Solution Manual
Financial Statement Analysis,
By Charles H. Gibson
13th Edition
, 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 Accepted Accounting Principles Do Not Apply When A
Firm Does Not Appear To Be A Going Concern. If The Decision
Is Made That This Is Not A Going Concern, Then The Use Of
Gaap Would Not Be Appropriate.
1- 7. With The Time Period Assumption, Inaccuracies Of Accounting For
The Entity, Short Of Its Complete Life Span, Are Accepted. The
Assumption Is Made That The Entity Can Be Accounted For
Reasonably Accurately For A Particular Period Of Time. In Other
Words, The Decision Is Made To Accept Some Inaccuracy Because
Of Incomplete Information About The Future In Exchange For More
Timely Reporting. The Statements Are Considered
To Be Meaningful Because Material Inaccuracies Are Not Acceptable.
1- 8. It Is True That The Only Accurate Way To Account For The
Success Or Failure Of An Entity Is To Accumulate All
Transactions From The Opening Of Business Until The Business
Eventually Liquidates. But It Is Not Necessary That The
Statements Be Completely Accurate In Order For Them To Be
Meaningful.
1- 9. A. A Year That Ends When Operations Are At A Low Ebb For The Year.
b. The Accounting Time Period Is Ended On December 31.
c. A Twelve-Month Accounting Period That Ends At The End Of
A Month Other Than December 31.
1-10. Money.
1-11. When Money Does Not Hold A Stable Value, The Financial
Statements Can Lose Much Of Their Significance. To The Extent That
Money Does Not Remain Stable, It Loses Usefulness As The
Standard For Measuring Financial Transactions.
1-12. No. There Is A Problem With Determining The Index In Order
To Adjust The Statements. The Items That Are Included In The
Index Must Be Representative. In Addition, The Prices Of Items
Change Because Of Various Factors, Such As Quality, Technology,
And Inflation.
Yes. A Reasonable Adjustment To The Statements Can Be Made For Inflation.
1-13. False. An Arbitrary Write-Off Of Inventory Cannot Be Justified
Under The Conservatism Concept. The Conservatism Concept Can
Only Be Applied Where There Are Alternative Measurements And
Each Of These Alternative Measurements Has Reasonable
Support.
, 1-14. Yes, Inventory That Has A Market Value Below The Historical
Cost Should Be Written Down In Order To Recognize A Loss.
This Is Done
Based Upon The Concept Of Conservatism. Losses That
Can Be Reasonably Anticipated Should Be Taken In Order To
Reflect The Least Favorable Effect On Net Income Of The
Current Period.
1-15. End Of Production
The Realization Of Revenue At The Completion Of The Production
Process Is Acceptable When The Price Of The Item Is Known And
There Is A Ready Market.
Receipt Of Cash
This Method Should Only Be Used When The Prospects Of
Collection Are Especially Doubtful At The Time Of Sale.
During Production
This Method Is Allowed For Long-Term Construction Projects
Because Recognizing Revenue On Long-Term Construction Projects As
Work Progresses Tends To Give A Fairer Picture Of The Results
For A
Given Period In Comparison With Having The Entire Revenue
Realized In One Period Of Time.
1-16. It Is Difficult To Apply The Matching Concept When There Is No
Direct Connection Between The Cost And Revenue. Under These
Circumstances, Accountants Often Charge Off The Cost In The
Period Incurred In Order To Be Conservative.
1-17. If The Entity Can Justify The Use Of An Alternative
Accounting Method On The Basis That It Is Rational, Then
The Change Can Be Made.
1-18. The Accounting Reports Must Disclose All Facts That May
Influence The Judgment Of An Informed Reader. Usually This
Is A Judgment Decision For The Accountant To Make.
Because Of The
Complexity Of Many Businesses And The Increased Expectations
Of The Public, The Full Disclosure Concept Has Become One Of
The Most Difficult Concepts For The Accountant To Apply.
1-19. There Is A Preference For The Use Of Objectivity In The
Preparation Of Financial Statements, But Financial Statements
Cannot Be Completely Prepared Based Upon Objective Data;
Estimates Must Be Made In Many Situations.
