entity, short
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of its complete life span, are accepted. The assumption is made that the entity
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can be accounted for reasonably accurately for a particular period of time. In
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other words, the decision is made to accept some inaccuracy because of
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incomplete information about the future in exchange for more timely reporting.
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vThe statements are considered to be meaningful because material
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inaccuracies are not acceptable.
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1- 8. v v It is true that the only accurate way to account for the success or failure of an
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ventity is to accumulate all transactions from the opening of business until the
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vbusiness eventually liquidates. But it is not necessary that the statements be
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vcompletely accurate in order for them to be meaningful. v v v v v v v v




1- 9. a. A year that ends when operations are at a low ebb for the year.
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b. The accounting time period is ended on December 31.
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c. A twelve-month accounting period that ends at the end of a month other
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than December 31.
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1-10. Money.

1-11. v v When money does not hold a stable value, the financial statements can lose
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much of their significance. To the extent that money does not remain stable, it
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loses usefulness as the standard for measuring financial transactions.
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1-12. No. There is a problem with determining the index in order to adjust the
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statements. The items that are included in the index must be representative.
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In addition, the prices of items change because of various factors, such as
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quality, technology, and inflation.
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Yes. A reasonable adjustment to the statements can be made for inflation.
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1-13. False. An arbitrary write-off of inventory cannot be justified under the
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conservatism concept. The conservatism concept can only be applied where
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there are alternative measurements and each of these alternative
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measurements has reasonable support.
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1-14. Yes, inventory that has a market value below the historical cost should be
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written down in order to recognize a loss. This is done based upon the
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concept of conservatism. Losses that can be reasonably anticipated should
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be taken in order to reflect the least favorable effect on net income of the
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current period.
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, 1-15. End of production
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The realization of revenue at the completion of the production process is
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acceptable when the price of the item is known and there is a ready market.
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Receipt of cash v v




This method should only be used when the prospects of collection are especially
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doubtful at the time of sale.
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During production v




This method is allowed for long-term construction projects because
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recognizing revenue on long-term construction projects as work progresses
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tends to give a fairer picture of the results for a given period in comparison with
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having the entire revenue realized in one period of time.
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1-16. It is difficult to apply the matching concept when there is no direct connection
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between the cost and revenue. Under these circumstances, accountants
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often charge off the cost in the period incurred in order to be conservative.
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1-17. If the entity can justify the use of an alternative accounting method on the
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basis that it is rational, then the change can be made.
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1-18. The accounting reports must disclose all facts that may influence the judgment
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of an informed reader. Usually this is a judgment decision for the accountant
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to make. Because of the complexity of many businesses and the increased
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expectations of the public, the full disclosure concept has become one of the
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most difficult concepts for the accountant to apply.
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1-19. There is a preference for the use of objectivity in the preparation of financial
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statements, but financial statements cannot be completely prepared based
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upon objective data; estimates must be made in many situations.
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1-20. This is a true statement. The concept of materiality allows the accountant to
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handle immaterial items in the most economical and expedient manner
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possible.
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1-21. Some industry practices lead to accounting reports that do not conform to
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generally accepted accounting principles. These reports are considered to be
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acceptable, but the accounting profession is making an effort to eliminate
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particular industry practices that do not conform to the normal generally
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accepted accounting principles.
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1-22. Events that fall outside of the financial transactions of the entity are not
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recorded. An example would be the loss of a major customer.
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