13 p
, Chapter1IntroductiontoFinancialReporting
QUESTIONS
1- 1. a. TheAICPAisanorganizationofCPAsthatpriorto1973acceptedtheprimary
responsibilityforthedevelopmentofgenerallyacceptedaccountingprinciples.Their
m m
mrolewassubstantiallyreducedin1973whentheFinancialAccountingStandards
Boardwasestablished.Theirrolewasfurtherreducedwiththeestablishmentofthe
m m
Public CompanyAccountingOversightBoardwas establishedin2002.
m V V
b. TheFinancialAccountingStandardsBoardreplacedtheAccountingPrinciples
Boardas theprimaryrule-makingbodyforaccountingstandards.Itis an
m V V
independentorganizationandincludesmembersotherthanpublicaccountants.
m
c. TheSEChastheauthoritytodeterminegenerallyacceptedaccountingprinciplesand
toregulatetheaccountingprofession.TheSEChaselectedtoleavemuchofthe
m
determinationofgenerallyacceptedaccountingprinciplestotheprivatesector.
m
TheFinancialAccountingStandardsBoardhasplayedthemajorroleinestablishing
m
accountingstandardssince1973.Regulationoftheaccountingprofessionwas
m m
substantiallyturnedovertothePublicCompanyAccountingOversightBoardin
m
2002.
m
1-2. Consistencyisobtainedthroughtheapplicationofthesameaccountingprinciplefrom m
mperiodtoperiod.Achangeinprinciplerequiresstatementdisclosure.
m
1-3. Theconceptofhistoricalcostdeterminesthebalancesheetvaluationofland.Therealization m
mconceptrequiresthatatransactionneedstooccurfortheprofittoberecognized.
V
1-4. a. Entitym e. Historicalcost
m
b. Realization
m f. Historicalcost
m
c. Materiality
m g. Disclosure
m
d. Conservatism
m
1-5. Entityconcept
,1-6. Generallyacceptedaccountingprinciplesdonotapplywhenafirmdoesnotappeartobe
m
agoingconcern. Ifthedecisionis madethatthisisnotagoingconcern,thentheuseofGAAP
m m V
wouldnotbeappropriate. m
1-7. Withthetimeperiodassumption,inaccuraciesofaccountingfortheentity,shortofits
completelifespan,areaccepted.Theassumptionismadethattheentitycanbeaccountedfor
m
reasonablyaccuratelyforaparticularperiodoftime. Inotherwords,thedecisionismade
m m
toacceptsomeinaccuracybecauseofincompleteinformationaboutthefutureinexchang
m
eformoretimelyreporting. Thestatementsareconsideredtobemeaningfulbecause
m m
materialinaccuracies arenotacceptable.
m V
1- 8. It is true that the only accurate way to account for the success or failure of an entity is to
m m m m m m m m m m m m m m m m m m m m
accumulate all transactions from the opening of business until the business eventually
m m m m m m m m m m m m
liquidates. But it is not necessary that the statements be completely accurate in order for
m m m m m m m m m m m m m m m
themtobemeaningful. m
1- 9. a. Ayearthatendswhenoperationsareatalowebbfortheyear.
V
b. TheaccountingtimeperiodisendedonDecember31.
c. A twelve-monthaccountingperiodthatendsattheendofamonthotherthan
V
m December31.
1-10. Money.
1-11. m m When money does not hold a stable value, the financial statements can lose much of their
m m m m m m m m m m m m m m m
significance. To the extent that money does not remain stable, it loses usefulness as the
m m m m m m m m m m m m m m m
standardformeasuringfinancialtransactions.
m
1-12. No.Thereisaproblemwithdeterminingtheindexinordertoadjustthestatements.The
m m m
itemsthatareincludedintheindexmustberepresentative.Inaddition,thepricesofitems
m V
changebecauseofvariousfactors,suchasquality,technology,andinflation.
m
Yes.Areasonableadjustmenttothestatementscanbemadeforinflation.
1-13. False. Anarbitrarywrite-offofinventorycannotbejustifiedundertheconservatism
m m
concept. Theconservatismconceptcanonlybeappliedwheretherearealternative
m m
measurementsandeachofthesealternativemeasurementshasreasonablesupport.
m
1-14. Yes,inventorythathasamarketvaluebelowthehistoricalcostshouldbewrittendownin
ordertorecognizealoss. Thisisdonebasedupontheconceptofconservatism. Lossesthat
m m m
canbereasonablyanticipatedshouldbetakeninordertoreflecttheleastfavorable
m
effectonnetincomeofthecurrentperiod.