1-20. This Is A True Statement. The Concept Of Materiality Allows The
Financial Statement Analysis,
By Charles H. Gibson
13th Edition
, 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 Accepted Accounting Principles Do Not Apply When A
Firm Does Not Appear To Be A Going Concern. If The Decision
Is Made That This Is Not A Going Concern, Then The Use Of
Gaap Would Not Be Appropriate.
1- 7. With The Time Period Assumption, Inaccuracies Of Accounting For
The Entity, Short Of Its Complete Life Span, Are Accepted. The
Assumption Is Made That The Entity Can Be Accounted For
Reasonably Accurately For A Particular Period Of Time. In Other
Words, The Decision Is Made To Accept Some Inaccuracy Because
Of Incomplete Information About The Future In Exchange For More
Timely Reporting. The Statements Are Considered
To Be Meaningful Because Material Inaccuracies Are Not Acceptable.
1- 8. It Is True That The Only Accurate Way To Account For The
Success Or Failure Of An Entity Is To Accumulate All
Transactions From The Opening Of Business Until The Business
Eventually Liquidates. But It Is Not Necessary That The
Statements Be Completely Accurate In Order For Them To Be
Meaningful.
1- 9. A. A Year That Ends When Operations Are At A Low Ebb For The Year.
b. The Accounting Time Period Is Ended On December 31.
c. A Twelve-Month Accounting Period That Ends At The End Of
A Month Other Than December 31.
1-10. Money.
1-11. When Money Does Not Hold A Stable Value, The Financial
Statements Can Lose Much Of Their Significance. To The Extent That
Money Does Not Remain Stable, It Loses Usefulness As The
Standard For Measuring Financial Transactions.
1-12. No. There Is A Problem With Determining The Index In Order
To Adjust The Statements. The Items That Are Included In The
Index Must Be Representative. In Addition, The Prices Of Items
Change Because Of Various Factors, Such As Quality, Technology,
And Inflation.
Yes. A Reasonable Adjustment To The Statements Can Be Made For Inflation.
1-13. False. An Arbitrary Write-Off Of Inventory Cannot Be Justified
Under The Conservatism Concept. The Conservatism Concept Can
Only Be Applied Where There Are Alternative Measurements And
Each Of These Alternative Measurements Has Reasonable
Support.
, 1-14. Yes, Inventory That Has A Market Value Below The Historical
Cost Should Be Written Down In Order To Recognize A Loss.
This Is Done
Based Upon The Concept Of Conservatism. Losses That
Can Be Reasonably Anticipated Should Be Taken In Order To
Reflect The Least Favorable Effect On Net Income Of The
Current Period.
1-15. End Of Production
The Realization Of Revenue At The Completion Of The Production
Process Is Acceptable When The Price Of The Item Is Known And
There Is A Ready Market.
Receipt Of Cash
This Method Should Only Be Used When The Prospects Of
Collection Are Especially Doubtful At The Time Of Sale.
During Production
This Method Is Allowed For Long-Term Construction Projects
Because Recognizing Revenue On Long-Term Construction Projects As
Work Progresses Tends To Give A Fairer Picture Of The Results
For A
Given Period In Comparison With Having The Entire Revenue
Realized In One Period Of Time.
1-16. It Is Difficult To Apply The Matching Concept When There Is No
Direct Connection Between The Cost And Revenue. Under These
Circumstances, Accountants Often Charge Off The Cost In The
Period Incurred In Order To Be Conservative.
1-17. If The Entity Can Justify The Use Of An Alternative
Accounting Method On The Basis That It Is Rational, Then
The Change Can Be Made.
1-18. The Accounting Reports Must Disclose All Facts That May
Influence The Judgment Of An Informed Reader. Usually This
Is A Judgment Decision For The Accountant To Make.
Because Of The
Complexity Of Many Businesses And The Increased Expectations
Of The Public, The Full Disclosure Concept Has Become One Of
The Most Difficult Concepts For The Accountant To Apply.
1-19. There Is A Preference For The Use Of Objectivity In The
Preparation Of Financial Statements, But Financial Statements
Cannot Be Completely Prepared Based Upon Objective Data;
Estimates Must Be Made In Many Situations.
1-20. This Is A True Statement. The Concept Of Materiality Allows The
