Solution Manual For Financial Statement Analysis,
f f f f f
13th Edition
f
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
f f f f f f f f f f f
, Chapter 1 f
f Introduction to Financial Reporting f f f
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
f f f f f f f f
accounting principles. Their role was substantially reduced in 1973 when
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the Financial Accounting Standards Board was established. Their role
f f f f f f f f f
was further reduced with the establishment of the Public Company
f f f f f f f f f f
Accounting Oversight Board was established in 2002.
f f f f f f f
b. The Financial Accounting Standards Board replaced the Accounting
f f f f f f f
Principles Board as the primary rule-making body for accounting
f f f f f f f f f
standards. It is an independent organization and includes members
f f f f f f f f f
other than public accountants.
f f f f
c. The SEC has the authority to determine generally accepted accounting
f f f f f f f f f
principles and to regulate the accounting profession. The SEC has
f f f f f f f f f f
elected to leave much of the determination of generally accepted
f f f f f f f f f f
accounting principles to the private sector. The Financial Accounting
f f f f f f f f f
Standards Board has played the major role in establishing accounting
f f f f f f f f f f
standards since 1973. Regulation of the accounting profession was
f f f f f f f f f
substantially turned over to the Public Company Accounting Oversight
f f f f f f f f f
Board in 2002.
f f f
1- 2.
f Consistency is obtained through the application of the same accounting
f f f f f f f f f
principle from period to period. A change in principle requires statement
f f f f f f f f f f f
disclosure.
f
1- 3.
f 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.
f f
1- 4.
f a. Entity
f e. Historical cost f f
b. Realization f. Historical cost f f
c. Materiality g. Disclosure f
d. Conservatism
1- 5.
f Entity concept f
,1- 6.
f Generally accepted accounting principles do not apply when a firm does not f f f f f f f f f f f
appear to be a going concern. If the decision is made that this is not a going
f f f f f f f f f f f f f f f f f
concern, then the use of GAAP would not be appropriate.
f f f f f f f f f f
1- 7.
f 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
f f f f f f f f f f f f f f
can be accounted for reasonably accurately for a particular period of time. In
f f f f f f f f f f f f f
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.
f f f f f f f f f f f
fThe statements are considered to be meaningful because material
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inaccuracies are not acceptable.
f f f f
1- 8. f f It is true that the only accurate way to account for the success or failure of an
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fentity is to accumulate all transactions from the opening of business until the
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fbusiness eventually liquidates. But it is not necessary that the statements be
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fcompletely accurate in order for them to be meaningful. f f f f f f f f
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.
f f f
1-10. Money.
1-11. f f 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
f f f f f f f f f f f f f f
loses usefulness as the standard for measuring financial transactions.
f f f f f f f f f
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. In
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addition, the prices of items change because of various factors, such as
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quality, technology, and inflation.
f f f f
Yes. A reasonable adjustment to the statements can be made for inflation.
f f f f f f f f f f f
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
f f f f f f f f f
measurements has reasonable support.
f f f f
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
f f f f f f f f f f f f f f
concept of conservatism. Losses that can be reasonably anticipated should
f f f f f f f f f f
be taken in order to reflect the least favorable effect on net income of the
f f f f f f f f f f f f f f f
current period.
f f
, 1-15. End of production
f f
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.
f f f f f f f f f f f f f f f
Receipt of cash f f
This method should only be used when the prospects of collection are especially
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doubtful at the time of sale.
f f f f f f
During production f
This method is allowed for long-term construction projects because
f f f f f f f f
recognizing revenue on long-term construction projects as work progresses
f f f f f f f f f
tends to give a fairer picture of the results for a given period in comparison with
f f f f f f f f f f f f f f f f
having the entire revenue realized in one period of time.
f f f f f f f f f f
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
f f f f f f f f f
often charge off the cost in the period incurred in order to be conservative.
f f f f f f f f f f f f f f
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.
f f f f f f f f f f f
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 to
f f f f f f f f f f f f f f
make. Because of the complexity of many businesses and the increased
f f f f f f f f f f f
expectations of the public, the full disclosure concept has become one of the
f f f f f f f f f f f f f
most difficult concepts for the accountant to apply.