m
, 1-15. Endofproduction
Therealizationofrevenueatthecompletionoftheproductionprocessisacceptablewhenthe m
priceoftheitemisknownandthereisareadymarket.
m
Receiptofcash
Thismethodshouldonlybeusedwhentheprospectsofcollectionareespeciallydoubtfulatthe
timeofsale.m
Duringproduction
Thismethodisallowedforlong-termconstructionprojectsbecauserecognizingrevenueon
V m
long-termconstructionprojectsasworkprogressestendstogiveafairerpictureofthe
m V V m
resultsforagivenperiodincomparisonwithhavingtheentirerevenuerealizedinone
m
periodoftime.
m
1-16. Itisdifficulttoapplythematchingconceptwhenthereisnodirectconnectionbetweenthecost
m
andrevenue. Underthesecircumstances,accountants oftenchargeoffthecostintheperiod
m m m
incurredinordertobeconservative.
m
1-17. Iftheentitycanjustifytheuseofanalternativeaccountingmethodonthebasisthatitis m
rational,thenthechangecanbemade.
m
1-18. Theaccountingreportsmustdiscloseallfacts thatmayinfluencethejudgmentofaninformed
V
reader.Usuallythisisajudgmentdecisionfortheaccountanttomake. Becauseofthe
m m m
complexityofmanybusinessesandtheincreasedexpectationsofthepublic,thefull
m
disclosureconcepthasbecomeoneofthemostdifficultconceptsfortheaccountanttoapply.
m
1-19. m Thereisapreferencefortheuseofobjectivityinthepreparationoffinancialstatements,
butfinancialstatementscannotbecompletelypreparedbaseduponobjectivedata;
m
estimatesmustbemadeinmanysituations.
m
1-20. Thisisatruestatement. Theconceptofmaterialityallowstheaccountanttohandle
m
immaterialitemsinthemosteconomicalandexpedientmannerpossible.
m
1-21. Someindustrypracticesleadtoaccountingreportsthatdonotconformtogenerally
acceptedaccountingprinciples. Thesereportsareconsideredtobeacceptable,butthe
m m
accountingprofessionismakinganefforttoeliminateparticularindustrypracticesthatdo
m
notconformtothenormalgenerallyacceptedaccountingprinciples.
m
1-22. Eventsthatfalloutsideofthefinancialtransactionsoftheentityarenotrecorded. An
examplewouldbethelossofamajorcustomer.
m
, Chapter1IntroductiontoFinancialReporting
QUESTIONS
1- 1. a. TheAICPAisanorganizationofCPAsthatpriorto1973acceptedtheprimary
responsibilityforthedevelopmentofgenerallyacceptedaccountingprinciples.Their
m m
mrolewassubstantiallyreducedin1973whentheFinancialAccountingStandards
Boardwasestablished.Theirrolewasfurtherreducedwiththeestablishmentofthe
m m
Public CompanyAccountingOversightBoardwas establishedin2002.
m V V
b. TheFinancialAccountingStandardsBoardreplacedtheAccountingPrinciples
Boardas theprimaryrule-makingbodyforaccountingstandards.Itis an
m V V
independentorganizationandincludesmembersotherthanpublicaccountants.
m
c. TheSEChastheauthoritytodeterminegenerallyacceptedaccountingprinciplesand
toregulatetheaccountingprofession.TheSEChaselectedtoleavemuchofthe
m
determinationofgenerallyacceptedaccountingprinciplestotheprivatesector.
m
TheFinancialAccountingStandardsBoardhasplayedthemajorroleinestablishing
m
accountingstandardssince1973.Regulationoftheaccountingprofessionwas
m m
substantiallyturnedovertothePublicCompanyAccountingOversightBoardin
m
2002.
m
1-2. Consistencyisobtainedthroughtheapplicationofthesameaccountingprinciplefrom m
mperiodtoperiod.Achangeinprinciplerequiresstatementdisclosure.
m
1-3. Theconceptofhistoricalcostdeterminesthebalancesheetvaluationofland.Therealization m
mconceptrequiresthatatransactionneedstooccurfortheprofittoberecognized.
