Test Bank for Financial Reporting and Analysis, 13th Edition Charles H. Gibson Chapter 1-13

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,Chapter 1
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Introduction to Financial Reporting n n n




QUESTIONS


1- 1.n 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 the
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Financial Accounting Standards Board was established. Their role was
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further reduced with the establishment of the Public Company Accounting
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Oversight Board was established in 2002.
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b. The Financial Accounting Standards Board replaced the Accounting Principles
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Board as the primary rule-making body for accounting standards. It is an
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independent organization and includes members other than public
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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. n n n 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.
n 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.
n a. Entity n e. Historical cost n n




b. Realization f. Historical cost
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c. Materiality g. Disclosure n




d. Conservatism



1- 5.
n Entity concept n




1- 6. Generally accepted accounting principles do not apply when a firm does not appear
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to be a going concern. If the decision is made that this is not a going concern,
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then the use of GAAP would not be appropriate.
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1- 7.
n 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 can
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be accounted for reasonably accurately for a particular period of time. In other
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words, the decision is made to accept some inaccuracy because of incomplete
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information about the future in exchange for more timely reporting. The
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statements are considered to be meaningful because material inaccuracies are
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not acceptable.
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1- 8. It is true that the only accurate way to account for the success or failure of an entity is
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to accumulate all transactions from the opening of business until the business
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eventually liquidates. But it is not necessary that the statements be completely
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accurate in order for them to be meaningful.
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2

, 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 than
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December 31.
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1-10. Money.



1-11. 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. In
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addition, the prices of items change because of various factors, such as quality,
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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 be
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taken in order to reflect the least favorable effect on net income of the current
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period.
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