f f f f f f f f
1-19. There is a preference for the use of objectivity in the preparation of financial
f f f f f f f f f f f f f
statements, but financial statements cannot be completely prepared based
f f f f f f f f f
upon objective data; estimates must be made in many situations.
f f f f f f f f f f
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
f f f f f f f f f f
possible.
f
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
f f f f f f f f f f
acceptable, but the accounting profession is making an effort to eliminate
f f f f f f f f f f f
particular industry practices that do not conform to the normal generally
f f f f f f f f f f f
accepted accounting principles.
f f f
1-22. Events that fall outside of the financial transactions of the entity are not
f f f f f f f f f f f f
recorded. An example would be the loss of a major customer.
f f f f f f f f f f f
f f f f f
13th Edition
f
By Charles H. Gibson, Verified Chapter's 1 - 13 | Complete
f f f f f f f f f f f
, Chapter 1 f
f Introduction to Financial Reporting f f f
QUESTIONS
1- 1. a. The AICPA is an organization of CPAs that prior to 1973 accepted the
f f f f f f f f f f f f
primary responsibility for the development of generally accepted
f f f f f f f f
accounting principles. Their role was substantially reduced in 1973 when
f f f f f f f f f f
the Financial Accounting Standards Board was established. Their role
f f f f f f f f f
was further reduced with the establishment of the Public Company
f f f f f f f f f f
Accounting Oversight Board was established in 2002.
f f f f f f f
b. The Financial Accounting Standards Board replaced the Accounting
f f f f f f f
Principles Board as the primary rule-making body for accounting
f f f f f f f f f
standards. It is an independent organization and includes members
f f f f f f f f f
other than public accountants.
f f f f
c. The SEC has the authority to determine generally accepted accounting
f f f f f f f f f
principles and to regulate the accounting profession. The SEC has
f f f f f f f f f f
elected to leave much of the determination of generally accepted
f f f f f f f f f f
accounting principles to the private sector. The Financial Accounting
f f f f f f f f f
Standards Board has played the major role in establishing accounting
f f f f f f f f f f
standards since 1973. Regulation of the accounting profession was
f f f f f f f f f
substantially turned over to the Public Company Accounting Oversight
f f f f f f f f f
Board in 2002.
f f f
1- 2.
f Consistency is obtained through the application of the same accounting
f f f f f f f f f
principle from period to period. A change in principle requires statement
f f f f f f f f f f f
disclosure.
f
1- 3.
f The concept of historical cost determines the balance sheet valuation of land.
f f f f f f f f f f f
The realization concept requires that a transaction needs to occur for the profit to
f f f f f f f f f f f f f f
be recognized.
f f
1- 4.
f a. Entity
f e. Historical cost f f
b. Realization f. Historical cost f f
c. Materiality g. Disclosure f
d. Conservatism
1- 5.
f Entity concept f
,1- 6.
f Generally accepted accounting principles do not apply when a firm does not f f f f f f f f f f f
appear to be a going concern. If the decision is made that this is not a going
f f f f f f f f f f f f f f f f f
concern, then the use of GAAP would not be appropriate.
f f f f f f f f f f
1- 7.
f With the time period assumption, inaccuracies of accounting for the entity, short
f f f f f f f f f f f
of its complete life span, are accepted. The assumption is made that the entity
f f f f f f f f f f f f f f
can be accounted for reasonably accurately for a particular period of time. In
f f f f f f f f f f f f f
other words, the decision is made to accept some inaccuracy because of
f f f f f f f f f f f f
incomplete information about the future in exchange for more timely reporting.
f f f f f f f f f f f
fThe statements are considered to be meaningful because material
f f f f f f f f
inaccuracies are not acceptable.
f f f f
1- 8. f f It is true that the only accurate way to account for the success or failure of an
f f f f f f f f f f f f f f f f
fentity is to accumulate all transactions from the opening of business until the
f f f f f f f f f f f f
fbusiness eventually liquidates. But it is not necessary that the statements be
f f f f f f f f f f f
fcompletely accurate in order for them to be meaningful. f f f f f f f f
1- 9. a. A year that ends when operations are at a low ebb for the year.
f f f f f f f f f f f f f
b. The accounting time period is ended on December 31.
f f f f f f f f
c. A twelve-month accounting period that ends at the end of a month other
f f f f f f f f f f f f
than December 31.
f f f
1-10. Money.