V
1-4. a. Entitym e. Historicalcost
m
b. Realization
m f. Historicalcost
m
c. Materiality
m g. Disclosure
m
d. Conservatism
m
1-5. Entityconcept
,1-6. Generallyacceptedaccountingprinciplesdonotapplywhenafirmdoesnotappeartobe
m
agoingconcern. Ifthedecisionis madethatthisisnotagoingconcern,thentheuseofGAAP
m m V
wouldnotbeappropriate. m
1-7. Withthetimeperiodassumption,inaccuraciesofaccountingfortheentity,shortofits
completelifespan,areaccepted.Theassumptionismadethattheentitycanbeaccountedfor
m
reasonablyaccuratelyforaparticularperiodoftime. Inotherwords,thedecisionismade
m m
toacceptsomeinaccuracybecauseofincompleteinformationaboutthefutureinexchang
m
eformoretimelyreporting. Thestatementsareconsideredtobemeaningfulbecause
m m
materialinaccuracies arenotacceptable.
m V
1- 8. It is true that the only accurate way to account for the success or failure of an entity is to
m m m m m m m m m m m m m m m m m m m m
accumulate all transactions from the opening of business until the business eventually
m m m m m m m m m m m m
liquidates. But it is not necessary that the statements be completely accurate in order for
m m m m m m m m m m m m m m m
themtobemeaningful. m
1- 9. a. Ayearthatendswhenoperationsareatalowebbfortheyear.
V
b. TheaccountingtimeperiodisendedonDecember31.
c. A twelve-monthaccountingperiodthatendsattheendofamonthotherthan
V
m December31.
1-10. Money.
1-11. m m When money does not hold a stable value, the financial statements can lose much of their
m m m m m m m m m m m m m m m
significance. To the extent that money does not remain stable, it loses usefulness as the
m m m m m m m m m m m m m m m
standardformeasuringfinancialtransactions.
m
1-12. No.Thereisaproblemwithdeterminingtheindexinordertoadjustthestatements.The
m m m
itemsthatareincludedintheindexmustberepresentative.Inaddition,thepricesofitems
m V
changebecauseofvariousfactors,suchasquality,technology,andinflation.
m
Yes.Areasonableadjustmenttothestatementscanbemadeforinflation.
1-13. False. Anarbitrarywrite-offofinventorycannotbejustifiedundertheconservatism
m m
concept. Theconservatismconceptcanonlybeappliedwheretherearealternative
m m
measurementsandeachofthesealternativemeasurementshasreasonablesupport.
m
1-14. Yes,inventorythathasamarketvaluebelowthehistoricalcostshouldbewrittendownin
ordertorecognizealoss. Thisisdonebasedupontheconceptofconservatism. Lossesthat
m m m
canbereasonablyanticipatedshouldbetakeninordertoreflecttheleastfavorable
m
effectonnetincomeofthecurrentperiod.
m
, 1-15. Endofproduction
Therealizationofrevenueatthecompletionoftheproductionprocessisacceptablewhenthe m
priceoftheitemisknownandthereisareadymarket.
m
Receiptofcash
Thismethodshouldonlybeusedwhentheprospectsofcollectionareespeciallydoubtfulatthe
timeofsale.m
Duringproduction
Thismethodisallowedforlong-termconstructionprojectsbecauserecognizingrevenueon
V m
long-termconstructionprojectsasworkprogressestendstogiveafairerpictureofthe
m V V m
resultsforagivenperiodincomparisonwithhavingtheentirerevenuerealizedinone
m
periodoftime.
m
1-16. Itisdifficulttoapplythematchingconceptwhenthereisnodirectconnectionbetweenthecost
m
andrevenue. Underthesecircumstances,accountants oftenchargeoffthecostintheperiod
m m m
incurredinordertobeconservative.
m
1-17. Iftheentitycanjustifytheuseofanalternativeaccountingmethodonthebasisthatitis m
rational,thenthechangecanbemade.
m
1-18. Theaccountingreportsmustdiscloseallfacts thatmayinfluencethejudgmentofaninformed
V
reader.Usuallythisisajudgmentdecisionfortheaccountanttomake. Becauseofthe
m m m
complexityofmanybusinessesandtheincreasedexpectationsofthepublic,thefull
m
disclosureconcepthasbecomeoneofthemostdifficultconceptsfortheaccountanttoapply.
m
1-19. m Thereisapreferencefortheuseofobjectivityinthepreparationoffinancialstatements,
butfinancialstatementscannotbecompletelypreparedbaseduponobjectivedata;
m
estimatesmustbemadeinmanysituations.
m
1-20. Thisisatruestatement. Theconceptofmaterialityallowstheaccountanttohandle
m
immaterialitemsinthemosteconomicalandexpedientmannerpossible.
m
1-21. Someindustrypracticesleadtoaccountingreportsthatdonotconformtogenerally
acceptedaccountingprinciples. Thesereportsareconsideredtobeacceptable,butthe
m m
accountingprofessionismakinganefforttoeliminateparticularindustrypracticesthatdo
m
notconformtothenormalgenerallyacceptedaccountingprinciples.
m
1-22. Eventsthatfalloutsideofthefinancialtransactionsoftheentityarenotrecorded. An
examplewouldbethelossofamajorcustomer.
m