1-11. f f When money does not hold a stable value, the financial statements can lose
f f f f f f f f f f f f
much of their significance. To the extent that money does not remain stable, it
f f f f f f f f f f f f f f
loses usefulness as the standard for measuring financial transactions.
f f f f f f f f f
1-12. No. There is a problem with determining the index in order to adjust the
f f f f f f f f f f f f f
statements. The items that are included in the index must be representative. In
f f f f f f f f f f f f f
addition, the prices of items change because of various factors, such as
f f f f f f f f f f f f
quality, technology, and inflation.
f f f f
Yes. A reasonable adjustment to the statements can be made for inflation.
f f f f f f f f f f f
1-13. False. An arbitrary write-off of inventory cannot be justified under the
f f f f f f f f f f
conservatism concept. The conservatism concept can only be applied where
f f f f f f f f f f
there are alternative measurements and each of these alternative
f f f f f f f f f
measurements has reasonable support.
f f f f
1-14. Yes, inventory that has a market value below the historical cost should be
f f f f f f f f f f f f
written down in order to recognize a loss. This is done based upon the
f f f f f f f f f f f f f f
concept of conservatism. Losses that can be reasonably anticipated should
f f f f f f f f f f
be taken in order to reflect the least favorable effect on net income of the
f f f f f f f f f f f f f f f
current period.
f f
, 1-15. End of production
f f
The realization of revenue at the completion of the production process is
f f f f f f f f f f f
acceptable when the price of the item is known and there is a ready market.
f f f f f f f f f f f f f f f
Receipt of cash f f
This method should only be used when the prospects of collection are especially
f f f f f f f f f f f f
doubtful at the time of sale.
f f f f f f
During production f
This method is allowed for long-term construction projects because
f f f f f f f f
recognizing revenue on long-term construction projects as work progresses
f f f f f f f f f
tends to give a fairer picture of the results for a given period in comparison with
f f f f f f f f f f f f f f f f
having the entire revenue realized in one period of time.
f f f f f f f f f f
1-16. It is difficult to apply the matching concept when there is no direct connection
f f f f f f f f f f f f f
between the cost and revenue. Under these circumstances, accountants
f f f f f f f f f
often charge off the cost in the period incurred in order to be conservative.
f f f f f f f f f f f f f f
1-17. If the entity can justify the use of an alternative accounting method on the
f f f f f f f f f f f f f
basis that it is rational, then the change can be made.
f f f f f f f f f f f
1-18. The accounting reports must disclose all facts that may influence the judgment
f f f f f f f f f f f
of an informed reader. Usually this is a judgment decision for the accountant to
f f f f f f f f f f f f f f
make. Because of the complexity of many businesses and the increased
f f f f f f f f f f f
expectations of the public, the full disclosure concept has become one of the
f f f f f f f f f f f f f
most difficult concepts for the accountant to apply.
f f f f f f f f
1-19. There is a preference for the use of objectivity in the preparation of financial
f f f f f f f f f f f f f
statements, but financial statements cannot be completely prepared based
f f f f f f f f f
upon objective data; estimates must be made in many situations.
f f f f f f f f f f
1-20. This is a true statement. The concept of materiality allows the accountant to
f f f f f f f f f f f f
handle immaterial items in the most economical and expedient manner
f f f f f f f f f f
possible.
f
1-21. Some industry practices lead to accounting reports that do not conform to
f f f f f f f f f f f
generally accepted accounting principles. These reports are considered to be
f f f f f f f f f f
acceptable, but the accounting profession is making an effort to eliminate
f f f f f f f f f f f
particular industry practices that do not conform to the normal generally
f f f f f f f f f f f
accepted accounting principles.
f f f
1-22. Events that fall outside of the financial transactions of the entity are not
f f f f f f f f f f f f
recorded. An example would be the loss of a major customer.
f f f f f f f f f f f
